Injecting money has short-term benefits but risky in the long run - Economist | Sunday Observer

Injecting money has short-term benefits but risky in the long run - Economist

3 January, 2021

The Modern Monitory Theory (MTT) which the Government considers a solution to the debt crisis could be beneficial in the short-term but risky in the long term, said Dr. Anil Jayantha of the University of Sri Jayawardenepura.

MMT is a strategy associated with financialisation which in turn pumps excessive cash into the economy, he said. It is clear that the biggest issue the Government is facing is the debt crisis and under the present state of the economy the Government has limited solutions. The Government is turning to MMT which means printing money as it needs to finance Government expenditure on the assumption that such expenditure will boost the economy. But the risk of this policy is that it could lead to hyper-inflation or a bubble crash, he said.

According to the Central Bank, the Government expects to cut the share of foreign debt to 40 percent in 2021 from 45 percent in 2020. Mathematically this would be true when the proportion of local borrowings is increased. However, the country needs to earn foreign currencies to settle foreign loans and will not be able to repay foreign debts by printing local currency. Countries such as the USA can do this as the dollar is accepted globally and eventually a dollar note becomes a commodity.

“The Government’s ability in foreign borrowings has been limited as the credit rating of the country has been downgraded to risky level. Hence, International Sovereign Bonds (ISB) has limited demand.

“It is evident from the fact that the Government was unable to issue a single ISB in 2020 even though it has been issuing ISB continuously from 2009. Then the only option available to the Government is to borrow locally. “With the knowledge of the Government’s ability to print money, creditors are understandably willing to accept mostly lower returns but at low risk on Government Bonds than on other investments and help the growth of the economy. This is a basic argument on the advantage of MMT, Dr. Jayantha said.

There is a theoretical argument on this strategy as the excess money is expected to create more jobs, push the aggregate demand up, increase production and then achieve economic growth. These assumptions would hold good only under certain situations and only for a short period. At this juncture in Sri Lanka, what matters is not simple injection of cash in to the economy but implementation of a comprehensive and integrated plan to increase production based on local demand and changing global demands and opportunities.

Additional cash pumped would either be idle or beat around the stock market and further pave the way for more corruption and will never have an assurance of achieving economic growth. It seems like the Government has simply taken only the theoretical arguments behind MMT in to consideration and not the prevailing situation of the country, Dr. Jayantha said. Of cause any Government can print money excessively to meet government expenditure by disregarding dare economic consequences for which people will have to pay the price collectively.

This strategy does not have any solution even theoretically to face the foreign debt crisis as local money printing will never honour settlements of foreign debts which have to be settled in foreign currencies. However, he said that there are limitations and serious negative consequences. Economies such as Sri Lanka are more likely to end up with a crisis of currency devaluation, debt default and hyperinflation.