Printing Own Currency — Can Poor, Developing Countries Do That?
Most of the developing countries and their young citizens, or as kids we all would have asked the question or had this doubt Why can’t the government Print our Own currency and become a Rich?
Me being an Indian a developing country which is rising from the ashes had the same question when I wasn't aware of the Global Economy, why can’t India Print more Rupee notes and circulate them and we will be rich, not just me at one point of time everyone would've had the same doubt in their minds. Right?
Well, there is nothing wrong with a government doing that, but what are the consequences or perils of printing our own currency will lead, has anyone thought about this? What if a country prints trillions of currency notes and that flows into the domestic economy?.
For this question, Sri Lanka will be an exemplar.
Sri Lanka an island nation in South Asia that lies in the Indian Ocean attracts more number of tourists per annum, tourism is one of the major sources of Income adding to its treasury. But the beautiful nation’s table has toppled and it's going through a very severe “Economic Crisis”, Sri Lanka’s foreign exchange reserves are diminishing at a very rapid pace which has put the country into a very onerous situation even to “import essential goods”.
Sri Lanka Economic Crisis — The imbalance in the economic structure is due to the injudicious policies of the authoritarian Government/Ruler, this economic crisis isn't a sudden outbreak, the lava was boiling inside a pot for a long time and finally that burst out loud.
Why Sri Lanka Landed Into Crisis — Major Reasons
- Sri Lank’s 26-year-old civil war ended in 2009 and the country saw some relief/peace, post-war the GDP grew at a higher rate of 8–9% per annum till 2012. But in 2013 the GDP crashed to half of its previous year as the global commodity prices fell, here Sri Lank’s trading was reversed — Their Imports increased whereas Exports decreased.
- Lanka's deficit budget was very high during the Civil War and again in one year prior to the decline of the war in 2009, there was the Global Recession 2008, which hit them very hard, during this period it led the country to borrow a loan of 2.6 Billion Dollars from the International Monetary Fund (IMF) in 2009. In 2016 they approached IMF for another 1.5 Billion Dollar loan but the conditionalities of the International Monetary Fund further weakened Sri Lanka’s Economy.
- Easter Bomb Blast 2019 — This was another economic shock, The Easter Bomb Blasts at ST Antony’s Shrine resulted in 253 deaths, due to this the number of tourists dropped drastically and another blow to their Foreign Exchange Reserves.
- Lower Tax Rate — In 2019 Gotabaya Rajapaksha promised wide-ranging SoPs and lower taxes for farmers, after coming to power whatever was promised was implemented as promised yet another problem.
- Covid-19 and Lockdown — Then came the novel coronavirus which exacerbated Sri Lanka’s Situation. International flights were stopped revenue from Tourism was Null, and Major exports like Tea, rubber spices were halted.
Due to all the above factors, there was a rise in Government expenditure, debt to GDP ratio increased from 94% in 2019 to 119% in 2021. Inflation shot up, demand for essential goods and services has increased and citizens are on the streets fighting against the ruling government.
Now in this situation can Sri Lanka, a country which is under severe economic crisis print currency? Is this right to do during a crisis and save the economy?
To this question, the answer is Yes, Sri Lanka actually started printing currency.
“Sri Lanka Printed Money” to pay salaries for government employees”, startling isn't it??
In the first quarter of 2022 1.2 trillion Sri Lankan rupees were printed, also the newly inducted Prime Minister of Sri Lanka Ranil Wickremesinghe addressed that the economic crisis in the country forced him to print the money just to pay the salaries of Government Employees,
The Timeline of Printing Blunder!!
Oh, wait why is it a Blunder? That's the question you might have, will explain it in detail. Printing of money wasn't started in 2022 but earlier in Feb 2020 was the initial stage.
- Sri Lankan government started to print money extensively in February 2020, simultaneously a few months prior to this was the Tax Reduction was implemented.
- Between December 2019 to August 2021 Sri Lanka’s money supply increased by 42%. In 2021 alone 1.2 Trillion rupees were printed, in the first quarter of 2022, it was 588 Billion rupees.
As said earlier a country can print its own money but at the same time, it has some drawbacks, major drawbacks in the case of Sri Lanka. For the government, it was a temporary relief as per the economist this idea might work theoretically and practically it is a disaster. The island nation printed trillions of rupees in two years, for the time being, it is a good idea but in the long run or the future of the economy?
Sri Lanka printed currency in a full-fledged it's not even an experiment but a 100% implementation, a country's revenue has to be increased through taxes, exports etc and even borrowing from other countries. But Sri Lanka has done a major mistake by printing its own money and circulating it which is going to be catastrophic.
Sri Lanka has been borrowing too much for years from IMF, earlier before Ranil, the Rajapaksa government sought help from India and China. India signed a diesel shipment under a 500 Million dollars credit line, another aid of 1 Billion dollars credit line was signed. India also exported essential food products, medicine etc.
China on the other hand considered providing Sri Laka with a 1.5 Billion dollars credit facility and a separate loan of up to 1 Billion dollars. But still, the Sri Lankan government sought help from India for another 1 Billion dollar credit.
The Sri Lankan government apart from the help from neighbouring nations it dissipated the money which was borrowed earlier on China-funded Infrastructure projects which are now obsolete. A country simply cannot print money and make use of it as its debts became huge.
Without any second thought Sri Lanka printed money and made use of it, Sri Lankan central bank governor permitted the printing press to operate 24/7 and also denied the link between printing money and inflation.
Consequences Of Printing Currency
Printing money is an internal and a short term solution just like a temporary painkiller shot to the wound, but what about the actual “Cure”? As I said earlier we had the thought of our government printing our own money and becoming rich. Now we cannot defend the thought, one thing is this isn't going to end the crisis instead it's a trap.
Let’s discuss Economics:
A country printing more money will have increased cash flow or more cash circulating in the economy but it doesn't increase any economic output.
Let us say with more cash flow people will have more money in their hands — The basic law of supply and demand. When more cash is in hand there will be demand for more goods, what if the supply of goods is less? if the supply of goods and services is less definitely it will lead to inflation, this is where it will make the country’s economy worse if it leads to inflation and shortage of goods and services.
Developing countries rely on Imports for certain essential goods, in order to import a commodity a country needs to have foreign exchange I.e US Dollars. In Sri Lanka the scenario is different they have more Local rupee flow in the economy but to meet the ends (Import Goods) they do not have the dollars as their forex reserves have been severely depleted.
Within a few days after printing money, the country faced high demand for essential goods Mainly Fuel/Oil. To import oil they need to have the foreign exchange but they're exhausted.
Sri Lanka asked for 75 Million Dollars!!
On 16th May 2022 Prime Minister Ranil Wickremesinghe addressed that his country is in need of 75 Million dollars in Foreign Exchange as they have to pay for the importing essentials like fuel and medicines.
As said earlier even if they have printed trillions of cash end of the day to meet the ends they have to import goods and pay for the checks and to pay this they need to do it through Foreign Exchange.
Let me rest the case — A developing or poor country just cannot print the money and flow that into the economy this is not going to end the crisis instead develop it further. Sri Lanka is in a severe crisis where inflation has shot up and people are paying heftily for very essential commodities.
Sure this beautiful country will be back on the track and for that, they need to be patient. Sri Lanka must learn from this and use this Crisis as an opportunity. The government should use the resources wisely instead of squandering them which is the result of the crisis.