ECONOMYNET – Sri Lanka will set up a new agency to help bankrupt micro, small and medium enterprises, President Ranil Wickremesinghe said, as bad loans at banks rose and many small businesses closed down after the worst currency crisis caused by the central bank.

A new institution called “Enterprise Sri Lanka” will be established to provide necessary support and assistance to micro, small and medium entrepreneurs, the President told a forum over the weekend.

The government has already intervened by suspending the execution procedure, a form of seizure.

Since it was not possible to rely on the suspension of standby indefinitely, a new institution called “Enterprise Sri Lanka” will be established to provide necessary support and assistance to micro, small and medium entrepreneurs.

Classical economists Steve Hanke and Robert Higgs call the tendency of governments to create a large number of new agencies and undertake new interventions after an economic crisis “the law of the ratchet.”

Although the agencies were set up as temporary solutions, they will continue to exist.

While some agencies have been privatized and there are talks about merging others to reduce the size of the government, a new agency was created this year to promote cinnamon.

The Great Depression in the US, caused by the Federal Reserve after it invented the policy rate and started what we now call ‘macroeconomic policy’ to fuel the economic bubble of the 1920s, led to the creation of a series of new agencies.

“At the time, organized agricultural lobbies, which had been demanding subsidies for decades, took advantage of the crisis to pass a massive rescue package, the Agricultural Adjustment Act, whose title indicated that it was “an act to relieve the existing national economic emergency,” Hanke and Higgs write.

“Nearly 70 years later, farmers are still sucking money from the rest of society, and agricultural policy has expanded to meet the needs of a variety of other interest groups, including conservationists, nutritionists and friends of the Third World.”

The Commodity Credit Corporation is one such entity that still exists today.

President Wickremesinghe said a mission from the International Monetary Fund is visiting the country and SME entrepreneurs can also meet them.

The IMF was also created after World War II to help maintain a stable exchange rate system, after the policy rate – adopted by other major central banks in the 1930s – led to currency collapses and reciprocal import protection.

The Bretton Woods region itself collapsed in 1971 as a result of aggressive macroeconomic policies (printing money to stimulate employment) and floats were abandoned in favor of clean floats by industrialized countries with problems (and non-problems).

“The IMF was established as part of the Bretton Woods Agreement of 1944 and was primarily responsible for providing subsidized short-term credit to countries facing balance-of-payments problems under the postwar system of pegged exchange rates,” Hanke and Higgs point out.

“However, in 1971, Richard Nixon, then US President, closed the gold window, which meant the end of the Bretton Woods Agreement and probably also the end of the original purpose of the IMF.

“But since then, the IMF has used every so-called crisis to expand its reach and size.”

“The oil crises of the 1970s gave the institution the opportunity to reinvent itself.

“These shocks required more IMF lending to, yes, facilitate balance-of-payments adjustments. And more lending occurred: from 1970 to 1975, IMF lending doubled in real terms; from 1975 to 1982, it rose by 58 percent in real terms.”

In 1978, the IMF amended its Articles of Agreement, dropping both the external and specie anchors. This left many countries that could not float and remained soft-pegged without a credible anchor. This led to defaults in countries with market access, as currencies collapsed due to a loss of reserves and confidence, and imports rose as money was printed to influence interest rates.

“When Ronald Reagan was elected US president in 1980, it appeared that the IMF’s crisis-driven opportunism would be reined in,” the economists said.

“However, with the outbreak of the Mexican debt crisis, more IMF loans were ‘needed’ to prevent debt crises and bank failures.

“That reasoning was used by none other than President Ronald Reagan, who personally lobbied 400 of the 435 members of Congress to get approval for an increase in the US quota for the IMF.

“IMF lending has continued to expand, with a real increase of 27 percent during Reagan’s first term.”

After the rupee broke like a matchstick and a large part of the population was plunged into poverty due to interest rate cuts and a capitulation decision by the central bank, a Welfare Benefits Board was set up with support from the World Bank.

Meanwhile, the president himself had authorized the central bank to create inflation of 5 to 7 percent, as it had done in the run-up to the crisis, instead of constraining the agency with a more credible and transparent anchor that could provide stability and protection for the poor, critics said.

During previous currency crises, a national drug agency was created to promote generic drugs, leading to a series of generic drug scandals.

Related Sri Lanka’s Pharma Control Neros Plays as Colombo Burns with Falling Rupee

“The NMRA is a farce,” wrote EN economics columnist Bellwether in 2015, when the NMRA was founded. “It is a dangerous farce. If the rulers want to keep prices low, not just of medicines but of all goods, they must first pursue sensible monetary and fiscal policies that allow for stable exchange rates.

“Or abolish the Central Bank and create a new currency council, so that printing money becomes illegal and the currency is fixed.” (Colombo/July 22, 2024)

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