Dump the rupee, advises world-renowned economist Prof. Hanke

Leading world expert on stopping hyperin flation, Steve Hanke took to twitter to advise Sri Lanka that the way out of the ongoing economic turmoil is to look at having a currency board.
He shared that the only way to save Sri Lanka’s crumbling economy is to “dump the rupee and install a currency board”.

“Today, I measure inflation in Sri Lanka at a roaring 49 percent/yr. Sri Lanka’s currency crisis and recent fuel price hikes are sinking LKA,” said the Johns Hopkins University Professor of Applied Economics in a tweet.

According to the Central Bank, the official inflation rate of the country for 2021 was 12.1 percent.

Since January 2022, the Sri Lankan rupee has depreciated by 26 percent against the US dollar, pointed out Hanke. The severe balance of payments crisis and recent fuel price hikes are sinking the country, he said.

He noted that to ease the crisis, the island nation needs to have in place a currency board, similar to what was there in from 1884 until the 1950s​​.

A currency board is an extreme form of a pegged exchange rate, where a government would set a specific fixed exchange rate. The establishment of such a board would take away from the Central Bank the management of exchange rate and money supply. The system would not allow governments to print money to pay down deficits.

Currency board regimes are commended for their rule-based nature, and are known to keep inflation under control.