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Friday December 9th, 2022

China mops up liquidity to prop up Yuan, Sri Lanka rupee slightly weaker

ECONOMYNEXT – The People’s Bank of China mopped up excess liquidity in money markets to prop up its now unstable ‘flexible exchange rate’ while fending off false accusations by US Mercantilists that it was ‘manipulating’ the currency to get a trade advantage.

Global financial media jumped on the US bandwagon claiming that China was undervaluing the currency to compensate for US import taxes, while the People’s Bank of China mopped up excess liquidity to prop up the Renminbi.

In Hong Kong alone the People’s Bank of China announced the sale of 30 billion Yuan worth securities to mop up excess liquidity (sterilize) in offshore markets.

Sri Lanka’s rupee has also slightly weakened amid unsterilized excess liquidity.

Mopping up excess Yuan

The PBOC can also mop up excess liquidity by selling dollars against Yuan at an intervention rate.

On Tuesday the PBOC said it was setting the rate at 6.96 against the US dollar (a weak side convertibility undertaking) after allowing the rate to fall to 6.987 to the US dollar a day earlier, setting off a hysterical reaction from US Mercantilists and mainstream international media.

The PBOC indignantly denied it was ‘manipulating’ the Yuan to get any trade advantage.

Under a floating rate the Yuan (or rupee) has to weaken if the US dollar strengthens. Any resistance immediately turns the arrangement into a peg.

China operated a tight peg from 1993 to 2005, which had high credibility – an arrangement labeled ‘exchange rate fixity’ by economist Steve Hanke.

But it was forced into an unstable ‘flexible exchange rate’ in 2005 mainly under US pressure, reducing credibility, generating frequent panics and instability and generally pushing up nominal interest rates.

The PBOC continues to generate liquidity from dollar purchases showing that it still operates a peg. It also announces a daily rate setting a two way convertibility undertaking.

Flexible Exchange Rate

Sri Lanka has a mish-mash of shifting convertibility undertakings for its highly unstable ‘flexible exchange rate’, which has left analysts dizzy.

Sri Lanka does not announce a daily rate but the central bank has a foreign reserve target and is committed to stopping ‘disorderly adjustment’ through a weak-side convertibility undertaking, analysts have pointed out.

Sri Lanka also has a real effective exchange rate target mainly involving a strong side convertibility undertaking to weaken rupee and give wage subsidies to exporters.

But it may become a weak-side undertaking if the REER sharply overshoots 100 though there is no floating policy rate to enforce a weak-side convertibility undertaking.

Sri Lanka’s rupee also weakened in recent days as the central bank failed to permanently mop up a part of about 200 million US dollars worth of excess rupee liquidity since July 17 with its Treasury bill stock was last materially sold down.

Progressives steady mopping up of forex inflows (consistent policy), squeezes outflows keeping a peg strong.

Analysts have said that the rupee was not under pressure as private credit has been weak or negative up to May 2019 and consumption has taken a hit.

Ceiling Policy Rate

But state spending has picked up with salary hikes and subsidies amid weak revenues, showing that the central bank has to be careful.

"In August 2018 the central bank triggered a run on the rupee by allowing unsterilized excess liquidity from dollar purchases to build up in money markets," EN’s economics columnist Bellwether says.

"More liquidity was generated by a rupee/dollar swap."

"In China excess liquidity usually builds up from dollar purchases as the PBOC is prohibited from buying Treasury bills to finance government spending or SOEs.

"Both Sri Lanka and China are vulnerable to excess liquidity because they have a ceiling policy rate.

Hong Kong can allow high volumes of excess liquidity as there is no ceiling policy rate to threaten the HK dollar. The Hong Kong Monetary Authority makes unsterilized dollar sales."

But the Hong Kong Monetary Authority also mops up through currency board paper. This is partly because actual HK dollar notes (Certificates of Indebtedness) are issued by note issuing banks against currency board paper (Exchange Fund Bills).

By issueing longer term sterilzation paper a monetary authoritiy can avoids large fluctuations in short term rates and is able to keep forex reserves for longer periods. EN’s economic columnist has called on the Centarl Bank to resume selling it own paper shortly before monetary instability began in 2018. (Sri Lanka’s Central Bank should sell own securities in new credit cycle: Bellwether)

The PBOC this week offered 20 billion 3-month paper and 10 billion 1-year paper.

Currencies collapse not because pegged central bank’s sell dollars, but because after selling dollars domestic money is printed to enforce a ceiling policy rate (sterilized forex sales).

"According to Mercantilist and Keynesian thinking currencies move because of so-called ‘price effects’," says Bellwether.

"They do not understand ‘income effects’ or savings propensities in the way that classical economists did.

"This obsession with price effects makes neo-Mercantilists think that there is something mysterious or bad about currency boards though the entire gold standard which was the basis of the European industrial revolution was based on basically the same principle."

"The current reaction against the Yuan is also based on the same mis-conception."

Consistent Policy

Currencies also collapse due to excess liquidity from deficit financing with printed money with the direct purchase of Treasury bills with printed money (central bank credit).

Sri Lanka’s is planning to change the country’s monetary law to prohibit outright financing of the deficit, though President Maithripala Sirisena has apparently wants wholesale money printing to continue.

Analysts have said Sri Lanka should keep excess liquidity from dollar purchases at between 20 to 30 billion rupee when operating a peg with strong side convertibility (dollar purchases) and mop up liquidity before switching to a floating regime. But as credit picks up it may need to be narrowed.

Analysts have also warned the central bank to keep the policy corridor wide, and not cut the ceiling rate so that the exchange rate corrects quickly and there is no prolonged monetary instability to undermine economic activity.

Sri Lanka’s ‘flexible exchange rate’ has been the biggest threat to economic stability in recent years, and is likely to remain so in the near term, analysts say.

Analysts and economists have called on Sri Lanka to follow a consistent policy, either float with a narrow inflation target, operate currency board, or operate a tighter-than-currency-board like China between 1993-2005 or GCC nations.

"Stability is not everything, but without stability, everything is nothing," Germany’s Economy Minister Karl Schiller once said.

Consistent policy (either floating or fixed) results in low nominal interest rates as well as low inflation, analysts say have said. (Colombo/Aug07/2019)

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Sri Lanka president slams power regulator chief after conflicting with minister

ECONOMYNET – The powers to change the electricity tariff in Sri Lanka is vested with the Minister of Power and not the Public Utilities Commission (PUCSL), President Ranil Wickremesinghe told the Parliament.

The minister of Power and Energy, Kanchana Wijesekara has requested an upward price revision to be implemented in two phases both in January and July next year, saying the recent tariff hike was not enough for the state-run utility provider Ceylon Electricity Board (CEB) to continue uninterrupted power supply.

However, Jaynaka Ratnayake, the Chairman of the PUCSL had said  the recent tariff hike is enough for the CEB to cover the cost of production and it will not allow another price hike. However, he has said a twice a year price revision is necessary though it should be in April and October instead of January and July.

President Wickremesinghe said the PUCSL chief was opposing the tariff hike due to his personal reasons.

“The power is vested with the Minister and me. I am the one who made the PUCSL act and I know what is in it,” Wickremesinghe told the parliament on Thursday. quoting a letter from the Attorney General which mentioned provisions in the island nation’s Electricity Act.

Accordingly the Act, the PUCSL would be statutorily obliged to give effect to such policy. It is observed that neither the Act nor the PUCSL Act contains any provisions that empowers the PUCSL to change or act invariant of such policy guidelines.

“The Chairman of the PUCSL is misguiding the general public. I have to meet him and see,” Wickremesinghe said.

WIckremesinghe said the Chairman does not want the tariff hike because he owns one of the highest electricity consuming companies.

“He is the Chairman of the Trillium corporation. It is the firm that takes up the most energy”, he said.

The Trillium group is managed by Janaka Ratnayake and he also holds positions as the chairman and CEO of Trillium Property Management & Services Ltd., City Housing and Real Estate PLC, Trillium Residencies Ltd., Computer Care (Pvt) Ltd., and Rent a Comp Services (Pvt) Ltd., and JR Management Consultants (Pvt) Ltd.

“It means when the electricity bill increases, his expenses increase as well”

He said the CEB still has a loss of 300 billion rupees since 2013 and it needs to be covered.

The CEB issue can be solved only in three ways, either printing more money, increasing value added tax or increasing the tariffm, he said. (Colombo/Dec08/2022)

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Sri Lanka President bemoans over inconsistent LNG deals

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe bemoaned over successive governments’ liquefied natural gas (LNG) deal that has brought in all the world powers into the discussion.

Wickremesinghe’s center-right United National Party (UNP) had discussions with India and Japan between 2002-2004 for an LNG project.

“Following dialogues with India and Japan, the UNP government could come to agreements to get two LNG power plants. After we were defeated the successor government, without cancelling those agreements granted it to New Fortress company in USA,” Wickremesinghe told the parliament.

“Thereafter, as they did not like New Fortress, they gave it back to Pakistan and China. So within the same premises, there were China, Pakistan, India, USA, Japan and only Russia was not there.”

“It was wonderful that a world war did not ignited there as there were five main powers in the world.”

“Now there is no LNG or anything here and now they ask me to solve this issue.”

Wickremesighe’s outburst comes as his government is forced to raise tariffs on power prices after successive governments failed to implement cheap and renewable power generation projects.

He said a total loss for the state-run Ceylon Electricity Board since 2013 was 300 billion rupees and a possible drought next year could increase the 2023 electricity cost to 420 billion rupees.

“If it rained, we need Rs. 352 billion while Rs. 295 is required if rained so much to have floods. How are we going to find this money? We would have to print money, but Rupee would depreciate. We would have to increase VAT but it would increase the price of all commodities or to charge it direct.” (Colombo/Dec08/2022)

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Air quality drop forces Sri Lanka to close schools; public warned

ECONOMYNEXT – A rapid drop in air quality in Sri Lanka has forced the Colombo government to close all schools across the country after a deep depression over Southeast Bay of Bengal, officials said.

The Education Ministry, issuing a special notice on Thursday said, it has decided to close all government schools for Friday, after discussing with the officials in Meteorology Department and Disaster Management Center.

An official said the drop was due to the deep depression over Southeast Bay of Bengal carrying the air from India.

Due to the depression over South east Bay of Bengal (370 km east of Trincomalee) has concentrated into a cyclonic storm “Mandous” by Wednesday night.

“Cyclone in the Bay of Bengal that is the prime reason for the increase in the pollution load as we receive more wind from India,” H.D.S.Premasiri, Senior Scientist, Coordinator-Air Quality, noise and vibrations at National Building Research Organization (NBRO) told EconomyNext on Thursday.

Officials said there is a likelihood of the cyclone moving west-northwestwards and further intensify into a severe cyclonic storm tonight and cross North Tamil-Nadu, Puducherry and South Andhra Pradesh coast around midnight of 09 th December and the maximum wind speeds will be 70-90 km per hour and can increase up to 90 in sea areas.

“Hopefully, today we can expect normalization in the environment and the effects of the fog will disappear”.

According to the NBRO’s real time Air Quality Index Indicator, the quality of air in northwestern coastal district of Puttalam has dropped drastically and indicated a particular matter (PM) 132, while Kegalle (85) and Mannar (84) were the districts which had next worst air quality.

According to NBRO, Battaramulla, Polonnaruwa, Dambulla, Kegalle, Mannar and Puttalam indicate a poor quality of air due to higher PM.

“The fog will lead to lung and breathing issues,” Premasiri said.

“So the public is warned to wear a mask when they travel outside. The pollution highly prevails in city areas and has a less impact on the other parts of the areas.” (Colombo/ Dec08/2022)

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