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Thursday December 8th, 2022

China resumes Sri Lanka FTA push amid Indian tactics over loans, energy deals

ECONOMYNEXT – China has pushed Sri Lanka to complete a Free Trade Agreement saying the deal “would immensely benefit” the island as India is strategically wrapping up energy deals while offering credit lines to the nations strapped for dollars due to money printed to keep rates low.

Free trade talks between China and Sri Lanka hit a hurdle in 2018 under the last administration because Beijing disagreed with Colombo’s demand for a review of the FTA after 10 years according to officials familiar with the issue.

Qi Zhenhong, the Chinese Ambassador to Sri Lanka has discussed the ongoing FTA negotiations when he met Foreign Minister G L Peiris a statement said.

“Ambassador Qi while stating that China had signed over 26 FTAs, expressed that finalising the proposed FTA between Sri Lanka and China would immensely benefit the Sri Lankan local market and products,” Sri Lanka’s Foreign Ministry said in a statement on Sunday (20).

“He also urged the Sri Lankan authorities to resume the 7th round of FTA negotiations at the earliest.”

“Minister Peiris highlighted that the 7th round of FTA negotiations will soon commence with the support of the respective line agencies in Sri Lanka.”

China has invested billions of dollars building ports, airports, roads and power stations in the Indian Ocean island nation just off the southern toe of India as part of its Belt and Road Initiative (BRI) to increase its trade and other connections across Asia and beyond.

However, since the last quarter of 2021, Sri Lanka has strengthened its diplomatic relations with neighbor India, which has strategic investment and security interests in the island nation.

Sri Lanka is facing severe shortage of foreign currency and risks of sovereign debt default due to low interest rates enforced by money printing.

Sri Lanka Borrows, Signs Deals

As a result, the President Gotabaya Rajapaksa’s administration was compelled to ask for loans and swaps to prevent a sovereign debt default and a growing shortage of fuel, food, medicines, and other essential items.

India has agreed to extend a billion dollar credit line to import food, medicines, and other essential items, a 500 million US dollar credit line to import fuel, a 400-million-dollar swap, and deferment of around 912 million US dollars until May.

In return, Sri Lanka finalized nearly two-decade dragged oil tank farm deal in its Eastern port district of Trincomalee, agreed on a government-to-government deal to build a 100 MW solar power plant in Trincomalee’s Sampur area.

Power plants are also expected with India’s Adani group.

India’s leap on lending and inking the deal within shorter period comes as it along with the United States and Japan had raised concerns over increasing Chinese influence in Sri Lanka.

Sri Lanka’s Foreign Ministry said “both parties expressed great satisfaction over strong bilateral relations, including government to government contacts, people to people contacts as well as Party to Party contacts between the Chinese Communist Party and the island nation’s ruling Sri Lanka Podujana Peramuna (SLPP).

Sri Lanka consumers and businesses import more goods from China than it at the moment, some of which are inputs for exports to third countries and also products made for the domestic market.

China has already overtaken India as the top importer since 2019, the official data showed.

Sri Lanka imported $3.5 billion worth of Chinese goods in 2020 which is 22 percent of the total imports, mostly raw materials for garments, machines and electronics, metals, transport equipment and chemicals, followed by India which accounted for 19.2 percent of the total imports in the same year.

No FTA Talks in 5 Years

Ministerial level discussions about an FTA agreement have not been held since March 2017 while lower-level discussions between officials have made little progress after the deadlock over a 10-year review, Colombo officials have said.

Free trade benefits the poor and makes the country export efficient, but can hurt the profits and revenues of companies run by so-called import substation oligarchs and other firms which overcharge the public under tariff protection.

The review clause that Sri Lanka requested in 2017 would allow it to change some of the deal terms if firms that were overcharging the public faced more competition.

So-called ‘sunset clauses’ can increase uncertainty and put businesses that invest on the basis of a free trade deal at risk.

China in January signaled the desire to resume the stalled FTA talks to boost exports and come out of an economic crisis during a visit of Foreign Minister Wang Yi.

Officials from the last government had said that China wanted zero tariffs on 90 percent of goods the two countries sold to each other as soon as the FTA is signed while Sri Lanka wanted it to start with zero tariffs on only half of the products concerned and expand gradually over 20 years.

China’s push for free trade pacts with the Maldives in 2017 drew criticism from opposition political groups who said it had been rushed through parliament with less than an hour of debate.

Oligarch Power

Sri Lanka in 2018 has wanted more time to negotiate the deal as it was not sure about the economic impact of a rushed deal on its economy.

Though a leader in free trade in the region at one time, Sri Lanka has seen import tariffs go up over the last 15 or so years with protectionist oligarchs gaining more political clout, critics say.

India has tried to expand its existing FTA to a comprehensive economic partnership for more than a decade.

However, it has met with resistance from the protectionists who want to charge higher than world prices from consumers.

Exports to India under the free trade deal has grown making the country the third highest buyer of Sri Lanka goods after the US and EU.

Sri Lanka’s imports from India, some of which such as cars are heavily taxed, have also grown, as Indian products are cheaper for consumers than European or Japanese products, leaving more disposable income in the hands of consumers.

Money saved by the purchase of cheaper Indian or Chinese goods, can be spent on domestic services such as education, domestic tourism, or other products, raising living standards, expanding jobs, gross domestic product and tax revenues, analysts say.

An FTA with Singapore by the last administration was strongly resisted by the current ruling SLPP when it was in the opposition with doctors in particular making claims.

Government officials have said that some political parties resist such agreements without any knowledge but just to make sure it is not implemented under their rival government. (Colombo/March21/2022)

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Sri Lanka in deep talent drain in latest currency crisis

ECONOMYNEXT – Sri Lanka businesses are facing a drain of talent, top business executives said as the country suffers the worst flexible exchange rate crisis in the history of its intermediate regime central bank and people lose hope.

“We are seeing a trend towards migrating,” Krishan Balendra, Chairman of Sri Lanka’s John Keells Holdings told an economic policy forum organized by the Ceylon Chamber of Commerce.

“We have seen an impact mainly on the tourist hotels side, quite an exodus of staff (migrating) to countries we have not seen in the past. 

“We have seen people go to Scotland, Ireland. It has usually been the Middle East and Maldives. Australia seems like a red hot labor market at the moment.”

Sri Lanka’s rupee collapsed from 200 to 360 to the US dollar after macro-economists printed money to suppress rates.

Sri Lanka operates a ‘flexible exchange rate’ where errors in targeting interest rates are compensated by currency depreciation especially after the 1980s.

Classical economists and analysts have called for the power to mis-target rates and operate dual anchor conflicting monetary regimes should be taken away to prevent future crisis.

Currency crises are problems associated with flexible exchange rate central banks which are absent in hard pegs and clean floats.

“Something new we are seeing is that older people, even those in their 50s, which was a surprise, are looking at migrating,” Balendra said.

Businesses are trying to retain talent as real wages collapse.

Balendra said as businesses they see some stability returning and based on past experience growth is likely to resume, and they were communicating with the workers.

“We have a degree of conviction that the economy should get better, its the stability phase now and it will get better going forward so without the way our businesses are placed we should see good growth,” Balendra said.

“We can’t chase compensation that’s just not practical and we are not trying to do that especially if people are looking to immigrate but what we can do is show the career opportunities in the backdrop of the situation that people would rather stay here because its home.” 

Sri Lanka unit of Heineken says it is also trying to convince workers not to leave, with more success.

“We are all facing the effects of brain drain and it’s not just the lower levels… What we are doing is a balance of daring and caring,” Maud Meijboom-van Wel – Managing Director / CEO, Heineken Lanka Ltd told the forum.

“Why I say daring is, you have to be clear in what you can promise people, when you make promises you have to walk the talk. So with the key talents and everyone you need to have the career and talent conversations.

“I am a bit lucky because I am running a multinational company so my career path goes beyond Sri Lanka so I can say if you acquire certain skills here, then you can move out of here and then come back too, that is a bit easier for me but it starts with having a real open conversation with walking the talk – dare and care.” (Colombo/Dec7/2022)


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Despite losses, Sri Lanka to resume “park & ride” transport after complaints  

ECONOMYNEXT –  Sri Lanka’s state-run Transport Board will resume its loss-making City Bus service from January 15, 2022 Cabinet Spokesman Bandula Gunawardena said, after the service abruptly discontinued with the state-run firm’s director board citing losses.

The City Bus service was introduced in 2021, under the government of former President Gotabaya Rajapaksa, from Makubura to Pettah and Bambalapitiya.

The service was started to reduce the number of automobiles travelling to and from Colombo and suburbs by providing a comfortable, convenient and safe public bus transportation for passengers and riders who use cars and motorcycles as their means of transportation.

During the time period in which the service was initiated, there were 800 hundred vehicles that would be parked and would use the system, Gunawardena, who is also the Transport Minister, said.

The service was later collapsed due to inconsistencies in scheduling and it was completely stopped after

“Without informing the Secretary or the Minister of the relevant Ministry, the Board of Directors have come to a conclusion that this is loss making route and must be halted,” Gunawardena said.

“The users of the City Bus service brought to our notice and therefore I gave the Secretary to the Ministry of Transport the approval to start the City Bus service from January 15.”

“If we stop all loss making transport services then massive inconveniences will occur to the people in far parts of the island.”

The chairman of the state run Ceylon Transport Board has been asked to handover the resignation letter by the Minister Gunawardana citing that the head has failed to implement a policy decision approved by the government. (Colombo/ Dec 06/2022)

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Sri Lanka may see rates falling next year: President

ECONOMYNEXT – Sri Lanka’s interest rates are high and hurting small businesses in particular but interest rates are required to maintain stability, President Ranil Wickremesinghe said.

“One is, all of you want to know what’s going to happen to the interest rates?,” President Wickremesinghe told an economic policy forum organized by the Ceylon Chamber of Commerce.

“I wish I know. The governor has told me that the inflation has peaked. It’s coming down. You all understandably want some relief with the interest rates to carry business on.”

“I understand that and appreciate the viewpoint. It’s not easy to carry business on with such high interest rates. On the other hand, the Central Bank also has to handle the economy. So maybe sometimes early next year we will have a meeting of minds of both these propositions.”

Sri Lanka’s interest rates are currently at around 30 percent but not because the central bank is keeping it up. The central bank’s overnight policy rate is only 15.5 percent but the requirement to finance the budget deficit and roll over debt is keeping rates up.

Rates are also high due to a flaw in the International Monetary Fund’s debt workout framework where there is no early clarity on a whether or not domestic debt will be re-structured.

After previous currency crises, rates come down after an IMF deal is approved and foreign loans resume and confidence in the currency is re-stabilished following a float.

This time however there has been no clear float, though the external sector is largely stable and foreign funding is delayed until a debt re-structure deal is made.

Sri Lanka’s external troubles usually come because the bureaucrats do not believe market rates are correct when credit demand picks up and mis-uses monetary tools given in 1950 by the parliament to suppress rates, blowing the balance of payments apart.

The result of suppressed rates by the central bank are steep spikes in rates to stop the resulting currency crisis.

A reserve collecting central bank has little or no leeway to control interest rates (monetary policy independence) without creating external troubles, which is generally expressed as the ‘impossible trinity of monetary policy objectives’.

However, it has not prevented officials from trying repeatedly to suppress rates, perhaps expecting different results.

After suppressed rates – supposedly to help businesses – trigger currency crises, the normalization combined with a currency collapse leads to impoverishment of the population.

The impoverishment through depreciation leads to a consumption shock, which also leads to revenue losses in businesses.

The suppressed rates then lead to bad loans.

In the 2020/2022 currency crisis the sovereign default has also led to more problems at banks. Several state enterprises also cannot pay back loans.

“…[T]he bad debt that is being carried by the banks is mainly from the private sector or the government sector,” President Wickremesinghe said.

“Keep the government sector aside. We’re dealing with it. How do you handle it? Look, one of our major areas of are the small and medium industries. You can’t allow them to collapse, but they’re in a bad way.”

Classical economists and analysts have called for new laws to block the ability to central bank to suppress rates in the first place so that currency crises and depreciation does not take place in the first place.

Then politicians like Wickremesinghe do not have to take drastic and unpopular measures to fix crises and there will be stability like in East Asia.

Sri Lanka had stability until 1950 when the central bank was created by abolishing an East Asia style currency board. The currency board kept the country relatively stable through two World Wars and a Great Depression.

In 1948 after the war (WWII) was over “we stood second to Japan” Wickremesinghe said.

“But we started destroying it from the sixties and the seventies,” he said. :We started rebuilding an economy, which was affected by a (civil) war, and thereafter the way we went, is best not described here.”

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