An Echelon Media Company
Saturday May 25th, 2024

Colombo to Haldummulla, Sri Lanka’s centres of free banking

ECONOMYNEXT – Sri Lanka (then Ceylon) had issued currency notes at multiple locations ranging from Colombo and Galle to plantations districts of Haldemulla and Nuwara Eliya, during the free banking era of the island, an expert said.

Under free banking more than one bank could issue notes, which would circulate in parallel. A free bank typically issued notes, with a promise to pay back a specific weight in silver or gold (a convertibility undertaking), depending the metallic standard in use.

Ceylon Free Banking 

By Ordinance Number 23 of 1844, the British colonial administration had allowed private banks in Ceylon to issue currency notes, starting off a free banking period, which ended in 1885 with the setting up of the fully foreign reserve-backed Currency Board with a one-to-one convertibility with the Indian rupee.

This was around the time when the British parliament passed the Bank Charter Act of 1844, which sought to limit money printing by the Bank of England in a bid to end balance of payments troubles, as the arguments of bullionists’ finally found favour defeating ‘anti-bullionist’ Mercantilists.

But it was too late to prevent the British Railway Bubble, analysts say.

"The first private bank to issue notes was the Bank of Ceylon, not the current Bank of Ceylon," explained Kavan Ratnatunga, a retired astrophysicist who is also the Vice-President of the Sri Lanka Numismatic Society, and the Archaeological Society of Sri Lanka.

He was speaking at a monthly lecture of National Trust Sri Lanka, a heritage society with a broad focus.

A free bank was expected to issue specie backed money (gold or silver pegged), but it may also be tempted to issue unbacked money (expand reserve money) without deposits, especially when credit demand grew.

Its paper money would then be ‘depreciated’ and the rising gold or silver prices would encourage holders to demand gold or silver back according to the convertibility undertaking, as dollar are demanded in the forex market from a dollar pegged central bank now.

Redemption will then shrink reserve money, and boost the value of the paper, bringing stability back.

A modern day state-owned central bank will however print more money through reverse repo and other liquidity facilities, boosting credit beyond deposits raised, to target a policy rate, generating a full blown balance of payments crisis, until rates are finally allowed to go up.

If the private bank could not redeem at the promised rate (convertibility undertaking) it will ‘default’ and the bank collapsed. Its directors could also face criminal prosecution if not all the deposits, denoted by gold was returned.

A modern government central bank however would default and give a lower amount of dollars for the money it printed (depreciated or devalued), and escape with no accountability, generating large losses to holders of the paper and everyone who held assets denominated in that paper.

Currency Competition

Meanwhile, the first Bank of Ceylon had operated from 1844 to 1849. The Ceylon Government also continued to issue Sterling notes until 1856, in a period of currency competition.

Though Ceylon had officially adopted the Sterling by this time, up to about 1879 the India rupee was also circulating in parallel.

"It was the currency used by most of the people," Ratnatunga said. "Most of the people people were used to rupees than pounds. It had the standard exchange rate of 10 rupees to the pound."

Ratnatunga had located a specimen two sterling pound note issue by the Bank of Ceylon from the British Museum. He also maintains a website on matters of historical interest, where images of Sri Lanka’s current and also could notes could be viewed.

The undated note had the denomination printed in Sinhala, Tamil and English.

In Sinhalese it said Lanka Mudal Nidanaya, which was used to describe the word treasury, he said. It was issued in Colombo. 

"There was a camel in the logo," Ratnatunga said. "There is a camel in addition to an elephant. May be the people in England did not really what animals to put." 

Paper Money driven BOP Crises 

The first known paper money was issued in Sri Lanka in 1785 in the form of a note called credit brieven, by Dutch Governor Vandergraff, when Britain declared war on Holland as a fallout of the American War of Independence. 

The credit brievens generated one of the earliest known balance of payments troubles, long before the central bank generated repeated monetary instability crises and depreciation by printing large volumes of money from 1951. 

The original credit brievens that were printed were exchangeable at 48 stuivers for each Rix dollar. 

The Governor paid the soldiers with paper, and auctioned the Dutch East India company’s metal money. 

"This may be the first step, in lowering the Ceylon Exchange and the depreciation of its currency," wrote Anthony Bertolacci, a civil servant who came with British Governor Frederick North several decades later. 

"The silver ducatoons, which in 1785 had been exchanged for not more than eighty stivers each, were sold, in 1795, at one hundred." 

After the British came more paper Rix Dollars were printed creating even more disruption and hardship

for the people was created, sending prices shooting up. 

Bertolacchi says by 1812, ducatoons were bought at two hundred and eight stivers, or four Rix-dollars and four fanams each. 

Branch Banking 

The Mercantile Bank of India, London and China – Ceylon Branch had started issuing notes from 1857.

Notes were issued under the name of The Chartered Mercantile Bank of India, London and China (after getting a Royal Charter). 

It had issued notes from Colombo, Kandy and Galle branches. 

"Each branch issued its own notes," Ratnatunga said. "It said the note was redeemable either at that brand or the Colombo branch." 

"Its notes were withdrawn in 1884 when all the private bank notes were discontinued," Ratnatunga said.

The Asiatic Banking Corporation, had started in 1864 and ended in 1866. 

"It had an existence of only three years, and it was liquidated," Ratnatunga said. "It is relatively expensive to get one (of its notes) but it is not extremely rare." 

In 1846 the Oriental Bank – Ceylon Branch had started issuing notes. 

"The Oriental Bank was the Bank of Western India which was founded in Mumbai in 1845 and was reconstituted as the Oriental Bank moving its headquarters to London. 

"In 1849 the Oriental Bank took over the failed Bank of Ceylon. That was the end of the Bank of Ceylon, till 1938 when we go the new Bank of Ceylon." 

It first issued sterling notes. 

The bank was given a Royal Charter in 1851 in London as the Oriental Bank Corporation, Ratnatunga said. 

The bank then issued rupees. 

It was a practice at the time to tear a note in half, post it and when the first half was received, post the second half, as a measure against stealing, he said. 

Ratnatunga found notes issued by the Oriental Bank Corporation in Jaffna, Kandy, Badulla, Galle, Nuwara Eliya and Haldummulla. 

"Ten years ago when I went to Haldummulla there wasn’t even an ATM (automated teller machine) there. But in the British Era they issued their own currency notes," Ratnatunga said. 

"So it was an important location with tea and coffee estates." 

The Dutch credit brievens were issued in Batticaloa and Trincomalee. 

Currency Board 

In 1884, the Oriental Bank Corporation collapsed when coffee plantations were hit. 

Banking analysts have also said the firm was hit by unhedged exchange rate risk as it had borrowed sterling which was gold and loaned rupees which was silver based. When silver/gold parity changed, it was exposed to exchange rate risk. 

Sri Lanka’s central bank was hit by a 14 billion rupee unhedged forex loss in 2018 due to a somewhat similar event. 

"The government took over its liabilities and there was a bill in 1884 that the government would be issuing currency," Ratnatunga said. 

The Ceylon Currency Board started issuing notes from 1885. It issued foreign reserve backed currency which was fully convertible. The Ceylon Currency Board had a fixed exchange target of 1 Indian rupee (which later became gold backed), and interest rates floated. 

In general a currency board will have foreign assets in excess of 100 percent (usually about 115 percent) of the notes in issue to cover of exchange fluctuations or other impairment of reserve assets. 

Under the currency board, Ceylon became financial centre where companies from countries like Malaysia raised capital. 

It is often said that by the time the central bank was set up, Sri Lanka’s living standards were only second to that of Japan in Asia. 

The Currency Board did not collapse. But was abolished in 1950 not because it failed but following machinations of the US State Department and Treasury to set up dollar pegged soft-pegs in the post World War II Bretton Woods system, analysts have said. 

"Currency boards have existed in about 70 countries, and none have failed," explains Steve Hanke, a Professor at Johns Hopkins University who had helped set up modern hard pegs. 

"The demise of currency boards resulted from a confluence of three factors. A choir of influential economists was singing the praises of central banking’s flexibility and fine-tuning capacities. 

"In addition to changing intellectual fashions, newly independent states were trying to shake off their ties with former imperial powers. 

Additionally, the International Monetary Fund and the World Bank, anxious to obtain new clients and “jobs for the boys,” lent their weight and money to the establishment of new central banks." 

"In the end, the Bank of England provided the only institutional voice that favored currency boards."  

Malaysia, Singapore, Maldives and Mauritius and Hong Kong, which had not got independence from Britain in the formative years of Bretton Woods, escaped. 

The currency boards of those countries provided a strong foundation for stability and growth. 

The Philippines was badly hit by central banking. South Vietnam was devastated. South Korea however learned fast analysts say, probably helped by its wartime experience under Japan. 

Sri Lanka’s rupee collapsed from about 4.70 to the US dollar at the time it was created, to 176 by mid 2019 generating economic crisis after crisis, restricting free trade, capital flows generally de-stabilizing the economy. (Colombo/June30/2019 – Update II)

Leave a Comment

Your email address will not be published. Required fields are marked *

Leave a Comment

Leave a Comment

Cancel reply

Your email address will not be published. Required fields are marked *

Melco’s Nuwa hotel to open in Sri Lanka in mid-2025

ECONOMYNEXT – A Nuwa branded hotel run by Melco Resorts and Entertainment linked to their gaming operation in Colombo will open in mid 2025, its Sri Lanka partner John Keells Holdings said.

The group’s integrated resort is being re-branded as a ‘City of Dreams’, a brand of Melco.

The resort will have a 687-room Cinnamon Life hotel and the Nuwa hotel described as “ultra-high end”.

“The 113-key exclusive hotel, situated on the top five floors of the integrated resort, will be managed by Melco under its ultra high-end luxury-standard hotel brand ‘Nuwa’, which has presence in Macau and the Philippines,” JKH told shareholders in the annual report.

“Melco’s ultra high-end luxury-standard hotel and casino, together with its global brand and footprint, will strongly complement the MICE, entertainment, shopping, dining and leisure offerings in the ‘City of Dreams Sri Lanka’ integrated resort, establishing it as a one-of-a-kind destination in South Asia and the region.”

Melco is investing 125 million dollars in fitting out its casino.

“The collaboration with Melco, including access to the technical, marketing, branding and loyalty programmes, expertise and governance structures, will be a boost for not only the integrated resort of the Group but a strong show of confidence in the tourism potential of the country,” JKH said.

The Cinnamon Life hotel has already started marketing.

Related Sri Lanka’s Cinnamon Life begins marketing, accepts bookings


Continue Reading

Sri Lanka to find investors by ‘competitive system’ after revoking plantations privatizations

ECONOMYNEXT – Sri Lanka will revoke the privatization of plantation companies that do not pay government dictated wages, by cancelling land leases and find new investors under a ‘competitive system’, State Minister for Finance Ranjith Siyambalapitiya has said.

Sri Lanka privatized the ownership of 22 plantations companies in the 1990s through long term leases after initially giving only management to private firms.

Management companies that made profits (mostly those with more rubber) were given the firms under a valuation and those that made losses (mostly ones with more tea) were sold on the stock market.

The privatized firms then made annual lease payments and paid taxes when profits were made.

In 2024 the government decreed a wage hike announced a mandated wage after President Ranil Wickremesinghe made the announcement in the presence of several politicians representing plantations workers.

The land leases of privatized plantations, which do not pay the mandated wages would be cancelled, Minister Siyambalapitiya was quoted as saying at a ceremony in Deraniyagala.

The re-expropriated plantations would be given to new investors through “special transparency”

The new ‘privatization’ will be done in a ‘competitive process’ taking into account export orientation, worker welfare, infrastructure, new technology, Minister Siyambalapitiya said.

It is not clear whether paying government-dictated wages was a clause in the privatization agreement.

Then President J R Jayewardene put constitutional guarantee against expropriation as the original nationalization of foreign and domestic owned companies were blamed for Sri Lanka becoming a backward nation after getting independence with indicators ‘only behind Japan’ according to many commentators.

However, in 2011 a series of companies were expropriation without recourse to judicial review, again delivering a blow to the country’s investment framework.

Ironically plantations that were privatized in the 1990s were in the original wave of nationalizations.

Minister Bandula Gunawardana said the cabinet approval had been given to set up a committee to examine wage and cancel the leases of plantations that were unable to pay the dictated wages.


Sri Lanka state interference in plantation wages escalates into land grab threat

From the time the firms were privatized unions and the companies had bargained through collective agreements, striking in some cases as macro-economists printed money and triggered high inflation.

Under President Gotabaya, mandating wages through gazettes began in January 2020, and the wage bargaining process was put aside.

Sri Lanka’s macro-economists advising President Rajapaksa the printed money and triggered a collapse of the rupee from 184 to 370 to the US dollar from 2020 to 2020 in the course of targeting ‘potential output’ which was taught by the International Monetary Fund.

In 2024, the current central bank governor had allowed the exchange rate to appreciate to 300 to the US dollar, amid deflationary policy, recouping some of the lost wages of plantations workers.

The plantations have not given an official increase to account for what macro-economists did to the unit of account of their wages. With salaries under ‘wages boards’ from the 2020 through gazettes, neither employees not workers have engaged in the traditional wage negotiations.

The threat to re-exproriate plantations is coming as the government is trying to privatize several state enterprises, including SriLankan Airlines.

It is not clear now the impending reversal of plantations privatization will affect the prices of bids by investors for upcoming privatizations.

The firms were privatized to stop monthly transfers from the Treasury to pay salaries under state ownership. (Colombo/May25/2024)

Continue Reading

300 out of 1,200 Sri Lanka central bank staff works on EPF: CB Governor

ECONOMYNEXT – About 300 central bank staff out of 1,200 are employed in the Employees Provident Fund and related work, Governor Nandalal Weerasinghe said, with the function due to be transferred to a separate agency after a revamp of its governing law.

“When it comes to the EPF there is an obvious conflict of interest. We are very happy to take that function out,” Governor Weerasinghe told a forum organized by Colombo-based Advocata Institute.

“We have about 300 staff out of 1,200 including contract staff, almost 150 of permanent staff is employed to run this huge operation. I don’t think the central bank should be doing this business,”

The EPF had come under fire in the past over questionable investments in stocks and also bonds.

In addition, the central bank also faced a conflict of interest because it had another agency function to sell bonds for the Treasury at the lowest possible price, not to mention its monetary policy functions.

“There has been a lot of allegations on the management of this fund. This is the biggest fund of the private sector; about 2.6 million active, I think about 10 million accounts.

“When it comes to EPF, obviously there’s another thing. We obviously have, in terms of resources, on the Central Bank, that has a clear conflict because we are responsible for the members.

“We have to give them a, as a custodian of the fund, we have to give them a maximum return for the members.

“For us to get the maximum return, on one hand, we determine the interest rates as multi-policy. On the other hand, we are managing public debt as a, raising funds for the government.

“And on the third hand, this EPF is investing 90 percent in government securities. And also, interest rates we determine, and they want to get the maximum interest. That’s a clear conflict, obviously, there’s no question.”

A separate agency is to be set up, he said.

“It’s up to the government or the members to determine to establish a new institution that has a trust and credibility and confidence of the members that this institution will be able to manage and secure an interest and give them a reasonable return, good return for their lifetime savings,” Governor Weerasinghe said.

“The question is that how whether we have whether we can develop that institution, whether we have the strong institution with accountability and the proper governance for this thing.

“I don’t think it should be given completely to a private sector business to run that. Because one is that here we have no regulatory institution. Pension funds are not a regulated business.

“First one is we need to establish, government should establish a regulatory agency to regulate not only the EPF business fund, there are several other similar funds are not properly regulated.

“Once we have proper regulations like we regulate banks, then we can have a can ensure proper practices are basically adopted by all these institutions.

“Then you can develop an institution that we who can run this and can be taken back by the Labour Department. I’m not sure Labour Department has the capacity to do all these things.”

While some EPF managers had come under scrutiny during the bondscam and for questionable stock investments, in recent years, it had earned better returns under the central bank management than some private funds that underwent debt restructuring according to capital market analysts with knowledge of he matter. (Colombo/May24/2024)

Continue Reading