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Sunday May 26th, 2024

Fingers crossed that Sri Lanka’s failed bill auctions which ravaged rupee will end

ECONOMYNEXT – Sri Lanka’s is holding the first Treasury bill auction without price controls Wednesday that crippled the bond markets and led to liquidity injections that ravaged the rupee and pushed the economy in to a monetary crisis triggering the worst balance of payments deficits in history.

The price controls on bill and bond auctions progressively discouraged investors from longer term bonds and 12-month bills and trading in the secondary market dried up.

Crippled Bond Auction

On Tuesday a solitary 2024 bond was quoted at 8.35/45 percent up from 8.25/40 levels Friday dealers said.

The central bank is offering 39.5 billion rupees of 3, 6 and 12 month bills.

There were no secondary market quotes for 12-month bills.

Sri Lanka’s 3, 6 and 12 yields flattened as price controls and liquidity injections continued over the past year and a half, a telltale sign that signals currency crises.

When bids are rejected and the central bank prints money to buy bills, rates remain rock steady week after week giving a ramrod straight curve over time until the currency collapse.

In times of monetary stability however the is a gap of around 100 basis points or more between 3 and 12 month bills.

The ramrod anomaly continues until delayed corrections are made to stabilize the rupee.

Then the gap between 3 and 12 month bills widen steepening the yield curves.

As stability comes back, credit slows after rate hikes the rates fall. If the currency is allowed to bounce back rates fall faster. At the moment however Sri Lanka’s forex markets are also dysfunctional.

Newly appointed Central Bank Governor Nivard Cabraal ended the price controls last week.

There is a high degree of uncertainty among market participants.

“Bids may be on the high side,” a dealer said. “We are not sure whether they will be accepted.”

The interbank money market is now 200 billion rupees short following a hike in the statutory reserve ratio as well as some foreign exchange interventions in September. The short is filled with printed window money at 6.0 percent.

It is not clear why the statutory reserve ratio was raised before the crippled bond auctions were allowed to work.

In order to fill the liquidity with foreign asset purchases after the liquidity injections stop, the interbank forex markets where the net internally unmatched dollar balances are traded among banks must also work work.

Hobbled Forex Markets

In addition to crippled bond markets, Sri Lanka forex markets are also hobbled under a series of controls. There is no spot market and forward cover is banned.

The exchange rate is decreed at 203 to the US dollar but there is no monetary policy to back it as long as there are liquidity injections to enforce artificially low interest rates.

Despite the peg being weakened by liquidity injections and low rates, more liquidity is being pumped in to the system through exporter forex surrenders worsening pressure on the exchange rate. Similar cascading policy errors had been seen in the past, analysts have shown.

In order to maintain a stable exchange rate (a credible peg) the monetary authority has to allow interest rates to move so that no money is printed to keep rates down artificially and interventions have to be unsterilized, or mostly unsterilized so that the credit system tightens and overnight rates move up.

Social Unrest Exchange Rate

Sri Lanka is following a so-called ‘flexible exchange rate’ a highly unstable pegged regime involving two conflicting anchors operated with inflationary policy to keep rates down until the currency peg collapses.

“This is new fangled words to describe highly unstable post World War II third world crawling or soft pegs without a credible monetary anchor which trigger currency crises, social unrest and sometimes civil wars,” says ENs’ economic columnist Bellwether.

“Social unrest flexible exchange rates have previously also been known as dirty floats or managed floats.”

Importers are now buying dollars at 230 to the US dollar or higher in the over-the-counter market as low rupee interest rates have incentivized exporters to keep dollars instead of converting them.

In the absence of liquidity injections any dollar hoarding should have driven up rupee rates and crowded out domestic credit, keeping the external sector in balance.

However liquidity injections permit dollars to be kept at low cost and also for domestic credit to expand unchecked triggering imports.

Sri Lanka’s policy rate is still 6.00 percent at which all interventions are sterilized.

The central bank has effectively halted convertibility (floated) the rupee for trade transactions leading to the rupee falling to 230 or weaker.

A float however does not work if liquidity continues to be injected either through failed bond auctions or sterilized interventions.

Credit expansion, monopoly, price controls

Sr Lanka is now mired in trade controls, price controls and forex shortages as the inflated reserve money supply undermined and de-stabilized the market, while import substitution oligopolies are fleeing the public under cover of trade controls.

In parliament, on Tuesday ruling party legislators called for demonetization of rupee notes and controls over kerb market operators in the style of many money printing European governments in the last century as Marxism and Keynesianism spread like new religions.

“European governments and parliaments have been eager for more than sixty years to hamper the operation of the market, to interfere with business, and to cripple capitalism,” Economist Lugwig von Misses wrote.

“They have blithely ignored the warnings of economists. They have erected trade barriers, they have fostered credit expansion and an easy money policy, they have taken recourse to price control, to minimum wage rates, and to subsidies.

“They have transformed taxation into confiscation and expropriation; they have proclaimed heedless spending as the best method to increase wealth and welfare.

“But when the inevitable consequences of such policies, long before predicted by the economists, became more and more obvious, public opinion did not place the blame on these cherished policies, it indicted capitalism.

“In the eyes of the public not anticapitalistic policies but capitalism is the root cause of economic depression, of unemployment, of inflation and rising prices, of monopoly and of waste, of social
unrest and of war.” (Colombo/Sept22/2021)

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Sri Lanka power outages from falling trees worsened by unfilled vacancies: CEB union

HEAVY WINDS: Heavy rains and gusting winds have brought down trees on many location in Sri Lanka.

ECONOMYNEXT – Sri Lanka’s power grid has been hit by 300,000 outages as heavy winds brought down trees, restoring supply has been delayed by unfilled vacancies of breakdown staff, a union statement said.

Despite electricity being declared an essential service, vacancies have not been filled, the CEB Engineers Union said.

“In this already challenging situation, the Acting General Manager of CEB issued a circular on May 21, 2024, abolishing several essential service positions, including the Maintenance Electrical Engineer in the Area Engineer Offices, Construction Units, and Distribution Maintenance Units,” the Union said.

“This decision, made without any scientific basis, significantly reduces our capacity to provide adequate services to the public during this emergency.

“On behalf of all the staff of CEB, we express our deep regret for the inconvenience caused to our valued customers.”

High winds had rains have brought down trees across power lines and transformers, the statement said.

In the past few day over 300,000 power outages have been reported nationwide, with some areas experiencing over 30,000 outages within an hour.

“Our limited technical staff at the Ceylon Electricity Board (CEB) are making extraordinary efforts to restore power as quickly as possible,” the union said.

“We deeply regret that due to the high volume of calls, there are times when we are unable to respond to all customer inquiries.

“We kindly ask consumers to support our restoration teams and to report any fallen live electrical wires or devices to the Electricity Board immediately without attempting to handle them.

The union said there were not enough workers to restore power quickly when such a large volume of breakdowns happens.

“We want to clarify that the additional groups mentioned by the minister have not yet been received by the CEB,” the union said.

“Despite the government’s designation of electricity as an essential service, neither the government, the minister in charge, nor the CEB board of directors have taken adequate steps to fill the relevant vacancies or retain current employees.

“We believe they should be held directly responsible for the delays in addressing the power outages due to the shortage of staff.”

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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


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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)

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