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Wednesday December 7th, 2022

Hong Kong, GCC pegs, Vietnam hike rates after Fed as Sri Lanka eyes flexible policy

ECONOMYNEXT – The Monetary Authority of Hong Kong, an orthodox currency board and currency- board-like UAE, Saudi Arabia, Kuwait, Qatar, Bahrain and Oman as well as Vietnam raised rates in tandem as the US Federal Reserve hiked rates as Sri Lanka eyes a new law with more flexible policy.

The US Fed hiked its target rate to 3.0 – 3.25 percent and the interest on reserve balances (earlier called excess reserves) to 3.15 percent.

The Hong Kong Monetary Authority, a near-orthodox currency board, raised its base rate to 3.50 percent or 50 basis points above the lower Fed target rate or a the five day moving average of overnight and one month rate Hong Kong interbank offered rate, whichever is higher.

UAE, which has a currency-board-like arrangement along with several other Gulf Co-operation Council nations, raised its overnight deposit rate to 3.15 percent from 2.4 and the lending rate to 50 basis points above the IORB rate.

The Saudi Central Bank hiked cash injection rate by 75 basis points to 3.75 percent and excess cash deposit rate by 75 bp to 3.25 percent.

Kuwait said it is raising its rate by 25 bps to 3 per cent. Qatar Central Bank has raised its deposit rate by 75 bps to 3.75 per cent as.

Bahrain raised its overnight deposit rate from 3.00 to 3.75 per cent, the four-week deposit rate from 4 to 4.75 per cent and the lending rates from 4.50 to 5.25 per cent. Bahrain raised policy interest rate one one-week deposit facility from 3.25 to 4 percent.

Oman also raised its policy rate to 3.75 percent.

Vietnam, which has kept its peg around 22,000- 23000 dong to the US dollar for around 12 years following its last currency crisis in 2011, in the wake of a ‘stimulus’ debacle when the Greenspan-Bernanke bubble broke, hiked rates by 100 basis points.

The hike took the overnight liquidity auction rate, which fluctuates on liquidity conditions to a ceiling 6.0 percent. Another discount and re-discount rate was raised to 5.0 and 3.5 percent. The Vietnam dong has slipped about 200 to 300 dong in the past few weeks.

State Bank of Vietnam has promised US Treasury Secretary Janet Yellen, a former Fed Chief that it will not depreciate its currency and the it is kept stable for domestic stability, after the Trump Treasury falsely labeled Vietnam as currency manipulator based on Mercantilist beliefs.

RelatedVietnam promises US it will not devalue, but dreaded Sri Lanka style ‘monetary modernization’ looms

Vietnam has so far resisted pressure from the International Monetary Fund to adopt flexible inflation targeting but it also has other interest rate controls on broader credit which can make the currency vulnerable. Laos however has fallen.

Hiking domestic rates in step stops the domestic credit cycle from going beyond that of the Fed and triggering a credit bubble and depletion of reserves for imports, panic, and ultimately a balance of payments crisis.

Poor countries, with reserve collecting pegs who believe they can extend credit cycles with flexible or independent monetary policy (now called flexible inflation targeting) face collapsing currencies, sharply higher interest rates, social unrest and in extreme cases like Sri Lanka’s central bank and in the case African central banks, malnutrition as food prices rocket beyond that of reserve currencies.

To institutionalize discretionary policy with a high inflation target Sri Lanka is to enact a flexible inflation targeting law under an IMF program.

Vietnam raised rates 100 basis points with official inflation at 2.89 percent up to August.

Singapore’s former Prime Minister Lee Kwan Yew in August 1966, two days before a currency board law was announced described the phenomenon as follows in a speech to workers.

“Right, stop; break; pull the money back.” Bank rates go up; money cannot borrowed easily; shops cannot borrow money; private owners cannot borrow money to build houses, to buy cars; hire purchase is more difficult; expenditure contracts; demand goes down; imports go down; unemployment goes up,” PM Lee explained.

“Now, we are going to run a Currency system which means that the moment we earn less, we spend less.”

“This is a tough, vigorous regime. And I say we do it or we die because this is a society with an open market, exposed,” PM Lee said.

To this day Singapore does not have true policy rate, while Sri Lanka busts up reserves for imports based on Harvard-Cambridge orthodoxy that Singapore warned against.

Sri Lanka also borrowed heavily for ‘bridging finance’ through international sovereign bonds and other budget suppot credits to cover holes blown in the balance of payment in a quick succession of currency crises in 2015/16, 2018 and 2020 onwards and ultimately defaulted.

“If you start fiddling around with currency and you start printing notes and then you have no money really to spend and you start borrowing to cover up, you will end up in penury and bitterness,” PM Lee warned.

Economists at the time had warned Singapore against setting up a currency board citing various scare stories about deflation and had urged the country set up a central bank instead like other post-independent countries that later became unstable and poor.

Sri Lanka’s public gave the economists and bureaucrats the tools to print money to suppress rates, bust up reserves for imports and depreciate the currency to cut real wages in an failing strategy to boost exports in 1950 and has not been able to take it away from them, despite malnutrition of kids.

Sri Lanka’s interest rates are now at 30 percent and inflation near 70 percent after latest mis-adventure with post-Keynesian flexible monetary policy with a peg.

Most Western central banks with floating regimes which printed money for stimulus for jobs as talking heads to hosannas from talking heads in financial media (except Wall Street Journal) are now engaging in “Right, stop; break; pull the money back,” tactics as explained by PM Lee. (Colombo/Sep26/2022)

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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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