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Saturday May 25th, 2024

How Sri Lanka’s IMF-backed ‘Young Plan’ fired a foreign debt death spiral: Bellwether

NO RULES: IMF gave Sri Lanka technical support to calculate an output gap, which was inflationarily targeted with ‘flexible’ ‘go’ policy undermining the monetary anchor.

ECONOMYNEXT – While Sri Lanka’s monetary meltdown accelerated with historic low interest rates driven by money printing after the tax cuts of 2019, the storm gathered pace from 2015, when rapid foreign debt accumulation greater than the annual foreign financed deficits began.

That was due to monetary instability coming from a non-rule based monetary regime of ‘flexible exchange rate’ and ‘flexible inflation targeting’ with built in contradictions of epic proportions which created forex shortages and forced maturing debt to be repaid with more foreign borrowings.

Even in 2020, when authorities claimed that foreign debt had fallen, and foreign financing of the budget was negative, the net foreign debt had risen by over 600 million dollars when the fall in net international reserves are taken in account.

Cascading Errors

A country that has monetary stability (no forex shortages) and does not inflate the domestic reserve money supply above a consistent anchor can transfer wealth from the domestic economy to repay foreign loans through the credit system.

However a country which inflates reserve money, cannot transfer wealth to repay foreign debt through the credit system as it runs into ‘foreign exchange shortages’.

Any country which follows a similar set of cascading policy errors, ends up at the same place.

While Latin America nations with bad central banks are the most widely known after World War II, the original blunder, backed by the US policy confusion, was made in Germany after World War I, during the period of what is called the Weimar Republic.

This is the key reason the ‘Yahapalana’ administration failed to solve the foreign debt problem and worsened it in peacetime despite raising taxes to high levels, expanding the state under ‘revenue based fiscal consolidation’, bringing down the deficit and creating the much mis-understood ‘primary surplus’.

Why did foreign debt rocket, despite a ‘primary surplus’?

If fiscal problems were solved, why did foreign debt ratchet up so fast?

Why did foreign dollar denominated debt rocket in particular? Why did foreign investors flee from rupee debt?

While fiscal problems are usually there from time to time, foreign debt default in a pegged exchange rate regime is at its core a problem with monetary instability.

To know why it happens, there has to be a clear understanding of what inflationary and deflationary policy is in a pegged exchange rate regime.

As long as deflationary policy is run (central bank withdraws liquidity), it is very easy to repay foreign debt (or build massive foreign reserves), however if the opposite inflationary policy is run for several years in a row (the central bank injects liquidity), foreign debt default is almost certain as ad hoc ‘stop-go’ policies also slows growth.

The contradictory and unstable monetary regime, triggered rapid stop-go policies, confidence shocks, which led to subdued growth.

This was topped off by the Liability Management Law (borrowing abroad instead of transferring wealth from the domestic economy through savings) which is also an automatic and inevitable consequence of the mindset of any country with chronic monetary instability and is founded on Keynesian thinking.

If anyone tries to fix Sri Lanka’s economic problems without understanding this phenomenon, it will keep recurring, as it happens in Latin America despite repeated IMF programs.

The core mis-understanding behind these cascading policy errors that leads to foreign debt default is an economic fallacy spread by most Anglo-Saxon Keynesian universities (other than a few like LSE) that foreign debt cannot be repaid with domestic resources or a domestic transfer of wealth.

While people can understand that it can be done with real goods (give a building in return for debt or a port for that matter), it is almost impossible to imagine how it can be done through a credit system when paper money of different note-issue banks are involved in what is generally called ‘foreign exchange.

The Weimar ‘Dawes’ and ‘Young’ repayment plans

Before getting into Sri Lanka’s numbers to see how foreign debt suddenly ballooned, it is useful to understand how this thinking emerged and what happened in Weimar Germany in the 1920s.

As the Prussian/nationalist aggressor, post World War I Germany had to pay reparations to Allies who defeated them. But the economy descended into hyperinflation in 1923 as money was printed and Germany defaulted.

In 1924, a committee under Charles G Dawes and also Owen Young re-organized the Reichsbank which was correctly identified as the cause of the inflation. A new repayment plan was made.

To help Germany with the debt, the US arranged a Wall Street loan with JP Morgan, like the Liability Management Law, in the Keynesian/Mercantilist belief that money raised in domestic currency cannot be used to repay foreign loans and ‘dollars’ were needed.

There were however several problems with the Dawes plan, not least something similar to what happened to Mangala Samaraweera’s petroleum price formula, where money was parked in the banking system, awaiting dollars under a ‘transfer clause’.

When money earned from Samaraweera’s formula was parked in a state bank it was loaned to others to bring imports and buy dollars.

If not for the output gap targeting and REER targeting exercise, Samaraweera would have gone down in history as the Tun Daim Zainuddin of Sri Lanka who fixed the fiscal problem.

However he had no Bank Negara to provide monetary stability, instead money was printed for output gap targeting.

Dawes won a Nobel Peace Prize.

But, the country ran into trouble again like Sri Lanka’s IMF programs.

Britain’s John Maynard Keynes, who seemed to have a weak understanding of the link between trade deficits and credit, claimed that Germany must have a trade surplus (or current account surplus in modern parlance) to repay foreign debt.

This kind of obsession with the ‘current account deficit’ is also found in Sri Lanka.

Several classical economists in vain tried to explain to Keynes that it was inflationary policy (liquidity injections) that made it difficult to collect foreign exchange and as long as domestic money was raised (the ‘budgetary problem’ was solved) either through taxes or loans without printing money; it was possible to generate dollars (‘transfer’ problem) to make foreign payments.

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Keynes did not get it. He insisted that there was a ‘transfer problem’. Mercantilists backed by Germany who did not want to pay reparations insisted that government ‘political’ repayments were somehow special and different from commercial payments.

Classical economists insisted it was not so, showing examples of other countries including France.

Because Keynes was influential, the Allies in general bought it. When the first one failed, a similar plan to the Dawes Plan was devised under Owen Young, in 1929.

“The Allies were from the very beginning of the negotiations handicapped by their adherence to the spurious monetary doctrines of present day etatist economics,” explained classical economist Ludwig von Mises later. “They were convinced that the payments represented a danger to the maintenance of monetary stability in Germany and that Germany could not pay unless its balance of trade was “favorable.”

“They were concerned by a spurious “transfer” problem. They were disposed to accept the German thesis that “political” payments have effects radically different from payments originating from commercial transactions.”

The Young Plan also had another JP Morgan syndicated loan like Sri Lanka’s ISBs.

Heavily US driven agencies like the IMF and World Bank or any institution which has staff from Cambridge, Harvard (where Alvin Hansen taught) or other Keynes-influenced university will easily believe all this.

Automatic Transfer

Sri Lanka’s Liability Management Law which came alongside an International Monetary Fund program was a classic Young Plan with ‘JP Morgan’ style International Sovereign Bonds to raise dollars to repay maturing debt.

Even now many people write and say that reparations made Germany caused hyperinflation, based on Keynesian ideas. They have romantic notions about central banks or have no idea at all.

“The truth is that the maintenance of monetary stability and of a sound currency system has nothing whatever to do with the balance of payments or of trade,” Mises explained.

“There is only one thing that endangers monetary stability—inflation. If a country neither issues
additional quantities of paper money nor expands credit, it will not have any monetary troubles.

“An excess of exports is not a prerequisite for the payment of reparations. The causation, rather,
is the other way around.

“The fact that a nation makes such payments has the tendency to create such an excess of exports. There is no such thing as a “transfer” problem.

“If the German Government collects the amount needed for the payments (in Reichsmarks) by taxing its citizens, every German taxpayer must correspondingly reduce his consumption either of German or of imported products.

“In the second case the amount of foreign exchange which otherwise would have been used for the purchase of these imported goods becomes available.

“Thus collecting at home the amount of Reichsmarks required for the payment automatically provides the quantity of foreign exchange needed for the transfer.”

Petroleum Weimar ‘Young Plan’

This is the reason why economists and analysts want fuel to be market priced. Then the enhanced payments to the CPC by its customers, would reduce non-oil consumption and savings and therefore non-oil imports and credit.

This offsetting series of events would generate the dollars required to pay the import bills.

But if the central bank printed money (ran inflationary policy), there would be a forex shortage regardless of whatever the CPC did with fuel pricing because the entire credit system rus with central bank money.

When the central bank printed money in 2018, CPC was made to borrow, like the JP Morgan loan to Weimar Republic. In the end CPC ended up with massive losses when the currency fell.

That is one of the cascading policy errors in Sri Lanka.

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However in 2017 and 2019, when the central bank was selling down its Treasury bill stocks (when the central bank was running deflationary policy), there was plenty of dollars not only to pay the current bills but reduce CPCs past borrowings as well.

The experience with Germany shows that the Keynes made a bigger impression on Americans than Europeans since those who opposed him included French, Swedish as well as Austrians like Mises.

Shortly after, during the Depression created by the Fed, Alvin Hansen and others adopted Keynesianism wholesale.

Someone brought up in Keynesian thinking cannot understand how fixed exchange central banks which run deflationary policy in East Asia (or Bangladesh) collect vast reserves (Asian Savings Glut) giving loans to foreign governments, while Latin America with higher per capita income and revenue to GDP ratios default.

GCC pegs which run deflationary policy also collect vast foreign reserves (Petro dollars).

In short foreign borrowing need not be repaid with more foreign debt, if there is monetary stability.

In fact in all recens years with monetary stability, the net growth in foreign debt in Sri Lanka, is lower than the foreign financed debt component of the budget deficit.

In all years with inflationary policy, debt after foreign reserves went up faster than the dollar financed debt.

Spiraling Up

Sri Lanka’s death spiral started in late 2014, when liquidity was injected (inflationary policy) to keep rates down.

It accelerated after the 100 day program of fiscal profligacy, which did not lead to a rate hike as credit expanded but rates were instead cut because ‘inflation was low’, despite having a peg.

It is however not possible to run an inflation targeting framework with a peg. So the currency collapsed under ‘flexible exchange rate’ in 2015 and 2016 with excess liquidity being injected.

In 2017, there was stabilization or a deflationary policy. In 2018 money printing began again to target the call money rate and an output gap with discretionary flexible inflation targeting. The flexible exchange rate collapsed again.

Current State Minister for Capital Markets Nivard Cabraal goes around saying that when the Mahinda Rajapaksa administration left in 2015 International Sovereign Bonds were 5.0 billion dollars and when they came back in 2019 it was 15.0 billion.

Most people dismiss this as politicking. However, that is not so.

This was a classic Young Plan in action. The death spiral happened in several ways.

REER Targeting, Flexible Exchange Rate, Capital Flight

In the case of market debt, the REER targeting (destroying the rupee to destroy real wages of the working class in monetary protectionism and give freebies to the exporters at the expense of social upheaval), led to flight of capital from rupee debt markets.

Remember depreciation leads to the expropriation of foreign capital unless they are dollarized. As a result any investor will try to protect themselves against monetary expropriation.

“The Keynesian school passionately advocates instability of foreign exchange rates,” explained Mises as Keynesian depreciation became popular among some countries during the interwar years.

“The days are gone in which most persons in authority considered stability of foreign exchange rates to be an advantage.

“Devaluation of a country’s currency has now become a regular means of restricting imports and expropriating foreign capital. It is one of the methods of economic nationalism. Few people now wish stable foreign exchange rates for their own countries.

“Their own country, as they see it, is fighting the trade barriers of other nations and the progressive devaluation of other nations’ currency systems. Why should they venture to demolish their own trade walls?”

Foreign capital however will not stay and be expropriated by the REER-targeting and inconsistent ‘flexible’ exchange rate.

Therefore they fled. They had to be replaced by dollar denominated debt, which gave protection against any REER targeting expropriation.

In 2013 when the rupee was at 131 to the US dollar 3.6 billion dollars equivalent was in rupee securities. At the time the total market debt including ISBs and foreign held SLDBs was 7.1 billion US dollars.

By 2019, two currency crises later the rupee debt was down to 573 million dollars and the total market debt was 15.6 billion US dollars.

The people of the country however faced this debilitating expropriation. The debilitating depreciation will make it that much more difficult to generate resources to repay debt.

Rapid depreciation, the monetary expropriation of domestic savings will make it even more difficult to generate real resources to repay debt.

The rise steep increase in dollar denominated, International Sovereign bonds, the rapid flight of rupee debt after ‘flexible exchange rate’ and REER targeting can be seen in the table.

In 2020 debt holders also began to flee after downgrades following the December 2019 tax cut and the March ‘flexible exchange rate episode when the rupee fell to 200 to the US dollar.

Total foreign owned commercial debt went up from 8.4 billion US dollars in 2014 to 14.1 billion dollars in 2020 after rising to 15.6 billion US dollars in 2019. In 2019 however foreign reserves also grew.

But this is just one side of the problem.

The ALM Young Plan Fallacy

While the current administration cut value added taxes in a crazy policy move, delivering the coup de grace to state finances the Yahapalana administration had also severely undermined state finances with the 100 day program.

Then under ‘revenue based fiscal consolidation’ of the IMF cost cutting was pooh poohed, and state spending ratcheted up to around 20 percent of GDP from 17 percent in 2014, increasing the burden of the state on productive sectors.

GDP itself was revised up.

Revising GDP up may have made deficits appear smaller, but in actual fact they got bigger. The worst deficits were in 2015 and 2016, under Finance Minister Ravi Karunanayake.

Mangala Samaraweera fixed them but was betrayed by REER targeting and output gap targeting in 2018 despite the deficit being brought down.

Death Spiral

This is where the death spiral from monetary instability comes in.

In Sri Lanka, about half the budget deficit – give or take – is foreign financed.

From 2014 to 2019 the dollar financing ranged from about a billion to three billion dollars each year as the following table shows.

Under revenue based fiscal consolidation, as the state was expanded with higher salary payments, budgets expanded, and so did foreign financing of the budget. The interest bill was also financed abroad in years with monetary instability.

This is the basic dollar financed deficit.

Based on ALM thinking one would imagine that foreign debt grows by the foreign financed deficit.

But that is not so.

In 2014 the foreign financing of the budget deficit was 1.6 billion US dollars but the total foreign debt went up by only 1.1 billion US dollars.

In 2015, money was printed and the foreign financing of the budget was 1.74 billion US dollars. Foreign debt however grew by only 845 million dollars.

Total foreign debt grew at a slower pace because a part of the foreign debt was repaid in that year with a run-down of foreign reserves.

Therefore to find out the actual increase in net debt, foreign reserves have to be deducted from the gross debt.

But gross reserves also have central bank borrowings such as swaps or IMF loans. So did the Treasury through the ALM law much later.

Therefore to get the actual net increase in debt, gross debt has to be adjusted by net international reserves rather than gross international reserves.

When adjusted for the fall in reserves, net foreign debt grew by a massive 2.3 billion US dollars in 2015, not 845.9 million.

After the adjustment it can be seen that net foreign debt grew by only 105 million US dollars in 2013 when net international reserves were deducted from gross debt, though the foreign financed deficit was 958 million US dollars.

In 2014, a year with monetary stability until the third quarter the dollar deficit was 1.6 billion, but after NIR debt fell by 256 million dollars on a net basis. In 2015, a money printing year the dollar deficit was 1.7 billion but the debt after NIR grew by 2.3 billion US dollars.

In 2016 which was partly a money printing year, the dollar deficit was 2.6 billion US dollars and debt after NIR went up 2.9 billion US dollars.

In 2017 the deficit was 2.8 billion but debt went up only 1.8 billion. In 2018 the deficit was brought down by Minister Samaraweera to 1.9 billion but output gap targeting money printing pushed up debt by 2.7 billion dollars.

In 2019 the dollar deficit ratcheted up to 3.0 billion dollars as the deficit expanded after the output targeting gap policy corrections slowed the economy. However total debt grew by only 1.2 billion due the accumulation of reserves by the selling down of Treasury bills (reversing money printing).

In the period central government debt went up from 23.7 billion US dollars to 34.1 billion US dollars. After deducting NIR, net debt went up to 28.3 billion US dollars from 17.2 billion in 2014.

In 2020, the central bank said a lot of foreign debt has been paid. In fact foreign financing of the deficit was 448 million dollars negative or a net pay back.

However it was achieved with a massive run down of reserves due to the money printing.

Debt after net reserves actually went up by 603 million dollars to 28.9 billion dollars from 28.3 billion US dollars.

Overall debt with SOEs, banks and the private sector seems to have come down with more dollar deposits being raised domestically for banks to use.

In Summary

The simplest way to understand the foreign reserves and foreign repayments and the fallacy of the Transfer Problem and ALM Law is to think about Sri Lanka’s history.

Sri Lanka has been taking World Bank, Asian Development Bank and Japanese loans for decades.

However not all these loans (and interest) were paid back with fresh dollar loans, like the ALM law.

The growth in dollar debt was not linear and in step with the part of the deficit that was financed with foreign debt.

It was less, due to squeezing the current account to repay debt.

When there is monetary instability the opposite happens. This is the Keynesian ‘transfer problem’ in action.

This is why the Weimar Republic collapsed and could not pay any debt.

On the other hand the Austrian economics/Ordoliberal driven Federal Republic which was bombed to the core and was three quarters of the country with East Germany separate country, not only paid WWII reparations, but also paid for US occupation.

Ultimately the Federal Republic repaid all WWI reparations that the Weimar Republic could not.

It can also be understood in the opposite way.

This is the reason why East Asian nations with monetary stability (now Bangladesh central bank also) acquire billions in forex reserves (negative debt) while other oil producing countries like Iran or Nigeria meltdown.

The East Asian ‘savings glut’ and the GCC area ‘fixed’ exchange rate ‘petro dollar’ forex reserves shows that there is no ‘transfer problem’.

The same with Nordic sovereign wealth funds, Singapore GIC, and also MAS itself. When there is no currency depreciation or a flexible exchange rate (inflationary destruction of domestic wealth), it is very easy to repay loans, and also invest abroad.

Grave Situation

The situation with Sri Lanka’s central bank is grave.

The 800 million dollar IMF SDR allocation will briefly improve the situation. But SDRs are also debt or a swap. As soon as SDR holdings are sold for dollars, interest will have to be paid on the allocation. The net reserves also contain items like swaps, partly because that was a trick used to shore up reserves but it is also a borrowing.

Net foreign assets on the other hand show the correct situation. It does not count SDRs or swaps.

Even as this is published, the central bank must be making quasi fiscal losses and may eventually require recapitalization.

Without net reserves, if the central bank intervenes it will eat into reserve assets and could become even more insolvent.

If bond auctions fail and liquidity injections continue to be made, the central bank can also default on the IMF loan and the swaps.

The first order of priority is to get bond auctions working. Then the CB’s Treasury bill stock has to be sold down. This is not about policy rates.

Before any policy rate hike, bond auctions and the sell-downs should begin. If necessary, policy rates can be raised later.

A tax hike will keep the rates lower than they need be. So will a debt restructuring and a debt sustainability sign off from the IMF which will unlock World Bank and ADB budgetary finance. It may be barely possible to do without an IMF program, but the corrective rate would be higher.

More Young plans one might say, but if monetary stability is maintained for over two years growth will take off without stimulus like East Asia and Germany. Privatization would help enormously to grow and also manage debt.

On the other hand, if interventions are made and bond auctions are not allowed to happen, the central bank itself can default on the IMF loan and it can default on the swaps.

Dollarization

When central banks lose the ability to intervene it can float. But usually soft-peggers do not know how to float and will intervene at crucial points. This will make the currency fall faster.

Eventually it could lead to market dollarization as people lose confidence in the currency.

Already there is significant deposit dollarization, with dollar accounts. The black market rates also show that people are chasing after US dollars.

But de facto dollarization happens when people start selling and pricing in US dollars and imagining their lives in dollars. The reason dollarization did not happen earlier is because there are legal tender laws prohibiting the domestic use of foreign currency and people had some confidence in the rupee.

If these laws are removed allowing any currency to be used, Sri Lanka’s economic and monetary instability will end.

In 2018 there was a chance for official dollarization by converting forex reserves and exchanging the note issue to rupee notes.

But parallel dollarization can still be done to cushion people and companies from any default shock. Several high performing stable economies have such arrangements.

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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.

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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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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)

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Desperate Sri Lankans seek risky foreign jobs amid tough IMF reforms

ECONOMYNEXT – After working 11 years in Saudi Arabia as a driver, Sanath returned to Sri Lanka with dreams of starting a transport service company, buoyed by Gotabaya Rajapaksa’s 2019 presidential victory.

However, the COVID-19 pandemic in 2020 and an unprecedented economic crisis in 2022 shattered his dreams. Once an aspiring entrepreneur, he became a bank defaulter.

Facing hyperinflation, an unbearable cost of living, and his family’s daily struggles, Sanath sought greener pastures again—this time in the United Arab Emirates (UAE).

“I had to pay 900,000 rupees ($3,000) to secure a driving job here,” Sanath (45), a father of two, told EconomyNext while having a cup of tea and a parotta for dinner near Khalifa University in Abu Dhabi.

Working for a reputed taxi company in the UAE, Sanath’s modest meal cost only 3 UAE dirhams (243 Sri Lankan rupees). Despite a monthly salary of around 3,000 dirhams, he limits his spending to save as much as possible.

Sanath has been in Abu Dhabi for 13 months but had to wait six months before driving a taxi and receiving no salary.

TOUGH REALITIES

“I had to get my UAE driving license. I failed the first trial, and the company paid 6,500 dirhams on my behalf, agreeing to deduct 500 dirhams monthly from my salary,” he explained.

“So far, I have repaid only 3,000 dirhams.”

To raise the 900,000 rupees for the job, Sanath borrowed money from friends and pawned jewelry.

“I don’t know if I was cheated by the agent, but I must repay that money and also send money for my family’s expenses,” he said, glancing at a photograph of his family in a Colombo suburb.

Working night shifts in busy Abu Dhabi, Sanath said, “If I can secure 9,000 dirhams monthly through taxi driving, I will earn 3,000 dirhams in the month after deductions for the license fee and any traffic fines.”

Sanath came to Abu Dhabi with seven other Sri Lankan men through an employment agency in the Northwestern town of Kurunegala.

“Only two of us have withstood the tough traffic rules and payment deductions for offenses,” he said. Some of his colleagues are still job-hunting, while others have returned to Sri Lanka.

Sanath is one of around 700,000 Sri Lankans who have left the island in the last two years due to the economic crisis that forced the country to adopt difficult fiscal and monetary policies, including higher taxes and costly borrowing, exacerbating the cost of living.

FOREIGN EXCHANGE EARNERS

From January 2022 to the end of March 2024, at least 683,118 Sri Lankans migrated for foreign employment through legal channels, according to the Sri Lanka Foreign Employment Bureau.

They have sent $11.31 billion in remittances through official banking channels during the same period, central bank data shows.

Many Sri Lankans leave on visit visas, hoping to find jobs later, often guided by friends already working abroad. The economic crisis has pushed them to seek better opportunities abroad, despite the risks.

Sri Lankan authorities struggle to stop such risk-takers, who sometimes resort to illegal migration, despite warnings about human trafficking.

In Myanmar, 56 Sri Lankans caught in an IT job scam were detained earlier this year, and the government is still repatriating them.

At least 16 retired Sri Lankan military personnel have been killed in the Russia-Ukraine war after being misled by unscrupulous recruiters. Officials estimate that over 400 retired military officers may have left for similar reasons.

DISPERATE TO LEAVE

In March, Foreign Minister Ali Sabry warned against visiting any nation on open visas, urging Sri Lankans to emigrate only through registered agencies.

Despite the risks, many Sri Lankans are desperate to leave.

Abu Salim, a 32-year-old former rugby player, came to Dubai on a visit visa hoping for a banking job, which he never got.

Now freelancing in an insurance firm, he said, “I survive, and my relatives don’t see my struggle. It’s stressful, but still better than Sri Lanka right now.”

Suneth, a former top garment merchandiser, is also job-hunting in Sharjah after quitting his initial job in Sharjah.

“My worry is the visa. I must find a new job before it expires,” he said.

Many Sri Lankans in the UAE work multiple jobs, compromising their sleep and health to make ends meet. (Abu Dhabi/May 24/2024)

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