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Wednesday July 24th, 2024

How to fix Sri Lanka’s debt crisis, unstable peg, avoid sudden stop event: Bellwether

ECONOMYNEXT – Sri Lanka is facing a monumental state failure after denying economic and civil freedoms for decades, destroying Sri Lanka’s rupee on which families build their lives and doing zero sum ad hoc interventions to favour special interests and state monopolies against the general public.

After cumulative state failures, strangled markets which have allowed rulers to mis-allocate taxes and savings taken from the people, compounded by left leaning Keynesianism, blatant unsound money with ‘flexible’ policy, the chickens are coming home to roost.

With a money printing central bank funding budget deficits, Sri Lanka is drifting closer to a ‘sudden stop’ external event.

With the State in the driving seat in Sri Lanka the public and the community cannot do much to get State get out of a crisis of its own making.

Both government debt and government money (rupees) are in crisis. There is no people’s money in Sri Lanka and there is no currency competition – only a monopoly of state money.

There is some light in the tunnel. President Rajapaksa is trying to get private investment into Colombo Port – another special interest admittedly – but a deal that will help keep Indian containers coming to Sri Lanka and is also a foreign policy move. (NOTE:This column was written in January 2021 and published in the Echelon Magazine of February 2021 before the ECT deal was cancelled and the RBI swap ended)

Certainly the drive to get private investment into infrastructure is a good strategy. Some salary hikes given by the last administration has been suspended.

Sri Lanka can certainly grow and outgrow many other countries if it uses its geographical advantages to the maximum, as ancient kings did, who had generated vast surpluses to build massive monuments.

For long term growth, a series of liberalizations which removes state controls on the community, and favours special interests and state monopolies have to be made.

Achilles Heel

Sri Lanka’s Achilles heel since independence has been the lack of a rule-based monetary policy and a reliance on highly soft-pegged regimes with ‘flexible’ or ‘discretionary’ policy where some floating rate practices are applied to a peg.

The mixed-up peg has an inflation target which is about 300 percent of successful countries. It must be noted that successful countries with a 2 percent inflation target are also located in the same planet and not in some other universe where different rules of nature exist.

That money printing to keep down interest rates amid a credit spike will weaken the currency in a peg, is a law of nature, not a figment in the imagination of classical economists.

That has to be fixed first of all.

The current administration has said it wants the rupee at 185 to the US dollar. There is no harm. Targeting an exchange rate is the most simple monetary policy imaginable (externally anchored monetary system).

But the current money printing and open market operations will goes completely against an external anchor.

All the high performing East Asian nations targeted the exchange rate in their growth phase and many still do. Successfully targeting an exchange rate requires complementary policy.

Japan – which was already an industrial nation by World War I with a specie peg – became an export powerhouse after World War II when Joseph Dodge closed the Keynesian Recovery Financial Fund (fukkin) which was financed by selling bonds to the Bank of Japan, and fixed the Yen at 360 to the US dollar eliminating multiple exchange rates.

The rate held until the collapse of the Bretton Woods under output gap targeting. Japan sometimes did not allow market interest rates and instead did credit controls which led to forex shortages in credit spikes and gave the MITI un-necessary power to impose its decisions on businesses by rationing forex.

This is how the MITI had the power to almost kill the electronic industry by denying forex for Sony to pay transistor royalties. MITI became a dead-duck as soon as the Yen was free floated with the break-up of the Bretton Woods.

This is Singapore.

The Singapore currency board which was at 3.0 to the US dollar also floated with the break-up of the Bretton Woods, and promptly appreciated (like the Yen) and stopped only after Paul Volcker tightened US policy and brought stability under Ronald Reagan (Fed Funds rate around 19 percent), allowing free trade to flourish.

This is Thailand

Thailand had a very good peg which was kept during Bretton Woods, and after it broke-up also. But the Bhat peg broke during the first Volker tightening and also in the 1984 tightening cycle (Fed Funds rate 11 percent) when it fell to 28.

Later it was brought to around 25 and kept until the East Asian crisis, when foreign speculators broke it mainly with swaps such as the one used to break the Sri Lanka rupee in July 2018.

It was also in 1985 Fed tightening cycle that Latin American pegs fell like nine-pins which Mercantilists call the ‘Latin American debt crisis’.

Sri Lanka was under severe controls involving the ‘closed economy’ after the Bretton Woods collapsed in 1971.

But in the run up to the collapse also when the system came under strain from output targeting and the Sterling collapsed Sri Lanka was doing a ‘Green Revolution’ with central bank re-financed agricultural credit. The Reserves Bank of Zimbabwe had done similar financing. Saubhagya loans are a repeat.

Governor A S Jayewardene stopped them.

Sri Lanka had 190 million dollars in foreign reserves when a currency board was dismantled in 1950.

Paddy production has reportedly rocketed from 36.3 million bushels in 1965 to 77.4 million bushels in 1970.

Meanwhile foreign reserves fell to 40 million dollars in 1969 and the Import and Export Control Law was enacted.

This law is being used to control imports in the current crisis.

Then Dudley Senanayake got booted out and the 1970s controls were intensified without fixing the central bank, unlike in East Asian nations.

Sri Lanka devalued from 8 to 15 in 1978, held till about the end of 1980 and then everything went downhill from there, though there were no import controls and people were able to do things and get more jobs and expropriation ended. Instead there was privatization.

But Sri Lanka was far removed from high performing East Asian nation. The central bank creating inflation, de facto targeted the real effective exchange rate, triggered political unrest, strikes and so on until A S Jayewardene came to office in 1994 and did some central bank reforms.

The basic principles behind those reforms were progressively abandoned in favour of aggressive open market operations from 2011 onwards and intensified in 2018.

In 1980 Singapore’s per capita GDP was almost 5,000 dollars. Hong Kong under the British was 5,700 dollars.

It was in the mid 1980s that Bank of Korea finally fixed it-self after an almost 30 year struggle with periodic step devaluations. The Won went on a wild ride as Volcker tightened and inflation soared but after a few years, the Bank of Korea managed to come up with a working system.

The won started to appreciate for the first time from 1987, just as the frustrated people hit by inflation and wage controls (to target the REER) went to the streets and the dictatorship ended.

From then on the exchange rate was stable; rates fell steadily, partly helped by Fed under Greenspan, until the East Asian crisis.

A country which was body-shopping workers and personnel to the Vietnam War to earn foreign exchange a little over a decade earlier then became an OECD country in a decade.

That Korea was lagging behind some other East Asian nations until the early 1980s was not because the people did not work hard, it was a problem with the Korean Won or more precisely the Bank of Korea and overall state controls, which took the country to some levels, but not beyond.

In 1980 Sri Lanka’s per capita GDP was 273 dollars. In 1980 Zimbabwe had a per capita GDP of 900 dollars or about half of that Korea.

Zimbabwe originally had a currency board as did Sri Lanka. Zimbabwe had two, the Southern Rhodesian Currency Board and the Central African Currency Board.

In 1980 Mugabe became Prime Minister. The rest is history.

Both Sri Lanka and Zimbabwe and Latin America are cases of monumental state failure not of private citizens.

Debt Problems

Debt problems are not the same as pure soft-peg problems, but they can be worse in countries with soft-pegs because currency collapses and debt feeds on each other.

A sudden peg collapse, as the one that happened with Argentina will lead to a default of foreign loans even if the country has a low level of debt.

If not an outright default due to ‘foreign exchange shortages’ it will at least lead to an inflation of foreign debt.

Currency collapses will also amplify the effect of entrenched problems. Creeping debt problems are linked to bad governments which mis-investments money due to corruption or incompetence or a statist ideology.

It may be compounded by controls, interventions or expropriation which block or discourage freedoms of the people and free enterprise, stifling them and preventing them from making full use of the investments.

Like the situation described below for example.

“Unfortunately, so long as our nation faces the problems of corruption, political instability, lack of transparency in governance and lack of rule of law, we will continue on a downward spiral as investors, both local and foreign, will shy away.

“Our country cannot afford a repeat of the financial scandals of the past. We are a nation blessed with natural resources, an ideal location along trade routes, high proficiency in English, and so on.

“But even these resources are finite, and as we saw with the Fitch downgrade, the consequences of poor management eventually come to a head.

“These polarising issues have scuttled efforts to implement the much-needed institutional and economic reforms, while simultaneously fuelling political instability.

“What is most worrying is that with polarisation increasingly permeating through our society, it endangers inter-ethnic harmony and erodes social cohesiveness. The very fabric of our society is in danger when we fail to see eye-to-eye and respect one another.

This is not a reference to Sri Lanka but Malaysia.

Read more on how Japan and Malaysia fixed themselves without IMF help: Can Sri Lanka solve its debt and monetary crisis sans the IMF: Bellwether

It is the Tun Daim Zainuddin who fixed Malaysia in 1985 with budget cuts, privatization and debt repayment in an interview with The Edge Malaysia in January 2021.

“In this respect, we must also acknowledge that Malaysia has not done well towards a united Bangsa Malaysia, in managing polarisation over race and religion, and undertaking social and political reforms.”

Malaysia dropped its fixed exchange rate in 2005.

Malaysia suffered the worst currency crisis since the East Asian crisis in 2015/2016 after it adopted a ‘flexible exchange rate’, which prompted then Singapore Prime Minister to advice his citizens not to express too much happiness at low prices fund when they visit Malaysia.

Without credibility a peg will create un-necessary panic.

The incumbent administration was overturned soon after.

Both the United States Treasury and the IMF are relentlessly opposed to fixed exchange rates.

But the problems with fixed exchange rates come when floating rate style ‘open market operations’ are administered.

It is the very same IMF which destroy credible pegs in the path to the holy grail of ‘modernising the monetary policy framework and transmission mechanism’.

The US Treasury in particular imagines that a fixed exchange rate makes a country an export powerhouse that ‘undervalues’ its currency to cause a trade deficit with the US, not understanding that it is domestic stability – monetary as well as policy stability – than brings foreign investors flooding into these countries to export.

Perhaps due to the clout the US has with the IMF, it may also be advising countries to have ‘exchange rate’ flexibility.

Vietnam disaster in the making

For several years now the IMF has been making noises to the State Bank of Vietnam about its simple peg built with sterilized purchases.

“The gradual reserve accumulation continued, as conditions allowed, with fully sterilized
Interventions,” the IMF report on Vietnam noted in further ignorance of a tighter than currency board style peg that generates forex reserve in excess of reserve money.

In 2018 the depreciation had been less than has been less than those seen in some
other emerging markets, only 2.2 percent against the U.S. dollar, the IMF report said in absolute ignorance of the tight peg the SBV runs with partially unsterilized dollar sales.

In their relentless opposition the IMF appeared to feed into later false US claims of ‘undervaluation’ measured by a current account surplus created which comes partfly from sterilized dollar purchase and also from outward private investment into areas like Cambodia and Laos.

“The authorities remain strongly committed to having a flexible exchange rate as a primary shock absorber and reiterate that market intervention was never intended to resist trend appreciation,” the report claimed.

“A well-designed and appropriate mix of policies and measures should be pursued flexibly in line with changing economic circumstances specific to the country to achieve not only external rebalancing but also economic and financial stability,” the IMF said in deadly advice if followed would reduce the country from its current rule based exchange rate policy mimicking East Asian nations in their strongest growth phases (sterilized purchases, partly unsterilized sales) in to a Sri Lanka style peg collapse.

“The current account surplus has been adjusting in the right direction and will continue to decline over the medium term. It is noted that the ongoing public investment and number of structural reforms would help strengthen domestic demand and moderate the current account surplus going forward.”

This deadly advice was given despite admitting elsewhere in the analysis that ”
without FX interventions, the standard deviation of the nominal FX rate, inflation
and output growth would have been more than doubled, suggesting that FX interventions have significantly dampened the economic volatility.”

That was in 2019. In December 2020 Trump’s US Treasury slammed the country as a currency manipulator which undervalued the Dong. It is clear where the false conclusion came.

Sri Lanka’s low recent growth came with two currency crises coming from the lack of rule-based monetary policy due to ‘flexible inflation targeting’ ‘flexible exchange rate’ involving open market operations to generate excess liquidity.

In Sri Lanka two currency crises in 2015 and 2018 bloated dollar debt and triggered capital flight.

The overall problems with ad hoc policy, nationalism, state enterprises and an over large state sector, regulations ranging from the Paddy Land Act to the Import and Export Control Act as well as expropriation have come to a head.

The government push to raise salaries of plantations companies is also an expropriation of private property to fulfill an election promise. The last administration engaged in damaging ‘ill gotten gains’ taxes which also frightened investors.

State Finances

In a debt crisis, a credible plan to fix state finances inspires confidence and persuades lenders to stop demanding their money back and gives motivation to roll-over debt.

Sri Lanka cut the taxes in 2019 taxes in a misguided move to ‘stimulate’ the economy without waiting for the automatic recovery that usually accompanies a currency crisis.

The revenue problem had been worsened by Coronavirus.

Salaries have been frozen and many expenses cut. However tens of thousands of people are being hired into the state sector.

For outsiders, whether bond or other investor it looks bad. That is because there other countries who do not do such things. Communist countries do no such thing.

They are frugal and prudent. Countries like Vietnam are ignoring advice from the stimulus happy International Monetary Fund to print money during the crisis, and is holding its peg like Singapore, Taiwan, Japan did before them.

In fact with weak credit SBV is buying dollars and interest rates have plunged to near zero.

Cambodia is dollarized so that country cannot be destroyed with a ‘flexible exchange rate’ or dual anchor contradictory policy. However IMF is trying to give them wrong advice and get open market operations to work again.

“They (directors) noted that promoting further financial market development and local
currency use would allow the central bank to move toward a more robust and flexible
monetary policy framework,” the IMF said in its last Article IV consultation report.

The viciousness of the Cambridge/Harvard Keynesian interventionism can be seen here. Cambodia is a country that suffered terribly from bad monetary policy of central banking. It has had remarkable stability and growth under dollarization. But the relentless pressure from the IMF set up by New Dealers, the worst Keynesians imaginable will eventually bring ‘flexible’ policy back to Cambodia and probably a dictatorship along with it.

In Sri Lanka the tax cut in 2019 had severely eroded confidence. The jugglery with budget numbers had also backfired. Budget numbers should not have been juggled for political purposes.

Fitch Ratings went by the numbers and said the budget deficit increased, but actually it is a little improvement from the previous year.

With economic activities recovering there will be some increases in tax revenues.

The valued added taxes lost to the budget have increased profits of import substitution companies owned by so-called ‘cronies’ to very high levels.

The firms were already benefitting from import controls which are also a loss of taxes to the Treasury.

The import substitution companies are not capitalist or free enterprises, they are crony Mercantilists benefiting from controls placed on the people or tax arbitrage.

Bleeding Reserves

The Treasury is printing the lost money to make up for lost taxes that are creating foreign exchange problems. The stock market is booming due to low interest rates and also the actual profits made by some firms.

But foreign reserves are steadily declining. Boosting them with swaps is a temporary solution only. If Sri Lanka is not careful, not only can there be sovereign default but the central bank itself could go bankrupt from swaps.

The foreign exchange problems are not coming from lack of tourism revenues. Lack of tourism or other export revenues will lead to an automatic collapse in imports when the salaries of the people in the sector are cut like in other countries including the Maldives.

If a hotel takes a loan from a bank and pay workers salaries, that may also not cause any currency pressure since the money comes from a deposit or a loan repayment by crowding out other credit.

However if a hotel takes a loan re-financed by the central bank, like the rural credit in the 1960s and in the 1980s or from excess liquidity with money printed for the Treasury that had come from a state bank which is in the system as excess liquidity there will be forex shortages.

When foreign loans are not available to bridge the deficit and spend, imports will automatically fall also.

In general, weak credit which stops savings of the people from being turned into imports through the credit system allows foreign reserves to be built in a peg, which can be used for debt repayments.

The government can directly borrow the savings and repay foreign debt also by crowding out domestic credit and therefore imports. There is no ‘transfer problem’ as Keynesians claim.

The first step is to stop additional bleeding of reserves through liquidity injections and low interest rates by allowing market rates to come back. Already some excess liquidity had been allowed to leave through dollar outflows.

The Treasury should not reject bids to roll-over bond maturities. Any rejection of bids turns debt from past deficits into printed money and instability in the current year.

This is how Sri Lanka’s central bank created crises in 2004 and 2011. In 2018 it was done mostly with open market operations not bill auction rejections despite a correction in the budget.

The central bank should always roll over coupon payments as paper Treasury bills or bonds instead of trying to pay cash by printing money.

Primary Deficit

The reason that the IMF uses a primary deficit as a target is to allow interest rates to be hiked to stop the currency crisis without disturbing the target. Though lost in the mists of time, interest can also be rolled over as paper in auction, leaving the remaining items such as salaries to be settled via banks notes which are exchangeable for dollars.

In Sri Lanka this is not understood. In 2018 money was injected through open market operations while running a primary surplus.

If interest payments are rolled over as paper, a big chunk of current budget spending is taken away from triggering currency pressure. That is the value of the primary deficit.

By rolling over debt and also rolling over interest rate payments as paper debt – at an appropriate market rate, whatever that is each month – a large chunk of state spending can be blocked from becoming reserve money.

If money is printed for interest rate payments on debt, more currency problems would come and import controls, weak growth and weak tax revenues would continue in a vicious circle.

Sri Lanka’s negative forward premium is one weird outcome of misaligned interest rates. Closing the forward market may reduce the need for spot dollars but that does not solve the fundamental problem of upside down interest rates.

The stock market is another. Importers who were put out business by trade controls, may continue to use their credit lines and working capital loans to play the stock market as they are now doing.

But that is not sustainable.

The Fed’s Jerome Powell is saying that the stock market boom has nothing to do with its money printing. But now people know better that to believe him.

The banking system in the US is not damaged like in 2008. So it is a different world now. People are also flushed with savings.


Sri Lanka has to have credible fiscal plan and monetary policy to regain stability and confidence.

In Sri Lanka a rise in interest rates and opening of imports will allow taxes to flow back to the Treasury, in a virtuous cycle.

A steeper rise in rates would also allow all the debt repayments that are coming up for repayment to be paid with domestic debt sales which crowd out consumption and halt imports. However that has its limits.

Sri Lanka also has to raise taxes. A value added tax hike is preferable to steep collapse of the currency.

A 20 percent value added tax and the removal of other niggling taxes under a pre-announced plan is preferable to a meltdown which will also destroy bank deposits, pension funds and salaries.

Raising value added tax 2021 is not the same as ‘revenue based fiscal consolidation’ that the IMF then advocated. It was based on getting the tax take up to some mindless abstract number, which politicians then busted up (quite naturally) in higher state salaries and subsidies. How naïve can one be?

Bangladesh, a high growth country with over 10 years of monetary stability, has revenue to GDP of about 8 percent. But it has a better central bank than either India or Sri Lanka.

The Taka has been steady for over a decade giving domestic stability though there are questions about the current Governor. It is not possible to have a stable currency without complementary monetary policy.

It is also vital to allow the CPC to use its cash to buy dollars. Forcing the CPC to borrow dollars state banks would create the same problems as in 2018, raise debt and allow other borrowers to use its cash deposits for imports.

It will also push up domestic dollar yields as state banks compete for non-existent dollars, worsening imbalances.

One fix that that can stop future currency crisis is to privatize energy utilities. In Sri Lanka the power regulator failed to fix prices and instead resisted increases proposed by the utility so that is no longer a solution either.

Sudden Stop

However Sri Lanka’s falling reserves are only partly due to trade and current account and forcing the CPC to borrow dollars and run positions.

Because of earlier money printing and currency falls under the ‘flexible inflation targeting/flexible exchange rate’ framework Sri Lanka’s debt has been downgraded to CCC and the country cannot roll-over debt. This column warned in 2019 that Sri Lanka did not have the rating space to engage in either fiscal or monetary indiscipline

“In any case Sri Lanka no longer has the rating space for either monetary indiscipline or fiscal indiscipline,” this column warned in November 2019.

“None of the candidates of the 2019 presidential elections have seriously talked about monetary discipline, though there is some understanding about the dangers of currency depreciation.

“If there is no serious monetary discipline that brings stability, all talk of economic programs is meaningless.”

Instead Sri Lanka cut taxes within weeks of that column appearing and was printing money from February.

The problem is not just sovereign debt.

Sri Lanka’s banks are finding it difficult to roll-over foreign credit lines. Limits have been cut by foreign counterparties. Import letters of credit from Sri Lanka banks are not being accepted by some foreign shippers. As a result they have to be re-confirmed back to back by foreign banks.

Some foreign banks which used to confirm have run out of limits amid higher demand or limits have been cut. Second tier banks in India and the Middle East are coming forward but premiums are high.

Sri Lanka is already drifting to a ‘sudden stop’ event, though default has not happened.

While it is possible to raise rates and generate dollars to repay foreign debt by curtailing domestic credit, it is not practical to do it on an ongoing basis for many years.

If investors see foreign reserves going up after debt repayments confidence may could come back. But it is a painful affair, which may or may not work given the current ideology.

For example using the stock market boom the government can also privatize and get revenues to fix the budget for a couple of years and boost reserves.

But this administration has an ideological problem with privatization. The last administration also failed to do any privatizations based on ideology but engaged in open market operations to bust the currency.

There is a widespread dislike of what are called ‘neo-liberal’ a kind of amorphous term used to describe policies ranging from Pinochet’s Chile (where the term appears to have originated) to policies practised in Germany to make it an economic miracle, Thatcher’s Britain (which had to reverse Keynesianism and post-war expropriation), Ronald Reagan (who brought free trade allowing East Asia to flourish) Mahathir-Daim’s Malaysia, Singapore, Japan under Joseph Dodge and so on.

All of these problems and ideologies have converged to create the current problems.

IMF Program

An effective way to restore confidence is to go for an IMF program. Whatever the faults with IMF programs, foreign investors have some confidence in them.

The IMF can if necessary do a debt workout and delay some of the repayments giving breathing space allowing domestic rates to be lower than they would otherwise be.

A front loaded disbursement would also push up foreign reserves and again allow interest rates to be lower than otherwise.

Any IMF programs should come with ceilings on domestic assets of the central bank and a low inflation target of around 2 percent. A 6 or 8 percent inflation target will land the country in another currency crisis, as this column warned before.

If foreign exchange swaps are available from India or China, it makes more sense to get them with an IMF program after raising rates sufficiently to at least stop the forex reserves bleeding from current transactions.

Like privatization, the IMF program is also held back due to some ideology. Sri Lanka has to change the false world view with which it views the universe around it.

Economic programs made on a false world view will not work. Sri Lanka also has to use foreign policy to make friends.

The cancellation of the Japan funded Light Rail Project makes no sense. It simply upsets the Japanese. Like the tax cut, loss making state enterprises, open market operations, and stifling regulations it is also an own goal. MCC grant was another fiasco.

An IMF program can be used to consolidate available support.

China unfortunately has no skills in fixing monetary or debt problems. Illiberal policy under Xi Jinping is creating problems for itself and its neighbhours.

China is in the same boat as the World Bank and Western nations were at one time after giving debt to countries with monetary instability and corruption, which made these agencies give loans with ‘conditions.’

Marshall Plan loans to Europe (where central banks had realized the futility of printing money during the war) was one thing but credit to newly independent nations with activist central banks was quite another.

The Economic Co-operation Agency which dispensed Marshall Plan aid failed dramatically in South Vietnam with a Keynesian central bank which it helped create.

Japan escaped with the skin of its teeth due to Joseph Dodge.

Korea’s First Republic was brought down with zeros taken off the bank notes with its Triffin-Prebisch central bank similar to the Central Bank of Ceylon which was set up by the Fed in 1953.

China realized some time ago that Exim Bank and China Development Bank was heading for trouble and started AIIB staffed with experienced outsiders to work with the ADB (mainly Japan) and World Bank (mainly US) in co-financing.

IMF programs also fail to fix economic problems in the long term due to the failure to fix central banks and leaving room for state interventions.

The IMF not only fails to fix Argentina – repeatedly – but also failed to fix the UK in the 1970s due to reliance on Keynesian interventionist monetary policy, which is a mild version of Modern Monetary Theory.

It was a combination of Margaret Thatcher, Alan Walters her advisor, and Geoffrey Howe, a lawyer like Malaysia’s Tun Daim who was not confused by Keynesianism and monetary madness who fixed the UK and ended exchange controls which existed for 40 years and made the Sterling strong again.

There are always solutions and options. Sri Lanka has a history of taking all the wrong options except in 2001 – which was done early and brought benefits, and in 1955/6 where corrective policies resulted in the administration getting booted out.

There are mediocre solutions to get over the problems and perhaps grow slowly until the next crisis.

There are stronger big bang solutions to become an OECD country involving monetary reform, jettisoning of illiberal laws wholesale, an overhauled public service with constitutional reform to improve rule of law and property rights and an education system that teaches logical reasoning and critical thinking instead of nationalism.

Howe ended exchange controls on October 23, 1979 with the opposition yapping at his heels for taking a ‘doctrinaire’ decision.

Sri Lanka can be ‘pragmatic’ and come up with some second class progarm that is partially compromised by illiberal ideology instead of a plan grounded on reason and a desire to expand the freedoms of citizens so that they can bloom and flower to their full potential.

It is always better to take pre-emptive action, rather than be pushed into a situation where there are no options.

But whatever is done, the faster it is done the better. It is messy to pick up too many pieces.

This column is based on ‘The Price Signal by Bellwetherpublished in the February 2021 issue of the Echelon Magazine. To read Bellwether columns as soon as they are published, subscribe to Echelon Magazine at this link. The i-tunes app can be downloaded from here.

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Comments (3)

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  1. sacre blieu says:

    The addiction to fraud, bribery and corruption along with deceit and deception, is well embedded in our social fabric, and it will only take a slash and burn effort to eradicate and clean up this eternal curse, the very many who are caught in it. Even the modest loans that is given by the government to the SMS businesses is infected with corruption where the applicants are sent around in circles until they pay the illicit commissions, to, both officials in the banks and departments, to have it passed. More so, the farmers are been consistently made victims of fraudsters when they go to procure their fertilizer and other legitimate goods, services, and equipment. Worst, now religion is been made white veil to cover the dirt. Finally, justice, it very much appears, is dumped into the dustbin of forgotten time. The President is spot on in his comments on corruption and naked fraud that goes on and on, plunging the citizen into debt after huge debt, incessantly.

  2. Yasa says:

    This is a jumble of incoherent rants. In Sinhalese, they call this “pissige palamalla” (madwoman’s basket of green leaves: my translation). The author could have done some elementary editing, at least to make this somewhat readable.

    1. lehini says:

      this article is all over the place, literally. like at least make the points clear on some areas.
      Its like information picked up from different places and put together to just finish the article.
      But anyways, hats off to writing all the points everywhere.

View all comments (3)

Comments (3)

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

  1. sacre blieu says:

    The addiction to fraud, bribery and corruption along with deceit and deception, is well embedded in our social fabric, and it will only take a slash and burn effort to eradicate and clean up this eternal curse, the very many who are caught in it. Even the modest loans that is given by the government to the SMS businesses is infected with corruption where the applicants are sent around in circles until they pay the illicit commissions, to, both officials in the banks and departments, to have it passed. More so, the farmers are been consistently made victims of fraudsters when they go to procure their fertilizer and other legitimate goods, services, and equipment. Worst, now religion is been made white veil to cover the dirt. Finally, justice, it very much appears, is dumped into the dustbin of forgotten time. The President is spot on in his comments on corruption and naked fraud that goes on and on, plunging the citizen into debt after huge debt, incessantly.

  2. Yasa says:

    This is a jumble of incoherent rants. In Sinhalese, they call this “pissige palamalla” (madwoman’s basket of green leaves: my translation). The author could have done some elementary editing, at least to make this somewhat readable.

    1. lehini says:

      this article is all over the place, literally. like at least make the points clear on some areas.
      Its like information picked up from different places and put together to just finish the article.
      But anyways, hats off to writing all the points everywhere.

Fitch confirms ‘A(lka)’ domestic rating of Sampath Bank Plc

ECONOMYNEXT – Fitch Ratings said it was confirming a national long-term A(lka) rating on Sri Lanka’s Sampath Bank Plc with a stable outlook, amid an improvement in operating environment, indicated by headline macroeconomic indicators.

The bank had stage 3 loans of nearly 17 percent at end-1Q24 (2023: 16.6 percent).

Fitch expected this ratio to decrease in the near- to medium-term alongside focused recoveries.

“We expect Sampath’s impaired (stage 3) loans ratio to decline gradually in the medium term, due to its recovery efforts, improvements in repayment capacity of borrowers from the stabilisation in economic conditions, and moderate loan book growth.”

The bank also had defaulted sovereign bonds. “Defaulted foreign-currency sovereign bonds, which accounted for 1.9% of assets, had impairments amounting to 52% of its holdings as of end-1Q24.”

The full statement is reproduced below:

Fitch Affirms Sampath Bank at ‘A(lka)’; Outlook Stable

Fitch Ratings – Colombo – 22 Jul 2024: Fitch Ratings has affirmed Sri Lanka-based Sampath Bank PLC’s (Sampath) National Long-Term Rating at ‘A(lka)’. The Outlook is Stable. Fitch also affirmed Sampath’s outstanding Sri Lankan rupee-denominated subordinated debt at ‘BBB+(lka)’.


Intrinsic Profile Drives Rating: Sampath’s National Long-Term Rating reflects its own financial strength, which is highly influenced by its exposure to the sovereign’s weak credit profile (Long-Term Foreign-Currency Issuer Default Rating (IDR): RD; LongTerm Local-Currency IDR: CCC-) and the ongoing sovereign debt restructuring, which had been putting pressure on Sampath’s credit profile. The rating also reflects Sampath’s modest domestic franchise as Sri Lanka’s fifth-largest commercial bank.

Stabilising OE: Sri Lankan banks’ operating environment (OE) continues to show signs of stabilisation, as evident in sustained improvements in reported headline macroeconomic indicators, supporting the recovery in banks’ operational flexibility.

Further improvement to the bank’s OE remains contingent on successful execution of the sovereign’s external debt-restructuring exercise alongside the restoration of the sovereign’s creditworthiness, given the strong link between sovereign financial health and banks’ operating conditions.

Economic Stabilisation Aids Business Profile: We believe the gradual improvement in economic conditions should support Sampath’s ability to generate and defend business volumes, despite the vulnerabilities from the weak sovereign and economy. We expect a moderate resumption in lending alongside the gradual economic recovery, similar to peers. This should result in a higher loan book share of assets (net loans to assets of 48.0% at end-1Q24) in the medium term.

Sovereign Risk Remains: Sampath’s risk profile assessment continues to reflect its exposures to the weak sovereign and economic environment. Defaulted foreign-currency sovereign bonds, which accounted for 1.9% of assets, had impairments amounting to 52% of its holdings as of end-1Q24. In addition, local-currency-denominated treasury securities contributed to 34% of its assets at end-2023, of which 59% were treasury bonds and the remainder in treasury bills, which makes the bank susceptible to the sovereign’s repayment ability and liquidity status.

Impaired Loans Decline Gradually: We expect Sampath’s impaired (stage 3) loans ratio to decline gradually in the medium term, due to its recovery efforts, improvements in repayment capacity of borrowers from the stabilisation in economic conditions, and moderate loan book growth. Prolonged economic challenges that continued for most of 2023 led to a further impaired-loans accretion, which together with loan book contraction resulted in the bank’s impaired-loans ratio rising to 16.6% by end-2023 (end-2022: 11.6%), above the industry’s 12.8%.

Declining Risks to Profitability: We believe downside risk to profitability from the restructuring of sovereign bonds has diminished, and any incremental impairment, if necessary, will be manageable, given the existing provisions on the holdings. We expect Sampath’s operating profit/risk weighted assets ratio (1Q24: 4.8%, 4-year average 3.2%) to moderate over the medium term on account of the decline in interest rates. This will be partially offset by lower credit costs, alongside the increase in risk density from the growth in the share of loans.

Downside Risks to Capital Manageable: We believe downside risk to capital from the bank’s exposure to defaulted sovereign bonds (1.9% as of end-1Q24) is manageable, as per the announced restructuring terms – given the bank’s provisions on these instruments amounting to 52% on the exposure at end-1Q24. The regulatory common equity tier 1 (CET1) capital ratio declined marginally to 15.6% by end-1Q24 (excluding 1Q24 profit) from 16.7% at end-2023, following a cash dividend payment, but remains one of the highest among Fitch-rated large Sri Lankan banks.

Funding and Liquidity Risks Remain: We believe Sampath ‘s funding and liquidity stress has eased on both the foreign- and local-currency fronts relative to the crisis period.

This was due to favourable external sector flows and the bank’s focus on liquidity preservation, as reflected in its high liquidity coverage ratio. We believe these developments have reduced the risk of bank failure. However, its funding and liquidity profile – particularly in foreign currency – remains susceptible to sudden changes in creditor sentiment driven by adverse changes to the sovereign’s credit profile, similar to peers.


Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

The bank’s National Rating is sensitive to a change in its creditworthiness relative to other Sri Lankan issuers.

A deterioration in Sampath’s key credit metrics beyond our base-case expectations relative to peers would also lead to increased pressure on the rating, which is driven by its intrinsic financial strength.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Positive rating action on the sovereign may lead to an upgrade. A sustained improvement in key credit metrics beyond our base-case expectations relative to peers, could also lead to an upgrade.


Sampath’s Sri Lankan rupee-denominated outstanding subordinated debt is rated two notches below the National Long-Term Rating anchor. This reflects Fitch’s baseline notching for loss severity for this type of debt, and our expectations of poor recoveries.

There is no additional notching for non-performance risks, as the notes do not incorporate going-concern loss-absorption features.


The subordinated debt ratings will move in tandem with the bank’s National Long-Term Rating.


The principal sources of information used in the analysis are described in the Applicable Criteria.

Additional information is available on (Colombo/Jul24/2024)

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Sri Lanka presidential candidate cash deposits not updated in 43 years: MP

MP Dullas Alahapperuma

ECONOMYNEXT — The cash deposits Sri Lanka’s presidential candidates are required to pay have not been revised in 43 years, opposition MP Dullas Alahapperuma said, calling for a significant increase in order to save money and to prevent proxy candidates.

Alahapperuma told parliament on Wednesday July 24 that, as per the Presidential Elections Act No. 15 of 1981, a candidate nominated by a recognised political party has to deposit only 50,000 rupees while an independent candidate, or a candidate nominated by any other party or by an elector, must pay only 75,000 rupees.

The MP said the cabinet of former president Gotabaya Rajapaksa had approved an amendment to the act to increase these amounts.

“The election commission proposed that this be increased to 2.5 million rupees for political parties and 3 million for independent candidates. This was a pertinent proposal. There were 35 candidates who contested the last election,” he said.

The Act notes that “Where the number of votes polled by any candidate does not exceed one-eighth of the total number of votes polled at the election, the deposit made in respect of such candidate shall be declared forfeit and shall be transferred by the Commissioner from the deposit account to the Consolidated Fund, and in every other case the deposit shall be returned to the person who made the deposit, as soon as may be after the result of the election is declared.”

At the 2019 presidential election, said Alahapperuma, the deposits made by all candidates besides the top two contenders were transferred to the Consolidated fund.

“The number of candidates might be 80 or 85 this election. Many candidates have no basis for contesting, and it costs a vast sum of money to print ballots and other expenses, not to mention the time consumed for counting votes. This is not just to prevent proxy parties from contesting but also to save a lot of national wealth,” he said.

Leader of the House Susil Premajayantha responding to Alahapperuma said, however, that it would not be possible to pass the proposed amendment in time for the 2024 presidential election.

“The election commission made this proposal some time ago. But we know that to gazette a bill, we need to first draft the bill, the cabinet has to decide on it, send it back to the Legal Draftsman, and receive clearance from the Attorney General. So there is no time to bring this amendment for the upcoming presidential election. You can propose it at the next one,” he said. (Colombo/Jul24/2024)

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Sri Lanka deaf driver license project to be expanded islandwide

ECONOMYNEXT – A pilot project that allowed hearing-impaired persons to obtain light-vehicle driving licenses has been successful and will be rolled out island-wide, Sri Lanka’s Motor Traffic Department said.

The project was implemented in the Gampaha District initially where 50 licenses were provided to drivers who qualified.

The project was expanded to the Kurunegala District, where 150 drivers obtained licences. The drivers were given a probation period.

“Actually, this was a very successful project. It has been almost a year and we haven’t received a single complaint yet,” Motor Traffic Department Commissioner – Driving Licence Wasantha Ariyarathna told reporters on Wednesday.

“We plan to roll it out to all 25 districts islandwide.”

The issuance of driver’s licenses to hearing impaired persons will be done on a bi-annual renewal basis.

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