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Saturday July 20th, 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.

Confidence

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.

To reach the columnist: BellwetherECN@gmail.com

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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)

Cancel reply

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.

Jayampathy Wickramaratne PC, responds to President on constitutional article 83

ECONOMYNEXT – Jayampathy Wickramaratne, President’s Counsel had responded to a statement made by President Ranil Wickremesinghe that Article 83 (b) of the constitution which has reference to a six year term was left alone not due to any ‘lapse’ on his part.

A Cabinet sub-committee headed by Premier Wickremesinghe was appointed to oversee the Nineteenth Amendment process.

The changes to the Constitution, were made by a team of legal officers of which he was member, overseen by a Cabinet sub-committee headed by then Prime Minister Ranil Wickremesinghe.

“Presidential candidate Maithripala Sirisena signed a memorandum of understanding with a group of 49 political parties and organisations headed by the Venerable Maduluwawe Sobitha Nayaka Thero at Viharamaha Devi Park, in which he pledged to abolish the Executive Presidency altogether,” Wickramaratne explained.

“However, the very next day, he signed another MOU with the Jathika Hela Urumaya, in which he pledged not to make any constitutional change requiring a Referendum. Mr Sirisena’s election manifesto also stated that no constitutional reform necessitating a Referendum would be initiated.”

The Attorney General also made sure that there were no changes that required a referendum, he said. As a result Article 83 (b) was left as it was.

The full statement is reproduced below:

On President Wickremesinghe’s statement that not amending Article 83 was a lapse on my part

The President stated in Galle on 19 July 2024 that not reducing the upper limit of the term of the President and Parliament from six to five years while preparing the Nineteenth Amendment to the Constitution was a lapse on my part due to my inexperience.

I wish to set the record straight.

Presidential candidate Maithripala Sirisena signed a memorandum of understanding with a group of 49 political parties and organisations headed by the Venerable Maduluwawe Sobitha Nayaka Thero at Viharamaha Devi Park, in which he pledged to abolish the Executive Presidency altogether.

However, the very next day, he signed another MOU with the Jathika Hela Urumaya, in which he pledged not to make any constitutional change requiring a Referendum. Mr Sirisena’s election manifesto also stated that no constitutional reform necessitating a Referendum would be initiated.

Soon after being sworn in, President Sirisena appointed Mr Ranil Wickremesinghe as Prime Minister. Constitutional affairs was Gazetted as a subject under Prime Minister Wickremesinghe. A Cabinet sub-committee headed by Premier Wickremesinghe was appointed to oversee the Nineteenth Amendment process.

The five-member team that prepared the initial draft comprised three retired officials who had served in very senior positions in the Legal Draftsman’s Department, myself and another lawyer.

The entire drafting process was carried out on the basis that the Bill should not be placed for approval at a referendum, in keeping with President Sirisena’s electoral pledge. While the terms of the President and Parliament were proposed to be reduced from six to five years, the upper limit of six years was not touched as that would require a Referendum.

Article 83 of the Constitution mandates that a Bill that seeks to amend or is inconsistent with particular Articles listed or the said upper limits would be required to be passed by a two-thirds majority in Parliament and approved by the People at a Referendum.

It is essential to note that Article 83 itself is included in the list of provisions requiring a Referendum. The several drafts prepared were all shared and discussed with the Cabinet sub-committee.

The draft finally approved by the Cabinet sub-committee was then sent to the Legal Draftsman, who took over as required by law and made some changes. It was then sent to the Attorney-General, who took the view that certain clauses, especially some that reduced the powers of the President, would require a Referendum. Prime Minister Wickremesinghe had several meetings with the Attorney General to discuss the matter. I participated in one such meeting. Several changes had to be made to the Bill because of the Attorney-General’s position.

Prime Minister Wickremesinghe presented the Bill to Parliament. When it was challenged in the Supreme Court, the Attorney-General argued on behalf of the Government that no provision required a Referendum. The clauses that the Supreme Court held to require a Referendum were either amended or withdrawn in Parliament.

In light of the above, I regret that President Wickremesinghe has thought it fit to place the entire blame on me for not reducing the upper limits of the President’s and Parliament’s terms.

I reiterate that the entire amendment process was based on avoiding a Referendum following President Sirisena’s pledge at the Presidential election.

(Dr) Jayampathy Wickramaratne, Presidents Counsel
20 July 2024.

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Sri Lanka banking system foreign assets turn positive in May: analysis

ECONOMYNEXT – Net foreign assets of Sri Lanka’s banking system turned positive in May 2024, official data showed, amid a steady reduction in the negative reserve position of the central bank helped by the current interest rate structure and domestic credit.

In May the combined net foreign assets position of commercial banks and the central bank was about 311 million US dollars by May, up from a negative 178 million US dollars a month earlier, central bank data show.

It was made up of positive 1.9 billion US dollar foreign assets position in overseas banking units and a negative 811-million-dollar position which gave a positive NFA position of about 1.13 billion US dollars for banks.
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The central bank still had a negative position of about 821 million dollars by May, down from about 4.5 billion US dollars in last currency crises triggered by deploying liquidity tools (printing money) to cut rates.

The central bank has been collecting reserves for several months, except in June after a confidence shock from the flexible exchange rate and some injections made to keep rates down.

Analysts have warned that under flexible inflation targeting, where there are anchor conflicts, external imbalances will re-emerge when private credit recovers and money is printed to cut rates.

Printing after giving Reserves for Imports

Sri Lanka’s central bank ran up a negative foreign assets position, by spending dollars borrowed from the International Monetary Fund and from other central banks including in Bangladesh and India as well as domestic banks and spending them to suppress market interest rates and finance imports.

An ‘age-of-inflation’ (or age-of-BOP-deficit) central bank that spends reserve for imports, simultaneously prints money into banks, injecting excess rupee reserves to maintain an artificial policy rate, preventing the outflow of real resources to other countries being reflected in bank balance sheets.

The printing of money after spending reserves, or the sterilizing of an outflow, allow banks to give loans without deposits and trigger forex shortages.

To collect foreign assets, a central bank has to do the opposite, and sell its domestic asset portfolio down against dollars purchased from banks, at an appropriate interest rate, which will moderate domestic credit.

Modern IMF-prone reserve collecting central banks are able to mis-target rates beyond their reserves mostly with the aid of Central bank swaps.

Sri Lanka’s central bank also borrowed reserves from domestic banks through swaps, in a somewhat similar operation to the way Lebanon’s central bank borrowed dollars to show reserves instead of buying outright against domestic assets.

Borrowed Reserves

Central bank swaps were invented by the Federal Reserve to mis-target rates and avoid giving gold reserves as macro-economists printed money to target growth in the 1960s and the printed dollars boomeranged on itself from other Bretton Woods central banks that focused on stability.

RELATED Central bank swaps symptomatic of Sri Lanka’s IMF return tickets and default: Bellwether

By March 2022, before rates were hiked, negative reserve position of Sri Lanka’s central bank was around 4.0 billion US dollars.

The negative position worsened to around 4.5 billion US dollars by the third quarter of 2022, helped by credits from Reserve Bank of India, which allowed Sri Lanka to run arrears on Asian Clearing Union balances.

In addition to the swaps, Sri Lanka also had borrowings from the International Monetary Fund which contributed to the negative foreign assets position.

The IMF borrowings came from serial currency crises triggered in the course of money printing to enforce rate cuts and target growth (potential output) and generate twice to three times the level of inflation found in monetarily stable countries through ‘flexible’ inflation targeting.

The external sector started to balance only after ACU credits were stopped. It has since been turned into a swap and the central bank is paying it down steadily in the current interest rate structure.

Related Sri Lanka repays US$225mn to Reserve Bank of India in first quarter

Sri Lanka was unable to use a People’s Bank of China swap to mis-target rates and boost imports its use was barred after gross reserves fell below three months of imports.

Private and State Banks

Sri Lanka’s private and state banks also had negative foreign assets for many years, due to lending to the government through US dollar Sri Lanka Development Bonds and other credits. The dollar loans to the government were financed in part by foreign credit lines.

As downgrades hit the country, and forex shortages worsened from flexible inflation targeting/potential output targeting, banks could not renew their credit lines.

Some banks avoided rolling over Sri Lanka Development Bonds. After the default and debt restructure, they were repaid in rupees leading to banks covering their open positions. The dollars are banked abroad, leading a net foreign assets position.

An improvement of net foreign assets, reflects an outflow of dollars from the domestic economy to foreign accounts, similar to repaying debt for building foreign reserves.

The foreign assets position of banks excluding the central bank turned positive in February 2023 and reached around a billion US dollars by the year end and has remained broadly stable around those levels in 2024r.

RELATED Sri Lanka bank net foreign assets turn positive: analysis

The stabilization of the NFA position in banks may allow the central bank to collect more foreign reserves than earlier, analysts say, at the current interest rate structure as long as money is not injected overnight or term injections to mis-target interest rates claiming inflation was low.

Any confidence shocks from the ‘flexible’ exchange rate or liquidity spikes, would also reduce the ability of the central bank to collect dollars and lead to mini ‘capital flight’ style episodes from importers and exporters. (Colombo/July20/2024)

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New constitutional amendment a ‘necessary revision’: Sri Lanka President

ECONOMYNEXT – Sri Lanka’s President has said a proposed amendment to the country’s constitution was a ‘necessary revision’, which would not result in a postponement of elections.

“In 2015, we proposed a new constitutional amendment,” President Wickremesinghe was quoted as saying during a ceremony to open a court complex in Beligaha, Galle on Friday.

“Typically, I would have assigned this task to K N Choksy, a lawyer.

“However, since he had passed away, the responsibility fell to lawyer Jayampathi Wickramaratne. He was unable to make the necessary revisions. This oversight is regrettable, and I apologize to the nation for it.”

President’s Counsel Wickramaratne has explained that the leaving out Section 83 (b) of the constitution was a not an “oversight” but it was a result of instructions received from the then administration to avoid making changes that required a referendum.

President Maithripala Sirisena in his election manifesto has pledged not to make changes that required a referendum, and the drafting team was told not to make changes that would require a referendum.

Related Sri Lanka’s 6-year Presidential term: problem in drafting 19th amendment explained

Meanwhile President Wickremesinghe said the move to change the constitution should not lead to a delay in elections.

“Our country has upheld democracy since 1931,” he said. “Protecting democracy is crucial. The upcoming election is on schedule, with the Chief Justice and the Supreme Court confirming that it should be held within the specified timeframe, and we support this directive.

“Some critics argue that democracy is at risk during certain crises. However, our constitution, judiciary, and political system have worked to advance and protect it. The most significant threat to our democracy occurred in 2022, yet we have continued to progress through consensus.”

Sri Lanka became the first country in Asia and Africa to grant universal suffrage in 1931, Wickremesinghe said.

“Unlike in the United States, where some states did not extend voting rights to Black people, Sri Lanka is unique for maintaining democracy continuously since then.

“Despite facing wars and rebellions, Sri Lanka has preserved its democratic system, and democracy has remained intact despite numerous challenges.”

Sri Lanka got universal suffrage under British rule.

In Sri Lanka, power transitions smoothly and without conflict after elections, the president said, “a testament to the strength of our democratic process. Despite various debates and issues, democracy has never been compromised.”

Opposition parties and lawyers have charged that the legal process involving changing the constitution could potentially delay the upcoming Presidential elections.

“Article 83 of the Constitution of the Democratic Socialist Republic of Sri Lanka is hereby amended in paragraph (b) thereof, by the substitution for the words “to over six years,”, of the words “to over five years,” the gazette notice issued on the orders of Wickremesinghe says.

Download bill 523-2024-bill-constitution-EN

There is a discrepancy in the Article 83 with reference to a six year term, while the rest of the constitution, refers to a five year term. (Colombo/July19/2024)

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