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Tuesday June 18th, 2024

IMF cautions Maldives on money printing to stop rufiyaa fall as Sri Lanka wobbles

ECONOMYNEXT – Maldives should not print money if they wanted to maintain their rufiyaa peg at 15.4 to the US dollar and try to raise funds from bonds and curtail capital spending, the International Monetary Fund has said as Sri Lanka struggles.

Maldives, which is dependent on tourism revenues was badly hit by Coronavirus and their economy contracted 32 percent in 2020, but is expected to grow by 18.9 percent in 2021.

However with the pandemic, the Central Bank had bought Treasury bills, triggering a parallel exchange rate from the demand created.

IMF’s Executive Directors “cautioned against central bank financing of the government and encouraged developing a comprehensive debt management strategy, coupled with public financial management reforms, to manage the risks from large infrastructure projects and state-owned enterprises.

“Directors agreed that a tighter monetary policy stance may be needed to ensure compatibility with the exchange rate peg, lower external imbalances and build up reserves.”

Sri Lanka has been printing money from around the third quarter of 2014 and has only had stability in the external sector in 2017 and up to around July 2019 in the last 7 years contributing to a sharp rise in market debt and possible sovereign default.

Maldives was a stable country until highly volatile income tax replaced a previous stable bed tax and civil service salaries were raised for vote buying with the demise of Mahathir Mohammed.

He had the benefit of the Maldives Monetary Authority which does not usually print money and has no “modernized ” open market operations to bust the peg and has the strongest currency on an absolute basis in South Asia and the country has the highest per capita income.

IMF usually descends into Mercantilism and encourages ‘competitive’ exchange rates and the attendant high inflation and social unrest for central banks with active open market operations and inflating currencies.

Tourism has started to recover with growth projected at 19 percent in 2021. Inflation is expected to be 1.4 percent and set to increase to 2.3 percent in 2022 with high commodity and food prices.

Washington has been pushing countries to adopt income tax for years and Western agencies have been also pushing GCC countries and targeting tax havens through which large volumes of money were channeled as foreign direct investments.

This week a deal was reached for a 15 percent minimum corporate tax rate as a group journalists, who have been periodically targeting tax havens, released the latest findings.

But now it is trying hard to avoid sovereign default.

In addition to the income tax problem, the Maldives had taken large loans including from China to build infrastructure and also has a 200 million dollar international sovereign bond, which has been re-financed with a Sukuk.

“Nonetheless, fiscal and external positions are projected to remain weak over the medium term, underpinned by capital expenditure plans,” the statement said.

“The Maldives remains at a high risk of external debt distress and a high overall risk of debt distress.

“The total public and publicly guaranteed (PPG) debt-to-GDP ratio increased from 78 percent in 2019 to 146 percent in 2020, reflecting mostly the contraction in nominal GDP, but also an expansion in nominal debt.

“PPG debt is projected at 123 percent of GDP in 2026.” (Colombo/Oct08/2021)

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Sri Lanka telecommunications bill some clauses ruled unconstitutional by SC: Speaker

ECONOMYNEXT – Sri Lanka’s Supreme Court has found a number of clauses in a proposed amendment to the Telecom Telecommunications Amendment bill unconstitutional, speaker Mahinda Yapa Abeywardana said.

“Clause No 8, proposed section 9A 2 of the bill is inconsistent with Article 12 1 of the constitution, however this inconsistency shall cease if word ‘may’ will be replaced with word ‘shall’ as set out in the determination of the supreme court.”

“Clause No 9 is inconsistent with Article 12 1 of the constitution and only can be passed with special majority required under paragraph 2 of the Article 84. However, the inconsistency shall cease if clause is amended as set out in the determination of the supreme court.

Clause No 12, proposed section 17 10 of the bill is inconsistent with Article 12 1 of the constitution and can only be passed with special parliament majority required under Article 84 paragraph 2. However, the inconsistency shall cease if clause is amended as set out in the determination of the supreme court.”

Sections of clauses 13, 18, 20, 33 and 35 were also in violation of the constitution, and could only be passed by a special majority of parliament. (Colombo/Jun18/2024)

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Sri Lanka to exempt one house from imputed rent wealth tax: President

ECONOMYNEXT – Sri Lanka will exempt one house from a proposed wealth tax outlined in an International Monetary Fund program, President Ranil Wickremesinghe said.

About 90 percent of the people’s houses are likely to be exempt from the proposed tax, he said.

“[O]ne house will be exempt from this,” President Wickremesinghe told parliament Monday.

“It is going to have a very high threshold and I do not think the vast majority of the people in this country should even be worried about their house

“Don’t worry your house will be safe.”

The IMF program document however did not mention an exempt on one house, but did mention a threshold.

Taxing houses and thrift in general could have detrimental effects on people’s well-being housing stock and their willingness to remain in the country without migrating, critics say.

Related Sri Lanka to tax imaginary rents on houses under IMF deal

The mechanism of imputed rents was used because rates on houses was assigned to provincial councils and courts could strike it down.

Opposition legislator Harsha de Silva said the Samagi Jana Balwegaya welcomed President Wickremesinghe’s statement. (Colombo/June18/2024)

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Sri Lanka rupee opens weaker at 304.30/55 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee opened at 304.30/55 to the US dollar on Tuesday, while bond yields were broadly stable, and stocks opened 0.02 percent up, dealers said.

The rupee closed at 304.00/15 to the greenback on Friday, before the long weekend.

In equities, Colombo’s All Share Price Index opened 2.06 points higher at 12,312 while the S&P SL20 of more liquid stocks opened down 0.07 percent or 2.63 points to 3,642.

The market turnover was 3.3 million rupees.

In the secondary market, yields were broadly stable, dealers said.

A bond maturing on 15.12.2026 was quoted at 10.10/30, up from 10.05/30 percent.

A bond maturing on 01.07.2028 was quoted at 11.05/30 percent, up from 11.05/20 percent.

A bond maturing on 15.09.2029 was quoted stable at 11.80/85 percent.

A bond maturing on 01.10.2032 was quoted at 11.95/12.10 percent, down from 12.00/10 percent.

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