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Tuesday May 30th, 2023

Questions over EPF, state banks buying SriLankan Airlines shares

ECONOMYNEXT –  Sri Lanka’s cabinet of ministers had been told that Bank of Ceylon would benefit from buying shares in loss-making SriLankan Airlines after the exit of Emirates, and the share transfer itself had appeared to have been done in an irregular way, a commission of inquiry heard.

The commission is probing alleged irregularities in SriLankan Airlines and Mihin Lanka from 2006 to 2018. Emirate’s management of the airline was terminated in 2008, and the airline then started making losses.

Company Secretary Dalrene Thirukumar, who had joined the airline in 2013, presented documents filed by her predecessor in 2010.

A cabinet paper submitted by the Finance Ministry had said that it was desirable for strong institutional investors such as state banks be allowed to purchase shares in SriLankan, as they would benefit from the prevailing economic conditions and the tourism development to follow.

In addition to the Bank of Ceylon, People’s Bank, National Savings Bank and Employees Provident Fund had ended up taking shares of the loss-making airline, though the required documentation to carry out sales could not be located.

Thirukumar was asked whether she found a cabinet decision authorizing the EPF, NSB and People’s Bank to purchase shares held by Emirates.

She said she had not found such a document.

Thirukumar said that there was an incomplete transfer instrument copy between Emirates and BOC filed with SriLankan, and she was unable to confirm whether the copy was a draft or an original.

The transfer of Emirates shares took place in June 2010, but the next SriLankan board meeting held in August showed that BOC had only purchased 12.5 million shares from Emirates, while People’s Bank had purchased 4.2 million shares, NSB 4.2 million shares, and the EPF 1.8 million shares, Thirukumar said.

She was also asked whether there were instruments at SriLankan detailing the transfer of Emirates shares to People’s Bank, NSB and EPF.

She said that her office has conducted a ‘cursory search’, and had not located such documents. She said that a more detailed search will be conducted.

She said that according to the SriLankan Articles of Association, all transfers of shares should have an acceptable instrument.

She said that before the transfer, the government had held 51 percent of shares in SriLankan. Employees of the airline had held just under 6 percent of the shares.

The Valuation Department estimated the 51 percent of SriLankan shares held by the government to be worth 440 million US dollars in a letter written to the Finance Ministry. Cabinet documents showed the 43.36 percent of Emirates-held shares to be worth 53 million US dollars.
(COLOMBO, 02 August, 2018)

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Sri Lanka rupee at 296.75/297.25 to dollar at open, bond yields steady

ECONOMYNEXT – Sri Lanka’s rupee opened at 297 /297.50 against the US dollar in the spot market on Monday, while bond yields were steady, dealers said.

The rupee closed at 296.75 /297.25 to the US dollar on Monday after opening around 296.50 /297.50 rupees.

A bond maturing on 01.09.2027 was quoted at 26.50/75 percent steady from Friday’s close at 26.50/65 percent.

Sri Lanka’s rupee is appreciating amid negative private credit which has reduced outflows after the central bank hiked rates and stopped printing money. (Colombo/ May 29/2023)

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Sri Lanka rupee appreciation squeezes exporters

ECONOMYNEXT – Sri Lanka’s recent appreciation is starting to squeeze apparel exporters as their domestic costs including wages and energy, were hiked over recent months, when the rupee fell steeply, an industry official said.

Companies had raised salaries and emoluments at rates averaging 25 percent for workers while transport costs have also gone up but not has come down, Yohan Lawrence Director General of the Join Apparel Association Forum said.

Apparel factories in particular also provide transport and some meals for workers.

Electricity prices have also been hiked, based on the rupee which was weaker. A tariff cut is expected from June after the rupee appreciated and imported fuel prices fell.

Sri Lanka’s rupee collapsed in 2022 from 200 to 360 to the US dollar as interest rates were suppressed with liquidity injections and a failed attempt was made to float the rupee with surrender requirement in place.

From the second half of 2022, with higher interest rates and negative private credit, the central bank has avoided printing money under conditions which are generally accepted to be difficult, and is broadly running deflationary open market operations, triggering a balance of payments surplus and putting the rupee under upward pressure.

Central bank net credit to government which was 3,302 billion rupees in September in 2022, was down to 3,209 billion rupees by March 2023, part of which was due to rollovers, analysts say.

Market pricing of fuel and electricity by the Ministry of Energy and also spending controls and tax hikes buy have also helped contain domestic credit.

Sri Lanka also has mandatory conversion rules, imposed on exporters, which is a concern for exporters.

“We believe rupee should be at its natural level, but with forced conversions you won’t get the correct picture,” Lawrence said.

Sri Lanka has to release a plan to remove import controls, exchange controls and other restrictions imposed in the period where policy rates were suppressed with liquidity injections (so-called multiple currency practices and capital flow measures) by June under the IMF program.

Apparel exporters have also seen orders fall amid tighter conditions in Western markets.

The central bank has to peg (intervene actively in forex markets and create money) to meet reserve targets under an IMF program and cannot free float (avoid creating money through international operations) the rupee.

The newly created money has generally been absorbed in an overnight liquidity shortage.

There have also been foreign purchases of rupee Treasuries. Amid a contraction in credit, the inflows also do not turn into imports fast as the money if the money is spent.

By making purchases a little below what is allowed by the contraction in domestic credit, the rupee can be allowed to appreciate, analysts say.

The central bank has so far allowed the rupee to appreciate to around 300 to the US dollar from 360 levels under a transparent guidance peg up to February.

Except after the 2008/2009 currency crisis, Sri Lanka’s central bank has not previously allowed to the rupee to appreciate under IMF programs where the first year in particular sees balance of payments surpluses, before private credit and domestic investments picks up again.

One of the considerations used by third world central banks are Real Effective Exchange Rate indices.

The REER of the Sri Lanka rupee based on a basket of currencies calculated by the central bank was 61.12 points in February before the rupee was allowed to appreciate by lifting a surrender rule.

In March the index went up to 69.55 points, but remained steeply below 100. Real effective exchange rates are calculated also taking into account inflation in counterpart trading nations.

Sri Lanka’s inflation index had hardly risen since September amid rupee gains. Falling food prices can help contain pressure for further wage hikes, analysts say. (Colombo/May30/2023)

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Sri Lanka forum to discuss central bank independence vs sound money

ECONOMYNEXT – Central bank independence and sound money will be under discussion at a public event organized by the Sri Lanka chapter of the Bastiat Society today, May 30, as island is recovering from the worst episode of monetary instability since independence.

The forum will feature Lawrence H White, Professor of Economics at George Mason University in the US, and W A Wijewardene, former Deputy Central Bank Governor, of the Central Bank of Sri Lanka.

“The discussion will compare the current system against alternative systems and explore the relationship between such banking systems and sound money,” the organizers said.

White specializes in the theory and history of banking and money. He is the author of “The Clash of Economic Ideas” (2012), “The Theory of Monetary Institutions” (1999), “Free Banking in Britain” (2nd ed., 1995), and “Competition and Currency” (1989).

Wijewardene has been speaking on central bank independence in Sri Lanka long before it became a topic of wider discussion, but also on accountability.

In April, a Central Bank Independence and Other Matters, which includes a collection of his orations on the subject over the years as well a recent development was published.

The discussion comes as independent central banks in the West have created the worst inflation since the 1970s and early 1980s and are apparently unaccountable to parliaments and the public.

The early 1980s also saw the first wave of external debt crises in so-called soft-pegged countries in Latin America and Eastern Europe in particular as the US and UK tightened policy to end the Great Inflation.

The discussion will be held at 7.00 pm at the Lakmahal Community Library and those interested can register online, the organizers said. (Colombo/May30/2023)

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