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Tuesday June 25th, 2024

South Asia’s insiders benefit from crony capitalism: economist

ECONOMYNEXT- South Asia is practicing insider-outsider economics, where a small group benefits from the economy while excluding the majority, but technology could end the status-quo World Bank’s Chief Economist for South Asia said.

“South Asian economies are based on insider-outsider policies. Another name for this is crony capitalism,” Hans Timmer said at public lecture organized by the Central Bank of Sri Lanka.

“What you see in most countries is that a relatively small group of the society has created a preferential system,” he said.

“This is true for state sector workers as well as companies which have created a shielded position.”

Central Bank Governor Indrajit Coomaraswamy said insider-outsider policies were active in Sri Lanka.

In Sri Lanka, state-sector workers get duty free cars, state-sponsored pensions and raises without a link to productive work.

Companies use political patronage to create protection from international competition through high import tariffs and local competition through licensing systems.

Insider-outsider economics has led to a large informal sector across South Asia which has no social safety net, Timmer said.

“The problem is so big in South Asia, that more than 80 percent is in the informal sector. It’s not realistic to think that this is the way to go.”

“The formal sector has created a set of benefits which cannot be extended to the rest of the economy due to resource constraints, and this will ultimately be detrimental for the entire economy.”

He said the insiders get the benefits because the group is small, and everyone outside wants to enjoy similar benefits.

“When I went to a university classroom in Colombo, I asked the students what they want to do in the future, and they all said they want a job in the state sector,” he said.

Low female labour force participation too is another policy along similar veins, he said.

“Those on the inside don’t see the need to involve women in this respect.”

Timmer said the outsiders need to be plugged into the economy better, as they have potential to deliver higher growth.

“There is so much potential among the outsiders if they are involved in the economy.”

“But no one sees this as a primary problem on their list.”

“People are being pushed to the informal sector and underperforming in international markets, maybe because of how the formal sector is performing.”

He said South Asia exports just one third of its potential, because the informal sector is not able to access the tools and support needed to develop and trade.

Many others point to problems along borders, paratariffs and geopolitical situations instead, Timmer said.

However, he said technology is able to narrow the gap in benefits enjoyed by the insiders and outsiders.

“Tech is changing markets. It’s flexible. There’s no need for economies of scale anymore. It’s about plugging into value chains.”

“So then, the informal sector might be able to advance, because they are people who are used to flexible working conditions.”

“So, the tuk tuks in Colombo is an example of tech enabling the informal sector, not an exception.”

Timmer said policy makers must think of how technology can help bring greater economic activity to the informal sector, thereby providing them with a social safety net.

Even in agriculture, he said politicians should look at how technology could enable productivity gains and help farmers find clients in foreign markets. (Colombo/Dec06/2019)

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Sri Lanka to sign Paris Club debt deals as fresh ISB talks to also start

ECONOMYNEXT – Sri Lanka will sign agreements on restructured debt with Paris Club creditors Wednesday, Cabinet spokesman Minister Bandula Gunawardana said as sources said talks with private creditors are also due to start later in the week.

The relevant senior officials and State Minister Shehan Semasinghe has already left the country to sign the agreements, Minister Gunawardana said.

Sri Lanka has held detailed negotiations with bilateral creditors ever since a sovereign default in 2022 and President Ranil Wickremesinghe has personally met leaders of friendly countries to expedite the restructuring, he said.

The finalizing of the restructure was a ‘great victory’ for Sri Lanka he said.

Details will be revealed to parliament by President Wickremesinghe and an address to the nation on Wednesday he said.

Discussion with private bondholders are also taking place separately, he said.

Face to face talks with bond holders are likely to start Thursday, sources said.

Investors in a steering committee representing key bondholders have halted trading and are in a ‘restricted’ period Bloomberg Newswires reported.

Sri Lanka is attempting to restructure 12.5 billion dollars of sovereign bonds and about 1.7 billion dollars of past due interest following the declaration of an external default in 2022.

Private investors are seeking some so-called macro-linked bonds whose final haircut is linked to dollar GDP as well as some standard or ‘plain vanilla’ bonds with an upfront haircut.

The style of bonds have not been used in sovereign restructurings before. In the latest round of talks more plain vanilla bonds may be discussed, sources aware of the thinking of some bond investors said.

The ISB holders have proposed a 28 percent haircut and a 1.8 percent consent fee. The macro-linked bonds would have principle re-stated up to 92 percent of the original depending on the evolution of gross domestic product.

Sri Lanka is restructuring debt using an IMF debt sustainability model applied to middle income countries with market access as opposed to debt sustainability model used in countries like Ghana applicable to low income countries requiring deeper haircuts on both domestic and foreign debt.

Hair cuts may also depend on the maturity of bonds and the coupon interest.

Ghana has higher levels of commercial debt having started to access capital markets from around 2007.

Ghana also has a bad central bank like Sri Lanka and has gone to the International Monetary Fund 18 times.

The country is also operating flexible inflation targeting (inflation targeting without a clean float), which critics say is the latest spurious monetary regime peddled to hapless unstable countries without a doctrinal foundation in sound money.

Having done broad domestic debt restructuring as well as continued currency volatility both interest rates and inflation remains above 20 percent.

Ghana’s central bank has a worse monetary anchor (8 percent inflation plus 2 percent) compared to 5 percent plus two in Sri Lanka and runs into currency trouble despite being an oil producer like Iran, Venezuela and neighboring Nigeria.

Nigeria has an inflation target of 6-9 percent but ends up with around 20 plus inflation and currency trouble.

Sri Lanka has undershot its inflation target since reaching monetary stability in September 2022 and has appreciated the currency, amid deflationary policy giving a strong foundation for economic activity to resume. (Colombo/June26/2024)

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Sri Lanka to seek investors for 200MW BOOT power plant

EONOMYNEXT – Sri Lanka’s cabinet has given approval to seek investors for a 200 MegaWatt independent power plant on a build-own-operate-and-transfer (BOOT) basis, a government statement said.

The internal combustion power plant will be capable of running on natural gas and is part of the Long-Term Generation Expansion of state-run Ceylon Electricity Board.

The investor will get as 20-year power purchase agreement.

Land next to the ‘Sobhadanavi’ combined cycle plant will be made available for the developer.

According to the generation plan, the 200MW IC plant is expected to come on stream by 2026.

In 2026, a 115 MW gas turbine, a CEB owned diesel plants of 68 MW and 72 MW are due to be retired. (Colombo/June25/2026)

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Sri Lanka rupee closes steady at 305.25/35 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed fairly flat at 305.25/35 to the US dollar on Tuesday, down from 305.20/30 to the US dollar on Monday, dealers said, while bond yields up.

A bond maturing on 01.06.2026 closed at 10.75/11.05 percent.

A bond maturing on 15.12.2026 closed at 10.65/11.05 percent, up from 10.45/85 percent.

A bond maturing on 15.10.2027 closed at 10.65/11.10 percent.

A bond maturing on 15.03.2028 closed at 11.20/11.50 percent.

A bond maturing on 15.09.2029 closed at 12.10/15 percent, up from 12.05/17 percent.

A bond maturing on 01.12.2031 closed at 12.10/20 percent, up from 12.08/15 percent.
(Colombo/Jun25/2024)

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