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Tuesday February 7th, 2023

Sri Lanka banks asked not to compete for deposits: CB Governor

ECONOMYNEXT – Sri Lanka’s Central Bank has asked banks not to compete with each other for deposits Central Bank Governor Nandalal Weerasinghe said, as attempts were being made to bring down interest rates.

“With the tight liquidity banks are competing among themselves for deposits,” Governor Weerasinghe told a business forum organized by CT CLSA Securities, a Colombo-based brokerage.

“Some banks were offering 30 percent for deposits.

“We have made a request for banks not to compete with each other for deposits eating into some one elses share. If anyone needs liquidity the central bank is willing to provide liquidity even for individual banks.

“We have a mechanism in place to do it. So anyone who wants liquidity we can pump in liquidity through open market operations.”

Sri Lanka’s banking system has liquidity shortages because the central bank intervened in forex markets to finance imports and gave overnight liquidity at low rates (sterilized forex sales) to stop reserve money from shrinking and rates rising, preventing a slowdown in credit.

Sri Lanka’s inflation hit 70 percent after the most recent currency crisis and high rates allow small savers and old people to recover some of their savings expropriated by mis-targeted rates in the previous year.

A liquidity short which create a big asset liability mis-match discourages banks from lending without deposits to artificially boost imports.

In past currency crises the central bank mostly injected money permanently making it easier for banks to give loans without first raising deposits to keep the external sector in check.

Such sterilized interventions lead to a quick run down of foreign reserves of a pegged central bank when domestic credit demand is high.

Forex shortages and currency crises are a problem linked to reserve collecting central banks which have a policy rate to mis-target rates as domestic credit picks up and are absent in hard pegs or clean floats.

Governor Weerasinghe in April raised the rate at which new money is injected to 15.5 percent which slowed domestic credit and excessive demand for imports from liquidity injections.

Market rates went to around 30 percent in 2022 as open market operations at low rates were halted and central bank purchases of Treasury bills were curtailed, largely due to the requirement to finance a deficit and concerns over domestic debt re-structuring.

Before policy rates are brought down the central bank wanted to see market rates coming down, Governor said.

Once inflation starts to come down, ‘monetary policy action’ can be taken, he said.

Liquidity shortages can also widen if the central bank sells down its Treasury bills before it restores credibility of the exchange rate to start buying dollars on a net basis.

In 2022 however liquidity shortages of some banks have been worsened due to risk averse banks depositing cash overnight at the central bank.

Earlier in November, the central bank injected 130 billion rupees into banks permanently, raising some concerns among some forex market participants.

In the past, after rates and hike and credit is slowed, a quick float restores credibility of the exchange rate ahead of an IMF deal.

However this time, there is as surrender rule in place and a peg is maintained around 363 to the US dollar and an IMF deal has been delayed due to a requirement for debt re-structuring.

However taxes have been raised and tax revenues are up, reducing the borrowing requirement compared to last year. State enterprises have also raised rates reducing their borrowings to cover losses.

After Sri Lanka’s currency collapsed after two year of money printing to mis-targette rates the cost of providing utilities doubled as fuel prices went up. (Colombo/Nov30/2022 – Update III)

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Sri Lanka Railways to seek PPPs to boost revenue streams

CURFEW RUSH: Commuters scrambling to get home after curfew was declared in Sri Lanka on March 20, 2020.

ECONOMYNEXT – Sri Lanka Railway department hopes to expand Public Private Partnerships and earn more non-passenger revenues to offset recurring operational costs, an official said.

“For the past 10 years, except the last few years, the Railway operational income only covers around 50 percent of the operational expense of the Department,” the General Manager of the Railway, D.S. Gunasinghe told EconomyNext.

“Our plan is to increase the non-passenger revenue of the Railway department.

“And we cannot expect and do not hope for money from the government.”

Sri Lanka Railways already has agreements with Prima, a food firm, and Insee Cement, which is bringing in additional income, Gunasinghe said.

“We had agreements for material transportation such as sand in the past, however it was canceled but we hope to start it again” he said.

The department will rent out its storage facilities and circuit bungalows for the tourism sector to create additional revenue streams.

Sri Lanka Railways recorded an operating loss of 10.3 billion rupees during 2021, compared to a loss of 10.1 billion rupees in 2020, the Central Bank 2021 annual report showed.

The total revenue of the SLR stood at 2.7 billion rupees, a 41.3 percent drop from a year ago.

(Colombo/ Feb 06/2023)

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Sri Lanka’s doctors distribute anti-tax hike leaflets to train commuters

ECONOMYNEXT – Doctors representing Sri Lanka’s Government Medical Officers Association (GMOA) distributed leaflets outside the Colombo Fort railway station against a progressive tax hike, threatening to address the government in a “language it speaks”.

GMOA Secretary Haritha Aluthge told reporters outside the busy Fort railway station Monday February 06 afternoon that all professional associations have collectively agreed to oppose the personal income tax hike.

“The government is taking a lethargic approach. They cannot keep doing this. They have a responsibility towards the citizens, the country and society,” said Aluthge.

The medical officer claimed that the government was acting arbitrarily (අත්තනෝමතික).

“If it cannot understand the language they’ve been speaking, if the government’s plan is to put all professionals out on the street, if it doesn’t present a solution, all professional unions have decided unanimously to address the government in a language it speaks, ,” he said.

Aluthge and other GMOA members were seen distributing leaflets to commuters leaving the railway station. Doctors in Sri Lanka in general are likely to earn higher salaries than the average train commuter, and a vast majority of Sri Lanka’s population, most of whom take public transport, don’t fall into the government’s new tax bracket. Many doctors, though certainly not all, collect substantial sums of money at the end of every month as doctor’s fees in private consultations.

About two miles away from the doctors, the Ceylon Blank Employees’ Union, too, engaged in a similar distribution leaflet campaign on Monday at the Maradana railway station. A spokesman promised “tough trade union” action if there was no solution offered by next week.

Sri Lanka’s cash-strapped government has imposed a Pay As You Earn (PAYE) tax on all Sri Lankans who earn an income above 100,000 rupees monthly, with the tax rate progressively increasing for higher earners, from 6 percent to 36 percent.

A person who paid a tax of 9,000 rupees on a 400,000 rupee monthly income will now have to pay 70,500 rupees as income tax, the latest data showed. This has triggered a growing wave of anti-government protests mostly organised by public sector trade unions and professional associations.

Even employees of Sri Lanka’s Central Bank recently joined a week-long “black protest” campaign organised by state sector unions against the sharp hike in personal income tax, even as Central Bank Governor Nandalal Weerasinghe said painful measures were needed for the country to recover from its worst currency crisis in decades.

The government, however, defends the tax hike arguing that it is starved for cash as Sri Lanka, still far from a complete recovery, is struggling to make even the most basic payments, to say nothing of the billions needed for public sector salaries.

Economists say Sri Lanka’s bloated public service is a burden for taxpayers in the best of times, and under the present circumstances, it is getting harder and harder to pay salaries and benefits.

Sri Lanka’s new tax regime has both its defenders and detractors. Critics who are opposed to progressive taxation say it serves as a disincentive to industry and capital which can otherwise be invested in growth and employment-generating business ventures. Instead, they call for a flat rate of taxation where everyone is taxed at the same rate, irrespective of income.

Others, however, contend that the new taxes only affect some 10-12 percent of the population and, given the country’s economic situation, is necessary, if not vital, at least for a year or two.

Critics of the protesting workers argue that most of the workers earn high salaries that most ordinary people can only dream of, and, they argue, though there may be some cases where breadwinners could be taxed more equitably, overall, Sri Lanka’s tax rates remain low and are not unfair.  (Colombo/Feb06/2023)

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Sri Lanka bond Yields end steady

ECONOMYNEXT – Sri Lanka’s bond yields closed steady on Monday, dealers said while a guidance peg for interbank transactions remained unchanged.

A bond maturing on 01.07.2025 closed at 32.15/30 percent, steady from Friday’s 32.05/10 percent.

A bond maturing on 01.05.2027 closed at 28.90/29.10, steady from Friday’s 28.90/20.05 percent.

The Central Bank’s guidance peg for interbank US dollar transactions appreciated by one cent to 361.96 rupees against the US dollar.

Commercial banks offered dollars for telegraphic transfers at 370.35 rupees on Monday, data showed. (Colombo/Feb 06/2023)

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