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Tuesday February 7th, 2023

Sri Lanka broke currency peg without hiking rates, monetary board recommendations: CB Governor

ECONOMYNEXT – Sri Lanka broke a pegged exchange rate in 2022 in an attempt to ‘float’ the currency without hiking rates and taking monetary board recommendations in to account, Central Bank Governor Nandalal Weerasinghe said.

Sri Lanka’s soft-pegged central bank ran out of reserves in August 2021 (net foreign assets became negative) according to its own data. The agency continued to sell borrowed dollars and inject new money to offset the dollars preventing interest rates from going to protect the exchange rate.

Around March 2022 the peg was broken which was followed by a steep collapse from 200 to 360 to the US dollar.

“On the 08th of March the previous administration of the central bank let the currency float without any safeguards,” Governor Weerasinghe told a public forum in Colombo.

“Even the monetary board recommendation to gradually allow and take certain measures, without taking initiative to re-structure debt, without taking initiatives to tighten monetary policy, letting the currency float.”

Analysts have said a float involves stopping all interventions in forex markets so that reserve money is isolated from the balance of payments and surrender requirement also worsened the fall.

Sri Lanka forced commercial banks to sell dollars to itself in a surrender requirement, which is a tactic used by pegged exchange rate central banks to prevent appreciation of a currency (a strong side convertibility undertaking) and push the currency down.

Governor Weerasinghe hiked rates to 15.5 percent and allowed market rates to go up, slowing private credit and is now defending a peg around 360 with some success.

Dollars are bought and sold on both sides of the peg.

Meanwhile the Treasury has raised taxes to reduce domestic borrowings and energy utilities have hiked tariffs to reduce their borrowings.

The central bank also maintained liquidity short in the interbank market further discouraging credit.

Pegged exchange rate were generally not allowed to be broken without parliament approval until about 1980s when so-called basket, band, crawl (BBC) policy was peddled to the third world. In the UK, Bank of England originally had to have parliamentary sanction to break the peg and float through a Bank (covertibility) Restrictions Act.

Sri Lanka’s monetary law also originally had similar provisions. However from about 1980s when so-called basket, band, crawl (BBC) policy was peddled to the third world nations without a strong doctrinal foundation in sound money or knowledge about external anchoring critics, the rupee was depreciated to compensate for mis-targeted interest rates critics say.

Later the obligation to preserve the ‘external value’ of the currency was removed thought other sections of the Monetary Law on the peg remained.

A pegged exchange rate collapses due a policy rate maintained with liquidity injections to create bank rupee reserves which are then loaned to real borrowers to spend and import.

Liquidity injection hit the balance of payments as imports via the credit system reserves have to be sold to stop the peg from breaking, creating a so-called balance of payments deficit roughly equal to the volume of printed money.

If there is strong credit demand, continued domestic credit disbursements lead to more reserve sales and liquidity shortages in the banking system, which needs a rate hike to slowdown credit.

Government credit is usually inflexible, and state enterprise credit comes from losses coming from price controls or ‘administered prices’ both of which will create balance of payments deficits if liquidity is injected to maintain the policy rate.

In Sri Lanka price controls on electricity are imposed by the Public Utilities Commission and fuel by the Treasury.

Currency boards (true hard pegs) do not have an active fixed policy rate, interventions are unsterilized and can maintain pegs indefinitely, by immediate curtailment of credit through floating domestic interest rates.

Countries like Dubai, Qatar and Oman, though not true had pegs, also do not have an active policy rate and can maintain pegs for many decades, giving long term stability and a foundation for economic growth and employment above the domestic population.

When Sri Lanka had a currency board, the country import large number of workers from India. (Colombo/Nov16/2022)

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  1. James says:

    This is a misleading Headline.

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  1. James says:

    This is a misleading Headline.

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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