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Tuesday June 18th, 2024

Sri Lanka CB Governor meets envoy of forex reserve rich Bangladesh

A MORE CREDIBLE PEG: Bangladesh reserve money grew above target as the Taka was prevented from appreciating amid a slowdown in domestic credit which slowed outflows. The liquidity from NFA sharply lowered overnight rates. Similar outcomes were seen in stable pegs such as Vietnam where the overnight rate was allowed to fall to 0.2 percent.

ECONOMYNEXT – Sri Lanka’s central bank Governor Ajith Nivard Cabraal has met the High Commissioner for Bangladesh in Colombo, whose central bank has extended a 200 million US dollar swap to the island.

Governor Cabraal and the High Commissioner Tareq Md Ariful discussed “strengthening of economic ties and greater utilization of the Colombo Port for Bangladesh exports.”

Bangladesh Bank, the country’s central bank has given a 200 million US dollar swap to Sri Lanka’s central bank which has seen a run on its forex reserves as liquidity was injected into money markets to suppress rates.

As domestic credit slowed amid a Coronavirus pandemic, Bangladesh Bank (BB) has collected billions of dollars of new foreign reserves, in line with other countries that also have fairly credible pegs.

Bangladesh Bank runs a reserve money program with less discretionary power, compared to Sri Lanka which is operating a ‘flexible’ inflation target with contradictory domestic and external anchors and a obsessive control of short term rates with excess liquidity.

Backed by the credible peg Bangladesh’s balance of payments recorded a “sizeable surplus” of 9.2 billion US dollars up to June 2021 compared to 3.129 billion US dollars a year earlier, the central bank said.

“Relying on the this BoP surplus net foreign assets of the banking system saw a very strong growth of 275 percent alongside reaching BB’s foreign exchange reserves to a historically high level of USD 46.4 billion at the end of June 2021,” Bangladesh Bank said.

BB has kept is product, the Taka, around 83 to 84 to the US dollar from 2012, with monetary policy to support it, giving a strong foundation for stability and growth.

It follows a reserve money targeting exercise (a type of domestic anchor) which is more complementary to foreign reserve collection, though the peg can collapse if outflows are sterilized to keep rates down (reserve money starts to grow with acquisitions of domestic assets, which then drive private credit and outflows).

The last such collapse happened in 2010/2011 when the Taka fell to 83 from 68 to the US dollar.

In sharp contrast Sri Lanka follows a ‘flexible exchange rate’ an unusually non-credible peg with extreme anchor conflicts while printing money to push domestic inflation up to 6 percent, but frequently missing it and pushing it above that in many months.

In the same period Sri Lanka with a combination of call money rate targeting, high inflation targeting, real effective exchange rate targeting, has triggered four crises in 2011/2012, 2016/2016, 2018 and 2020/2021 which is ongoing.

The on going crises was engineered mostly with price controls on bond auctions and outright purchases of government securities.

In 2020 March as the currency fell sharply in a so-called sudden ‘flexible exchange rate episode’ with unusual helicopter drops of liquidity, panicking importers as usual, the Sri Lanka was downgraded.

As private credit collapsed amid lockdowns, the like Bangladesh Sri Lanka’s central bank also bought dollars and collected foreign assets but as private credit recovered more money was printed to keep rates down, hitting the exchange rate, triggering forex reserve losses.

Sri Lanka’s domestic credit is largely driven by a massive budget deficit coming from tax cuts in December 2019 driven by ‘stimulus’ ideology.

Rates were also suppressed due to ‘stimulus’ ideology. (Colombo/Sept26/2021)

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Sri Lanka’s Ceylon Chamber links up with Gujarat Chamber

ECONOMYNEXT – The Ceylon Chamber of Commerce has signed an agreement with the Southern Gujarat Chamber of Commerce and Industry (SGCCI) to increase trade cooperation between India and Sri Lanka.

The MOU was signed by CCC CEO Buwanekabahu Perera, SGCCI President Ramesh Vaghasia, in the presence of Dr Valsan Vethody, Consul General for Sri Lanka in Mumbai, India.

“With the signing of the MoU, … the Ceylon Chamber of Commerce and SGCCI aim to facilitate trade between the two countries via initiatives such as trade fairs and delegations, business networking events, training programmes,” the Ceylon Chamber said in a statement.

“This partnership will open doors for Sri Lankan businesses to explore opportunities in Surat’s dynamic market and enable the sharing of expertise and resources between the two regions.”

Established in 1940, SGCCI engages with over 12,000 members and indirect ties with more than 2,00,000 members via 150 associations. It promotes trade, commerce, and industry in South Gujarat.

The region’s commercial and economic centre Surat has risen to prominence as the global epicenter for diamond cutting and as India’s textile hub, and is ranked the world’s 4th fastest growing city with a GDP growth rate of 11.5%

Surat’s economic landscape is vibrant and diverse. As India’s 8th largest and Gujarat’s 2nd largest city, it boasts the highest average annual household income in the country.

The nearby Hazira Industrial Area hosts major corporations like Reliance, ESSAR, SHELL, and L&T. (Colombo/Jun18/2024)

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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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