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Saturday May 25th, 2024

Sri Lanka central bank bought property in Brazil, New York; forensic audit due: FinMin

LIQUIDITY: US$1000 note issued by the Second Bank of the United States. The notes were not irredeemable paper money like now. Source: Wikimedia

ECONOMYNEXT – Sri Lanka’s central bank has bought property in Brazil and New York and results of a forensic audit on questionable securities deals are due in two months, Finance Minister Mangala Samaraweera said.

The central bank in addition to printing money and busting the currency from 4.70 to 182 to the US dollar since it was set up in 1950, in the worst depreciation among South Asian monetary authorities, was also caught in what is now labeled the biggest securities scam in 2015 and 2016.

Conflicts and Corruption

The monetary authority, which is also charged with selling state debt in a conflict of interest, is alleged to have rigged bond auctions to favour a securities dealership controlled by then central bank Governor Arjuna Mahendran’s son-in-law Arjun Aloysius.

Sri Lanka is now seeking help from Singapore to arrest Mahendran.

The same monetary authority in another conflict of interest not only sells bonds but also invests them in a pension fund of private sector workers called the Employees Provident Fund.

In the scam, the central bankers who were managing the fund is alleged to have bought the bonds at high prices, after avoiding placing bids in the auction in a bid to drive up auction yields.

In that year central bank also issued larger volumes of long tenor bonds, unlike in other periods, running up to 30 years at high prices, despite a tax hikes and a fiscal consolidation plan being on the cards. The capital gains made from dumping bonds on the EPF increases with the tenor.

However the property in Brazil and New York had been bought before 2015.

“These are the acts of the former Finance Minister who is now pointing fingers at us,” Finance Minister Mangala Samaraweera said, responding to a statement made by ex-President Mahinda Rajapaksa.

In 2014 the bank had bought property in Brazil for 122 million rupees. A condominium bought in New York had been valued at 7 million US dollars in the central bank accounts.

There have been questions raised about earlier bond sales as well as central bank investments of EPF money in stocks.

It has been alleged that the same dealers who began the equity scams continued the bond scams as well.

“The forensic audits will come in a couple of months and reveal all,” Samaraweera said.

It is not clear how the agency bought the condominium or property in Brazil, what kind of procurement process was used. Nobody has been punished for the transactions, but under its governing law the agency has sweeping powers to engage in various transactions.

The Central Bank’s current Governor, Indrajit Coomaraswamy, a highly respected public servant, had done much to clean up its image.

Monetary Instability

But the collapsed further to new records, under a so-called flexible exchange rates backed by discretionary policy and an output shock and a revenue collapse.

The Reserve Bank of India – an agency which still taxes gold to fix the balance of payments – also started at 4.70 to the US dollar at independence to which the Ceylon Rupee was hard-pegged. The RBI has has collapsed its own currency to 71 to the US dollar.

Pakistan’s Central Bank has collapsed its currency to 160 and is closely following Sri Lanka’s central bank, dragging the country to the International Monetary Fund frequently.

Bhutan and Nepal have strong pegs, but unfortunately linked to the Indian rupee.

Bangladesh’s central bank had collapsed its currency to 81 to the US dollar.

But it had now had over 8 years of stability at around 81 to the US dollar giving a strong foundation for growth, compared to crises every two to three years in Sri Lanka.

The Mauritius rupee had fallen around around 36 to the US dollar after its currency board was broken, but the agency does not practice very fancy monetary policy.

Maldives which best monetary authority with the strongest currency in South Asia, has sen the rufiyaa fall to 15 to the dollar after it started to engage in more active open market operations, critics say.

In 2018, as monetary instability worsened, the central bank itself made the Treasury control, international trade, directly hitting the current administration’s free trade agenda.

After the collapse of the Bretton Woods Sri Lanka’s entire economy was closed with draconian exchange controls from the central bank as well as trade controls.

Top economist Razeen Sally, has called the setting up a money printing central bank, with sweeping discretionary powers, and ending a rule-based currency board, an early ‘birth defect’ of independent Sri Lanka.

You may also read:

Breaking currency board was early birth defect of independent Sri Lanka: Sally

There have been calls to reign in the discretionary powers of the central bank so that it cannot depreciate the currency at will, and generate instability through various re-incarnations of a soft-pegged exchange rate regime.


Monetary history shows that central banks, not just in Sri Lanka but elsewhere, tend to trigger financial bubbles and monetary instability as well as corruption like in Sri Lanka.

Sri Lanka’s central bank also has bureaucratic discretion to generate massive liquidity shocks.

The enormous resources place under the control of the central bank and its sweeping powers to print money and weak accountability has allowed the agency to act with impunity in Sri Lanka, generating fraud controversies critics say.

The United States once abolished a central bank amid corruption charges under President Andrew Jackson.

“You are a den of vipers and thieves,” Jackson was reputed to have told a delegation who came to visit him and ask him not to close the central bank (The Second Bank of the United States), though the exact words are disputed.

“I intend to rout you out, and by the eternal God, I will rout you out.”

A greater curse

A contemporary publication at the time, Niles Register reported that President Jackson had asked the bank to contract its note issue (withdraw 10 million cheques) through a sale of reserves, or face instant closure.

“Let the directors of the bank pursue their business on principles of Christian benevolence, and all will be well,” President Jackson, a Christian, was quoted as saying in the Niles Weekly Register of March 01, 1834.

“Let them wind up the business of the bank, without attempting to break down the government, and force a re charter, and it will die with the blessings of thousands; otherwise, it will have the curses of millions.

“I have read the scriptures, gentlemen, and I find that when Moses ascended the mountain, the children of Israel rebelled, and made a golden calf and worshipped it, and it brought a curse upon them.

“This bank will be a greater curse.

“I have no hostility to the bank; I am willing it should expire in peace; but if it does persist in its war with the government, I have a measure in contemplation which will destroy it at once, and which I am resolved to apply, be the consequences to individuals what they may.

“The bank has in circulation ten millions of checks, which I have no doubt are illegal. These checks must then be returned upon the bank, and will drain her of the specie she is hoarding.”

The bank closed two years later as its charter expired.

The US did not have central bank until 1916. Barely a decade after its creation the Federal Reserve fired such a massive boom (The Roaring 20s bubble) that its collapse around 1929, generated the Great Depression.

There have been calls to make Sri Lanka’s central bank follow consistent and non-contradictory policy which will end permanent depreciation, or have a genuine floating rate which will make inflation targeting possible and also end permanent depreciation and instability allowing people engage in economic activity in peace.

However efforts are now underway to perpetuate a discretionary ‘flexible exchange rate’ and also avoid genuine inflation targeting with a floating exchange rate, and instead continue wih a targeting a domestic anchor, as well as pegging to build a ‘reserve buffer’. (Colombo/Oct05/2019)

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Sri Lanka power outages from falling trees worsened by unfilled vacancies: CEB union

HEAVY WINDS: Heavy rains and gusting winds have brought down trees on many location in Sri Lanka.

ECONOMYNEXT – Sri Lanka’s power grid has been hit by 300,000 outages as heavy winds brought down trees, restoring supply has been delayed by unfilled vacancies of breakdown staff, a union statement said.

Despite electricity being declared an essential service, vacancies have not been filled, the CEB Engineers Union said.

“In this already challenging situation, the Acting General Manager of CEB issued a circular on May 21, 2024, abolishing several essential service positions, including the Maintenance Electrical Engineer in the Area Engineer Offices, Construction Units, and Distribution Maintenance Units,” the Union said.

“This decision, made without any scientific basis, significantly reduces our capacity to provide adequate services to the public during this emergency.

“On behalf of all the staff of CEB, we express our deep regret for the inconvenience caused to our valued customers.”

High winds had rains have brought down trees across power lines and transformers, the statement said.

In the past few day over 300,000 power outages have been reported nationwide, with some areas experiencing over 30,000 outages within an hour.

“Our limited technical staff at the Ceylon Electricity Board (CEB) are making extraordinary efforts to restore power as quickly as possible,” the union said.

“We deeply regret that due to the high volume of calls, there are times when we are unable to respond to all customer inquiries.

“We kindly ask consumers to support our restoration teams and to report any fallen live electrical wires or devices to the Electricity Board immediately without attempting to handle them.

The union said there were not enough workers to restore power quickly when such a large volume of breakdowns happens.

“We want to clarify that the additional groups mentioned by the minister have not yet been received by the CEB,” the union said.

“Despite the government’s designation of electricity as an essential service, neither the government, the minister in charge, nor the CEB board of directors have taken adequate steps to fill the relevant vacancies or retain current employees.

“We believe they should be held directly responsible for the delays in addressing the power outages due to the shortage of staff.”

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Melco’s Nuwa hotel to open in Sri Lanka in mid-2025

ECONOMYNEXT – A Nuwa branded hotel run by Melco Resorts and Entertainment linked to their gaming operation in Colombo will open in mid 2025, its Sri Lanka partner John Keells Holdings said.

The group’s integrated resort is being re-branded as a ‘City of Dreams’, a brand of Melco.

The resort will have a 687-room Cinnamon Life hotel and the Nuwa hotel described as “ultra-high end”.

“The 113-key exclusive hotel, situated on the top five floors of the integrated resort, will be managed by Melco under its ultra high-end luxury-standard hotel brand ‘Nuwa’, which has presence in Macau and the Philippines,” JKH told shareholders in the annual report.

“Melco’s ultra high-end luxury-standard hotel and casino, together with its global brand and footprint, will strongly complement the MICE, entertainment, shopping, dining and leisure offerings in the ‘City of Dreams Sri Lanka’ integrated resort, establishing it as a one-of-a-kind destination in South Asia and the region.”

Melco is investing 125 million dollars in fitting out its casino.

“The collaboration with Melco, including access to the technical, marketing, branding and loyalty programmes, expertise and governance structures, will be a boost for not only the integrated resort of the Group but a strong show of confidence in the tourism potential of the country,” JKH said.

The Cinnamon Life hotel has already started marketing.

Related Sri Lanka’s Cinnamon Life begins marketing, accepts bookings


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Sri Lanka to find investors by ‘competitive system’ after revoking plantations privatizations

ECONOMYNEXT – Sri Lanka will revoke the privatization of plantation companies that do not pay government dictated wages, by cancelling land leases and find new investors under a ‘competitive system’, State Minister for Finance Ranjith Siyambalapitiya has said.

Sri Lanka privatized the ownership of 22 plantations companies in the 1990s through long term leases after initially giving only management to private firms.

Management companies that made profits (mostly those with more rubber) were given the firms under a valuation and those that made losses (mostly ones with more tea) were sold on the stock market.

The privatized firms then made annual lease payments and paid taxes when profits were made.

In 2024 the government decreed a wage hike announced a mandated wage after President Ranil Wickremesinghe made the announcement in the presence of several politicians representing plantations workers.

The land leases of privatized plantations, which do not pay the mandated wages would be cancelled, Minister Siyambalapitiya was quoted as saying at a ceremony in Deraniyagala.

The re-expropriated plantations would be given to new investors through “special transparency”

The new ‘privatization’ will be done in a ‘competitive process’ taking into account export orientation, worker welfare, infrastructure, new technology, Minister Siyambalapitiya said.

It is not clear whether paying government-dictated wages was a clause in the privatization agreement.

Then President J R Jayewardene put constitutional guarantee against expropriation as the original nationalization of foreign and domestic owned companies were blamed for Sri Lanka becoming a backward nation after getting independence with indicators ‘only behind Japan’ according to many commentators.

However, in 2011 a series of companies were expropriation without recourse to judicial review, again delivering a blow to the country’s investment framework.

Ironically plantations that were privatized in the 1990s were in the original wave of nationalizations.

Minister Bandula Gunawardana said the cabinet approval had been given to set up a committee to examine wage and cancel the leases of plantations that were unable to pay the dictated wages.


Sri Lanka state interference in plantation wages escalates into land grab threat

From the time the firms were privatized unions and the companies had bargained through collective agreements, striking in some cases as macro-economists printed money and triggered high inflation.

Under President Gotabaya, mandating wages through gazettes began in January 2020, and the wage bargaining process was put aside.

Sri Lanka’s macro-economists advising President Rajapaksa the printed money and triggered a collapse of the rupee from 184 to 370 to the US dollar from 2020 to 2020 in the course of targeting ‘potential output’ which was taught by the International Monetary Fund.

In 2024, the current central bank governor had allowed the exchange rate to appreciate to 300 to the US dollar, amid deflationary policy, recouping some of the lost wages of plantations workers.

The plantations have not given an official increase to account for what macro-economists did to the unit of account of their wages. With salaries under ‘wages boards’ from the 2020 through gazettes, neither employees not workers have engaged in the traditional wage negotiations.

The threat to re-exproriate plantations is coming as the government is trying to privatize several state enterprises, including SriLankan Airlines.

It is not clear now the impending reversal of plantations privatization will affect the prices of bids by investors for upcoming privatizations.

The firms were privatized to stop monthly transfers from the Treasury to pay salaries under state ownership. (Colombo/May25/2024)

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