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Saturday May 25th, 2024

Sri Lanka cronies profiting from import controls, SMEs battered: Samarajiva

ECONOMYNEXT – Sri Lanka’s so-called cronies who benefit from customers trapped under state controls are raking even more profits from current import controls, while smaller firms are getting wiped out, a policy specialist and liberator of poorer consumers said.

Many domestic businesses also needed inputs.

“Import controls are creating a lot of opportunities for permit holders and cronies to make money,” Rohan Samarajiva, founder of LirneAsia, a regional policy advisory group told a forum organized by Advocata Institute, a Colombo-based think tank.

“And in those oligopolistic conditions they will raise the prices and they will add supra normal profits on top. Because they are now oligopolistic and they will control the market.

“I think we really should look at import restrictions in that way.”

“So the consumer and the industrialist will be paying more without question and because of that their demand will also go down, which is desirable from the point of view of the government.

“But instead of it being done efficiently, it will be done inefficiently where the permit guys – the permit raj – will benefit.

Samarajiva as Sri Lanka’s telecom regulator was responsible for de-regulation that made international calls cheap for Middle Eastern workers, and the outsourcing industry, the spread of fixed and mobile telephony into an everyday product from a super luxury status symbol.

He was also a key driver of South Asian aviation de-regulation which unleashed private budget carriers and de-regulating visas that made India the biggest source of tourists benefiting both small operators and high end hotels.


“Just to give an example the current controversial gazette which is requiring 100 percent deposit minimum deposit on invoices is basically knocking out small importers, who will not be able to afford the minimum deposit and all those harsh conditions and will leave us with a few importers who have deep pockets.

“What we are building is a kleptocracy which will then pollute and completely distort the political processes of this country from this time onwards. Not that they weren’t polluted enough, but this will aggravate it.”

Powerful business groups backed by nationalist academia in the style of German Historical Economics had for years been opposing free trade for the poor and allowing producers to extract excess profits in food and building materials in particular.

Samarajiva said small businesses and the informal sector was getting wiped out from the Coronavirus pandemic but a few large businesses were doing well.

With the currency peg giving way under liquidity injections, costs are rising for most businesses.

Sri Lanka’s import controls are coming from a highly unstable pegged exchange rate regime called the ‘flexible exchange rate’ where a central bank suddenly suspends convertibility after printing money, unleashing chaos.

Under the ‘flexible exchange rate’ massive liquidity injections have been unleashed from 2015 through term repo unwinding, overnight reverse repo injections, outright purchases of bonds monetizing past deficits, and also injections through dollar-rupee swaps.

The rupee is now floating around 230 to the US dollar for trade transactions but for government deals convertibility is provided at 203 to the US dollar.

The flexible exchange rate involves the most severe monetary anchor conflicts seen in the country perhpas and has driven the rupee from 151 to 230 so far.

The flexible exchange anchor conflicts involve pegging to build foreign reserves and printing money to target an inflation index or growth with artificially low interest rates completely out of step with domestic credit conditions.

Under the flexible exchange rate the monetary authority is given free rein to inject liquidity to target an inflation index until it become impossible maintain the reserve collecting peg and the convertibility suddenly suspended, leading to severe collapse in the credibility of the peg, leading to exporter hold backs and early covering of import bills.

Rate are then hiked under duress.

The contradictory flexible exchange rate has triggered three currency crises since 2015.

Analysts have called for the end of deadly ‘flexible exchange rate’ and return to rule-based consistent monetary policy of floating overnight rates or a free floating exchange with which inflation targeting is possible.

However the central bank has now run out of reserves and is on track to make large quasi fiscal losses on its reserve liabilities.

Protectionist Exploitation

Before free trade came to Britain and it became a major industrial power, Mercantilists used various means to influence politicians and get tax protections and also export controls for raw materials to fleece farmers like the export tax on non-packeted teas.

Classical economist and philosopher Adam Smith pointed out that since businessmen are generally good at making plans and implementing them, a Mercantilist (now called a crony capitalist) would be generally skilled at propagating their ideas and fleecing the public or the ‘country gentleman’.

Making large profits under cover of import duties, protected business, convince the public that the exploitation is in the public interest.

“Their superiority over the country gentleman is not so much in their knowledge of the public interest, as in their having a better knowledge of their own interest than he has of his,” Smith explained in Wealth of Nations, his treatise against Mercantilists or what is generally called crony capitalists in modern-day parlance.

“It is by this superior knowledge of their own interest that they have frequently imposed upon his generosity, and persuaded him to give up both his own interest and that of the public, from a very simple but honest conviction that their interest, and not his, was the interest of the public.”

Mercantilist businessmen would try to use the government to control the freedoms of poor consumers by limiting foreign competition, and force them to buy their products, which is clearly against the interests of the public.

“The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public,” Smith pointed out.

“To widen the market and to narrow the competition, is always the interest of the dealers.

“To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens.

“The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.

“It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.” (Colombo/Sept19/2021)

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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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300 out of 1,200 Sri Lanka central bank staff works on EPF: CB Governor

ECONOMYNEXT – About 300 central bank staff out of 1,200 are employed in the Employees Provident Fund and related work, Governor Nandalal Weerasinghe said, with the function due to be transferred to a separate agency after a revamp of its governing law.

“When it comes to the EPF there is an obvious conflict of interest. We are very happy to take that function out,” Governor Weerasinghe told a forum organized by Colombo-based Advocata Institute.

“We have about 300 staff out of 1,200 including contract staff, almost 150 of permanent staff is employed to run this huge operation. I don’t think the central bank should be doing this business,”

The EPF had come under fire in the past over questionable investments in stocks and also bonds.

In addition, the central bank also faced a conflict of interest because it had another agency function to sell bonds for the Treasury at the lowest possible price, not to mention its monetary policy functions.

“There has been a lot of allegations on the management of this fund. This is the biggest fund of the private sector; about 2.6 million active, I think about 10 million accounts.

“When it comes to EPF, obviously there’s another thing. We obviously have, in terms of resources, on the Central Bank, that has a clear conflict because we are responsible for the members.

“We have to give them a, as a custodian of the fund, we have to give them a maximum return for the members.

“For us to get the maximum return, on one hand, we determine the interest rates as multi-policy. On the other hand, we are managing public debt as a, raising funds for the government.

“And on the third hand, this EPF is investing 90 percent in government securities. And also, interest rates we determine, and they want to get the maximum interest. That’s a clear conflict, obviously, there’s no question.”

A separate agency is to be set up, he said.

“It’s up to the government or the members to determine to establish a new institution that has a trust and credibility and confidence of the members that this institution will be able to manage and secure an interest and give them a reasonable return, good return for their lifetime savings,” Governor Weerasinghe said.

“The question is that how whether we have whether we can develop that institution, whether we have the strong institution with accountability and the proper governance for this thing.

“I don’t think it should be given completely to a private sector business to run that. Because one is that here we have no regulatory institution. Pension funds are not a regulated business.

“First one is we need to establish, government should establish a regulatory agency to regulate not only the EPF business fund, there are several other similar funds are not properly regulated.

“Once we have proper regulations like we regulate banks, then we can have a can ensure proper practices are basically adopted by all these institutions.

“Then you can develop an institution that we who can run this and can be taken back by the Labour Department. I’m not sure Labour Department has the capacity to do all these things.”

While some EPF managers had come under scrutiny during the bondscam and for questionable stock investments, in recent years, it had earned better returns under the central bank management than some private funds that underwent debt restructuring according to capital market analysts with knowledge of he matter. (Colombo/May24/2024)

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