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Sri Lanka forex interventions rise to US$72mn amid credit pick-up in Jan 21

ECONOMYNEXT – Sri Lanka forex market interventions to defend a soft-peg with the US dollar had picked up to 72.25 million dollars in January 2021 from 22.5 million dollars in December as domestic credit started to pick up, official data showed.

Sri Lanka’s rupee has fell close to 200 to the US dollar in the one week forward market in February amid excess liquidity in money market mainly from Treasuries failed to be sold under a price controlled sale which was previously a multiple price ‘auction’.

Sri Lanka’s central bank wants to keep the exchange rate at 185 to the US dollar.

“There is a policy aim (prathipatthi aramunak) to bring the exchange rate to that rate,” Governor Cabraal told reporters at the last press conference of the monetary authority.

“Due to certain reasons the level of 180 to 185 (to the US dollar) has several advantages. A clear advantage is in the repayment of debt in converting from rupees.”

In 2020 the rupee fell close to 200 to the US dollar in March, under a so-called ‘flexible exchange rate’ where the monetary regime flips rapidly from a floating to pegged exchange rate multiple times with the same trading day.

However the central bank intervened (sold dollars) around 195 to the US dollar under a so-called disorderly market conditions rule (DMC), and strenghthened the rate after allowing the currency to fall rapidly and panicking importers into overdrawing banks to settle bills early and exporters to stay away.

“In the first instance we did it,” Governor Lakshman said. “In the second instance we could not because there was no required asset exchanges (wathkam maruweem).”

Analysts had pointed out that the central bank was able to not only defend the currency, but prevent an appreciation beyond 183 levels as private and state enterprise credit collapsed after April 2020 amid lockdowns.

State enterprise credit in particular which are used to subsidize Ceylon Petroleum Corporation, Ceylon Electricity Board of SriLankan Airlines losses, directly hit the forex market, while private credit also hits the forex market eventually.

Sri Lanka started injecting liquidity to the banking system from around February 2020, initially with a central bank profit transfer after cutting taxes in December 2019 and then outright purchases of Treasury bills from failed bill auctions.

In March 174 million dollars were sold to defend the peg against the liquidity injections and ‘flexible exchange rate’ panic or lack of credibility of the peg. In February 2020, when the profit transfer was made as liquidity Sri Lanka had foreign reserves of 7.9 billion US dollars.

The excess liquidity, which turns into credit, has to be redeemed in the forex market through dollar foreign reserves sales (interventions) to prevent the exchange rate from collapsing below 185 to the US dollar.

By January 2021, forex reserves were down to 4.8 billion US dollars.

Keeping the exchange rate at 185 to the US dollar involves maintaining an external anchor for monetary policy or a ‘credible peg’ for which the call money rate has to fluctuate based on the liquidity changes driven by interventions (reserve money and interest rates float).

Most East Asian nations in the their fastest growth phase and the period of strongest monetary stability stopped printing money and avoided targeting short term rates.

Hong Kong, Singapore, GCC nations to a greater degree and several other stable East Asian nations to a lesser degree follows such policies.

However if liquidity is injected through Treasuries purchases it is not possible to maintain the peg.

In 2018 Sri Lanka broke the peg by injecting liquidity to target a call money rate purely through open market operations, buying bills and bonds from banks and other holders (monetizing past year deficits), at a time when taxes were raised to reduce the deficit and state salaries were frozen, analysts have said.

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Sri Lanka’s path to debt and destruction paved by currency collapse, REER targeting: Bellwether

After July 2019, similar actions were taken instead of using a slowdown in credit (and imports and economic activity) to build up a reserve buffer, critics have said.

In January 2021 the central bank ordered banks to surrender 10 percent of converted remittances (at broadly market rates), the central bank, taking the dollars away from the forex market and creating more liquidity.

“If the central bank wants to keep the peg, it has to be either ready to sell the exact quantity of dollars in bought, or mop up the liquidity created by the remittance purchases through a sell down of CB-held Treasuries,” says EN’s economics columnist Bellwether.

“However there is a much more liquidity in money markets from failed bill auctions to target the call money rate and various points of the yield curve which dwarfs the pressure from remittance purchases.

“Import controls do not help, since credit will turn to an area that is not under controls.”

Analysts have said targeting the call money rate with excess liquidity is the most significant economic risk to the country after the end of a 30-year civil war, which put the country on the path of Latin America.

Falling reserves usually forces a correction of the rate and the abandonment of the rate targeting exercise.

Unlike in 2011, 2015 and 2018, where liquidity injections mostly generated imports through the current account and only some capital flight in rupee bonds, in 2020 and 2021, a loss of confidence from earlier ‘flexible exchange rat’ episodes is triggering financial account outflows in government and bank debt cross border debt.

The liquidity injections are adding to the reserve losses and taking away reserves that could be used for debt repayments. (Colombo/Feb19/2021)

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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

(Colombo/May25/2024)

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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.

Related

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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