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Sunday May 26th, 2024

Sri Lanka gives tax-payer guarantee to central bank’s US$2.45bn India debt

ECONOMYNEXT – Sri Lanka tax payers have underwritten 2,451.43 million dollars of borrowings taken by the central bank from India through a Treasury guarantee, official data shows, sharply increasing the obligations of the state.

The guarantee was originally issued on 17 October 2023 to the Reserve Bank of India for 2,601 million dollars and will be effective till 17 October 2024.

Remaining borrowings under Sri Lanka’s Treasury guarantees mostly to state enterprises climbed to 1,931 billion rupees by end December 2023, from 1,050 billion in September at the conversion rate used in a debt update.

Issued Treasury guarantees were 2,387 billion rupees by December from 1,527 billion in September.

Sri Lanka’s IMF program initially had a Treasury guarantee ceiling of 1,700 as an indicative target, which was raised to 2,100 in the last review.

Borrowed ‘Reserves’

Sri Lanka’s central bank borrowed dollars from the Reserve Bank of India through a swap and also by running arrears on dollars owed through the Asian Clearing Union for private imports.

A central bank with a policy rate that sells dollars to maintain the exchange rate, immediately prints money to offset the sale (sterilizes the intervention) to mis-target rates, worsening a currency crisis and allowing banks to give credit without deposits.

The exercise is carried out by macro-economists running soft-pegs or flexible exchange rates in the belief that monetary reserves can be used for private sector imports.

The belief seems to have emerged among Western inflationist academics after the 1920s in line with the invention of open market operations by the Fed and by Keynes’ belief in the spurious ‘transfer problem’, analysts say.

Neither clean floats nor hard pegs (currency boards) use reserves for imports or for any other purpose.

Macro-economic Policy Inflationism

Central bank swaps were invented by the ‘independent’ US Federal Reserve in the 1960s as money was printed to operate ‘macro-economic policy’ (potential output targeting in another name), because the agency did not want to give gold reserves to foreign central banks which were not printing money and wanted to redeem overproduced Fed notes.

There was a surge of forex borrowings by the Fed through swaps when money was printed ahead of the collapse of the Bretton Woods, when it eventually floated (suspended convertibility).

Swaps allowed inflationist central bankers not only run down reserves backing the note issue to target or mis-target the policy rate, but get into debt to continue to mis-target the rate and print more domestic money into banks to sterilize the reserve sales, critics say.

Sri Lanka’s central bank still has negative foreign assets as a result of borrowings from the IMF, Swaps, and ACU arrears being effectively used to mis-target rates via sterilized dollar sales.

However, as a result of re-financing credit, the central bank’s foreign debt from swaps or ACU arrears is effectively backed by (already issued) Treasury securities bought outright or taken as collateral for any liquidity injected into banks.

When the borrowed dollars are run down, and more money printed to mis-target the policy rate, the central bank ends up with an open position on dollars, which triggers a loss when the currency collapses due to earlier mis-targeted rates and sterilized interventions.


The ‘independent’ Fed has also come under fire for mis-using swaps to bailout Mexico, outside the control of the Congress in the mid 1990s when the Bank of Mexico mis-targeted rates, undermined its peg and drove the country towards default, despite the politicians operating good fiscal metrics.

Critics have slammed Fed’s swaps with other counterparts without congressional approval for being extra legal and also democratically unsanctioned foreign policy as well as for being yet another action for which central banks are not accountable.

Critics have questioned the concept of giving independence to an agency that engages in macro-economic policy and prints money to trigger high inflation in the belief that it can spur growth, but ultimately triggers monetary instability or asset price bubbles.

From mid-2022, after India cut the ACU tap, Sri Lanka’s central bank was able to end inflationary policy, and regain monetary stability.

Since then, rates have come down amid stability, a slowdown in domestic credit and confidence from deflationary policy despite reserves being collected.

Domestic credit also fell due to taxes reducing non-interest borrowings, SOE price corrections, and a slowdown in private credit. (Colombo/Mar19/2024)

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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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