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Saturday May 25th, 2024

Sri Lanka has to hike rates, ensure monetary fiscal co-ordination to help rupee: Bellwether

ECONOMYNEXT – Sri Lanka has to raise the policy rate urgently and also remove a surrender requirement which creates new money to help stabilize the rupee in a free float and also ensure monetary fiscal co-ordination.

Monetary fiscal co-ordination comes from an International Monetary Fund program where there is usually a reserve money program and a primary deficit or domestic borrowing target.

The central bank’s decision to abandon the non-credible peg and end forex and energy shortages is a positive move.

Before debt-restructuring the problem with the exchange rate has to be sorted.

The central bank’s decision to end subsidies to expatriate workers and stop money being printed is also the correct move.

The 200 to the US dollar peg was not credible due to money being printed to enforce the policy rate and sterilize reserve sales for fuel and other imports. In a well-functioning exchange rate regime, reserves are not given for imports.

In a credible peg, if reserves are sold for imports a rate rise must automatically result result in the interbank market in order to stop the currency from depreciating.

In a floating regime, foreign exchange is neither bought nor sold by the central bank and the rupee reserves in banks and the policy rate is not affected, except by an inflation target.

No Western floating rate central bank gives foreign exchange reserves for imports, mostly because they do not have any in the first place. Using reserves for imports even in a pegged rate with reserves is a busting savings for consumption.

Imports must be limited to the inflows. Imports exceeds inflows only when the central bank prints money. Floating the rupee is the first step.

Why Rates hike

Rates have to be raised sharply for two reasons.

Immediate reason: Forward premiums have to be sharply positive to encourage exporters to sell dollars to sell and discourage rupee borrowing. The cost of dollar holding has to be higher than the expected depreciation of the rupee.

Before the float the according to official data the one month forward was 200.84 rupees, and the 3-month was 198.98. There is a forward discount. It has to be premium of 1 or 1.50 rupees.

Without a sharp rate hike, which increase the gap between rupee yields substantially above dollar yields the stability of the rupee is under threat.

Second Reason: Rates have to be raised to bring inflation down and slow the growth of broad money. The inflation from the depreciation is a given. There is nothing that can be done about it. It is the result of the money printing of the past two years, that upended the price structure of the economy.

However the central bank can action to stop generating further inflation going forward.

However Sri Lanka’s inflation was 15.2 percent in February 2022 while neighboring countries with better central banks such as Bangladesh was only 5.32 percent in February.

Sri Lanka’s broad money is expanding too rapidly, mostly driven by the budget deficit, though private credit is factor. Private credit is factor including by exporters who borrow in rupees and hold dollars (see above on interest rate differential).

Third reason: The gap between overnight rate 7.5 percent and the 3-month Treasury bill yield is very wide.

This allows financial intermediaries and their clients to get money from the window, and buy Treasury bills and indirectly finance the budget and create foreign exchange shortages and further undermine the rupee.

To counter all these factors a tight reserve money program is needed.

Why the surrender rule?

There are two facets to the surrender rule. One part is a requirement for exporters to sell dollars in the market. This activity is relatively harmless and does not increase or decrease reserve money.

The second part is where 25 percent of such dollars given to banks are sold to the central bank.

This action takes away dollars from the float, and simultaneously creates money. At the moment there is an overnight short. This short is reduced adding rupee reserves to banks.

This is negative for the exchange rate, when it is floating. If it is a peg it is under pressure from previous money printing.

Compulsory sales

Any compulsory sales must go to the Treasury account in a standard commercial bank and not the central bank which creates money to buy it.

Money for compulsory sales must be found from bond auction and taxes by the Finance Ministry, without altering reserve money.

Fiscal and monetary co-ordination

For proper fiscal and monetary co-ordination and IMF program is needed.

After the float stabilizes the the currency Sri Lanka usually goes back to a peg or flexible exchange rate.

IMF programs, since they involve a bailout loan to the central bank also requires pegging to eventually repay the loan.

At the moment the central bank has called for fuel and electricity price hikes and sustained tax hikes.

But so far the government is not acting. Using the Indian credit line to fund subsdies would be a wrong move.

An IMF program would also help with debt re-structuring.

At the moment the central bank has called for fuel and electricity price hikes. But so far the government has not acted. Prices have to be raised to stop Ceylon Petroleum Corporation borrowing money and adding to domestic credit and demand. (Colombo/March09/2022)

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  1. Thoppi Godai says:

    Above all there is a confidence and credibility factor about CBSL and Finance Ministry about its policy consistency. Both institutions need to ensure that.

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  1. Thoppi Godai says:

    Above all there is a confidence and credibility factor about CBSL and Finance Ministry about its policy consistency. Both institutions need to ensure that.

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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