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Sunday May 26th, 2024

Sri Lanka in state guided market oriented economy with 1970s elements: CB Governor

GUIDED MARKET: Sri Lanka is trying to reach prosperity by limiting competition and pushing up prices to re-distribute income to producers from the mases.

ECONOMYNEXT – Sri Lanka is following a ‘guided market oriented economy’ with some elements of the 1970s and pre-1990s India, which was shown by the success of boosting domestic production by banning turmeric imports, Central Bank Governor W D Lakshman said.

Sri Lanka was now following an ‘alternative’ economic model.

Guided Market

“Our approach is market oriented, but guided by the state,” Governor W D Lakshman told reporters in Colombo Friday.

“Take our neighbor. With the kind of approach you are saying people criticize, with that, they have built up their Indian industrial foundation. After than in 1990s they started opening up.

“I am not saying that Sri Lanka will go back to 1970s. 1970s is the period people are referring to with extreme disgust.

“I am not saying that we have to go that period, but some elements of that period we adopted.

India had a so-called ‘Hindu rate of growth’ mired in controls and forex shortages also known as the ‘license raj’ after then Prime Minister started using central bank credit to finance Soviet-style 5-year plans.

The exercise ended in 1991 when the Indian rupee collapsed and the Reserve Bank of India ran out of forex reserves.

In January 1990 the Indian rupee was 16.90 to the US dollar. By the end of 1991 it was 25.80 to the dollar.

The Reserve Bank of India then stopped the Treasury secretary from getting involved in rate decisions and sold down its stock of ‘ad hoc Treasury bills’ used to print money for deficit financing.

However some critics say the RBI had in recent years triggered monetary instability with open market operations and then resorted to tactics like gold taxes instead of fixing policy errors.

Meanwhile Governor Lakshman claimed that the success stories had had also been seen in other countries.

He said the idea of ‘all around failure’ referred to countries like Sri Lanka but there had been success stories.

“That is what happened in China. That is what happened in Japan, post war,” he claimed. “Up to a certain period, they built up on the basis of certain controls certain restrictions. You have to read the historical stuff to find out how people have used their controls.”

Turmeric Economy

Sri Lanka has shown the success of the program by producing turmeric, domestically, Governor Lakshman said.

Sri Lanka banned the import of turmeric, a popular spice used in South Asian cooking; driving prices up to 200 rupees for 50 grams or 4,000 rupees a kilogram last year.

“We had difficulties with respect to turmeric last year,” he said. “No one is now talking about it. Now may be the entire domestic requirement are produced here.”

Powdered turmeric is available at self service supermarkets sporadically at prices ranging from 350 to 750 for a 100 grams.

The high prices re-distributed income fairly efficiently without a separate bureaucracy money indiscriminately from the poor and rich to turmeric farmers.

However it is not known whether any or how much value was lost due to inefficient production, or whether the productivity of the farmer was high enough to capture the transferred income through the coercive denial of competition.

There is no information available on the goods and services that consumers of turmeric forgo and reduce demand, when they buy a 100 gram pack at 600 rupees, up from about 100 to 115 rupees last year.

It is not known whether the import substituting farmers are productive enough to capture the lost spending on other sectors, some of which were taxable and would have helped state revenues, or a part of its is lost through non-competitive cultivation.

It is not known what crops, perhaps competitive crops, that generated value to consumers and farmers through free exchange, that were displaced to grow the spice whose price shot up due to a state controls or whether fallow land was used to grow the crop.

But the controls are known to have to have triggered an expansion in the smuggling business and Sri Lanka’s Navy was kept busy trying to stem the flow of turmeric across the Palk Straits.

Sri Lanka Customs also seized shipments at the port. It is not known how much turmeric escaped the net and entered the country. The usually omnipresent price control agency has not been seen.

Monetary Instability

More concerns however have been expressed by economists over large scale money printing under a so-called ‘Modern Monetary Theory’.

Sri Lanka has been rejecting real bids to oversubscribed domestic bill auctions and printing money to purchase bills into the central bank balance sheet and dumping excess liquidity in to money markets in a bid keep interest rates down.

As a result Sri Lanka has now controlled the import of a large number of goods as money printing triggered forex shortages. Some items are allowed in under licenses. Some are allowed in for re-export. Some are allowed in under supplier’s credit.

The excess money is turning into imports – whatever is allowed – through the credit system and the central bank is selling dollars to redeem the newly created money in forex markets, losing forex reserves.

Low rupee interest rates and high dollar yields in the domestic interbank market then turned negative, discouraging exporters from selling forward and encouraging importers to hedge forward putting more pressure on the spot market as banks tried provide covered forward positions.

The central bank then closed the forward market for importers.

Banks have been asked to sell 10 percent of foreign remittances converted to the central bank, creating more reserve money, and adding new liquidity to money markets which are already flushed with cash from Treasuries purchases.

Meanwhile stock markets have risen but credit driven positions are triggering volatility.

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  1. sarath sathkumara says:

    There cannot be a market economy guided by the government in Sri Lanka. Only Singapore has something close to that but it has honest politicians/public sector.

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  1. sarath sathkumara says:

    There cannot be a market economy guided by the government in Sri Lanka. Only Singapore has something close to that but it has honest politicians/public sector.

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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