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Saturday May 25th, 2024

Sri Lanka latest import restrictions should be revisited: Jayasundara

ECONOMYNEXT – Sri Lanka central bank’s recent import restrictions over 600 items should be revisited as it is hindering a booming service exports of information technology (IT), president’s secretary P B Jayasundera said.

The central bank early this month expanded its import restrictions to items including telecommunication goods including mobile phones as printed money mainly from failed bond auctions (central bank credit) triggered excess outflows over dollars flowing into the country.

As the central bank gave convertibility to the new rupees, reserves dwindled.

The restrictions have hit the information technology industry (IT) which is a booming foreign exchange generator especially after the pandemic started last year.

Jayasundera, Sri Lanka’s top most public official and former finance secretary, said such restrictions do not make sense and contradict the overall post-Covid-19 economic recovery plan.

“IT is one area where exports have bounced back rapidly and the IT industry itself claims they are targeting 1.7 billion US dollars this year,” Jayasundera told EconomyNext in an interview.

“Now the central bank has imposed a 100 percent credit margin on IT products, which is not healthy.”

“So those things should be revisited in order to get the cash flow as the recovery plan is done collectively.”

The latest restrictions do not ban imports.

Instead importers have been asked to fork up extra cash upfront for letters of credit and to settle bills with other money, raising the cost to high levels and making importers to look at other lending agencies for money.

The central bank had earlier suspended convertibility for the new rupees, leading to the rupee falling or floating down to 230 to the US dollar for imports.

The central bank then decreed a 203 exchange rate, revaluing the rupee up, but there is convertibility undertaking to support new peg.

Banks then began to ration dollars amid excess rupees from failed bond auctions.

Convertibility is given from reserves mostly for debt repayments.

However the money for debt repayments are also not raised from bond auctions or taxes, which should crowd out private consumption, credit and imports but from central bank credit, leading to further erosions of reserves.

Money injected to cover failed bond auctions are either going to finance the deficit, where the state worker salaries are the biggest item or old securities are being repaid with new money, turning paper debt into reserve money, exchangeable for real goods and dollars, analysts have pointed out.

Rupee Rationing

Newly re-appointed central bank Governor Nivard Cabraal has lifted a price control on bill auctions which was serving as a de facto policy rate to inject money and drive credit and excess imports, in a bid to get Treasuries auctions to work and divert real resources to the budget.

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Sri Lanka Treasuries auctions yields rise after price control lifted

If bond auctions are successful, rupees would be ‘rationed’ instead of dollars bringing the external and domestic sectors in to balance, and restoring monetary stability, analysts say.

But confidence is still weak among bond buyers at current rates (the price of the bond is too high) to at the levels the debt office is willing to sell, requiring some meeting point to be established in the near future.

The 12-month T-bills yield rose 38 basis points this week and some short term bonds are beginning to be quoted.

The central bank also raised a statutory reserve ratio before lifting the price controls and getting bond auctions to work, creating a large liquidity shortage. The liquidity short is filled with window money overnight 6.00 percent, creating an asset liability mis-match.

The asset liability mismatch is discouraging banks from investing in longer term bonds, but does not necessarily discourage short term credit or floating rate loans.

The printed money and low rupee interest rates, and 230 rupee to the US dollar in OTC market near floating rate due to the suspension of convertibility have also encouraged exporters to borrow rupees and hold dollars.

Sri Lanka also does not have an interbank spot market for a proper float, if any, to work, analysts say. There is also no forward market for importers.

They have been closed progressively as central bank credit inserted new rupee reserves to banks, lowered interest rates below domestic credit developments, hurting the exchange rate peg.

Prefered Imports

While there are restrictions on some goods, that officials dislike, especially cars, which bring high levels of taxes for every dollar spent, imports to sectors that they like instead of the economic agents, are at record levels.

In the 17-months to July 2021 imports rose to a 17-month high with intermediate goods rising to 6.5 billion US dollars, higher than the pre-pandemic 6.5 billion US dollars.

Machinery and equipment imports were 1.58 billion US dollars up from 1.43 billion in the pre-pandemic 2019. Total imports mainly to preferred sectors were 11.7 billion dollars up to July, up from 11.3 billion pre-pandemic.

In the absence of central bank credit, imports should at least have fallen by the net fall in tourism revenues (tourism earnings – less outward travel), as tourism sector workers and hotel owners lost incomes, analysts say.

However if hotels are given central-bank re-financed credit (printed money) to pay workers, the other credit and imports would not be crowded out.

The central bank’s excess money printing at record low interest rates since mid-2020 has encouraged importers to use cheap credit to import with available foreign exchange. (Colombo/Sept25/2021)

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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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