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Friday June 2nd, 2023

Sri Lanka monetary instability blamed on lack of industrialization

KOREAN TROUBLE: Despite the overhaul of a Latin America style central bank built by US money doctor Arthur Bloomfield, Korea continued to have BOP trouble and high rates (which triggered subsidized credit) until the mid 1980s reforms.

ECONOMYNEXT – Sri Lanka’s recurring monetary instability is due to lack of industrialization and not money printing or budget deficits, Howard Nicholas, an economist said, though the hot favourite now is lack of tourism revenues.

Others have blamed Sri Lanka’s monetary troubles on trade deficits (the usual suspect), oil, vehicles (another usual suspect), low productivity, exiting rupee bond holders (after 2015 in particular).

Throughout the 1990s controlling budget deficits were given as a ‘panacea’ for all economic ills but the country continued to have current account deficits and currency troubles, Nicholas who is from the International Institute of Social Studies (ISS), Erasmus University Rotterdam said.

Budget deficits was blamed for crowding out private investment by the International Monetary Fund and others he said.

“The reason was the lack of industrialization,” he told a business forum in Colombo organized by the Ceylon Chamber of Commerce.

Industrialization had happened in the late 1980s under President Premadasa, he said.

In Sri Lanka there were lot of opposition to money printing.

But Nicholas said the idea was no longer ‘fashionable’.

However he said unlike Modern Monetary Theory advocates he did not believe that money printing and deficit spending could be continued all the time.

The industrialization was the answer to end balance of payments troubles and industrialized countries such as in East Asia for example have current account surpluses he said.

“Vietnam went aggressively for industrialization in 2010 and they never had a balance of payment problems,” Howard claimed.

As the US housing bubble collapsed in 2008/9 Vietnam engaged in a stimulus attempt cutting rates and triggered a currency crisis.

The dong collapsed from around 16,000 to around 21,000 dong by the end of the debacle.

By 2011 overnight rates were topping 14 percent as the State Bank of Vietnam desperately defended the collapsing dong amid an unsustainable boom.

After the currency crisis Vietnam was left with massive bad loans from the mal-investment made during the boom, partly fuelled by the US Greenspan-Bernanke housing bubble in the 15,000-16,000 dong peg period.

The SBV has since been using the exchange rate as an inflation anchor for low inflation and stability and trying to dispel the US led Mercantilist myth that its currency is ‘undervalued’.

Vietnam has so far resisted IMF and US pressure to move into ‘flexible inflation targeting’ a highly discretionary regime with virtually no rules, which had devastated Sri Lanka in recent years.


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Vietnam’s stability and growth, both in domestic non-tradable and export activities started gain traction after SBV reforms after 1989, when its bank credit operations were separated into commercial banks to stop central bank re-financing, analyst familiar with Vietnam say.

Some of the banks such as Viettin bank (Vietnam Joint Stock Commercial Bank for Industry and Trade) unlike in China are now privatized and listed on the stock market as part of reforms envisaged under the US-Vietnam bilateral trade agreement, which led to a series of deep reforms.

A third spurt including large scale shifting of Korean firms like Samsung as identified by top policymakers in the country started after Vietnam entered the WTO in 2006.

Soon after the economy re-opened in 1986 the currency collapsed as central bank re-financed credit expanded and the economy imploded as the currency collapsed, triggering a new wave of boat people and an uprising in the highlands.

The first SBV reforms were almost similar to Peoples Bank of China reforms under Deng Xiaoping in 1978. However partly due to state enterprises finance the Renminbi continued to have problems until the late 1980s, until it was fixed in 1993 as a firm external anchor.

Nicholas said in Sri Lanka now people are complaining of money printing, but Japan was printing money and did not have inflation.

However Japan also had high inflation when it was printing money with a pegged exchange rate, until the currency was fixed at 360 by US banker Joseph Dodge under Amerian occupation, as inflation hit triple digits and food shortages were worse than the the war, analysts have shown.

Korea, the poster child for state backed industrialization also had severe currency crises, inflation and high interest rates to defend the currency, subsidized credit and government guarantees for foreign loans until the Bank of Korea was successfully reformed in the in the mid-1980s.

Korea’s First Republic collapsed along with currency under a US-built central bank designed by Arthur Bloomfield, a Fed official like John Exter, who built Sri Lanka’s Latin America style central bank.

However Bank of Korea (in its second re-incarnation) was reformed around a dozen times and periods of exchange rate stability of at least two Fed cycles at a time.

The Korean won appreciated for the first time in the 1987.

Meanwhile Howard said currency stability usuall came after industrialization and Sri Lanka should not to put the “cart before the horse”.

But countries like Singapore and Hong Kong and to a great extent Malaysia (until 2006) had currency stability and low interest rates due to orthodox currency boards or currency-board-like systems long before they were industrialized.

Un-fashionable ideas

Like Ceylon before the US-built central bank, their currencies were stable decades before they became industrialized, data show.

Singapore made its “Colonial” currency board the foundation of its economic program.

“When nearly two-thirds of our citizens’ expenditure is spent on imported goods, a strong Singapore Dollar helps to keep consumer prices down,” Singapore’s economic architect and Lew Kwan Yew’s top minister said explaining the decision.

“The second purpose was to inform our citizens that if they wanted more and better services, they must pay for these through taxes and fees. There is no free lunch here.

“Third, we wanted to indicated to academics, both local and foreign; that what is fashionable in the West is not necessarily good for Singapore. A perceptive mind is needed to distinguish the peripheral form the fundamental, transient fads from permanent values.”

“We also noted that the Germans and Japanese did not believe they could “spend their way to prosperity”, as the phrase went. Like Singaporeans, they set store on diligence, education and skills.:


Why Singapore chose a currency board over a central bank

One of the most industrialized countries in the world Germany also had currency troubles and defaulted until the Deutsche Bundesbank was built by Ordoliberals and Joseph Dodge.

Central Banks generally get a free pass for policy errors with monetary instability in the form of inflation, credit bubbles (and balance of payments troubles if is pegged), being blamed on cost-push, commodity prices, imports, overvalued currencies (REER), trade deficits and current account deficits.

The latest free pass to reserve currency central banks is ‘transient inflation’ and ‘supply chain’ problems.

Over the past year Sri Lanka has blamed currency troubles on the lack of tourism revenues.

Classical economists have pointed out that budget deficits which transfer private spending power to the government cannot create any additional demand unless accommodated by the central bank to reduce crowding out. (Colombo/Dec06/2021)

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Sri Lanka to ramp up weekend fuel deliveries after petrol price cut

More deaths reported at Sri Lanka fuel queues

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Petroleum Corporation will be operating on the weekend to complete all fuel deliveries to end vehicle queues forming outside fuel stations after the price revision earlier in the week, Energy Minister Kanchana Wijesekera said.

“Instructions have been given to CPC and Ceylon Petroleum Storage Terminals to continue fuel deliveries on Saturday and Sunday this week to supply sufficient stocks to all fuel stations,” Minister Wijesekera said in a TWITTER.COM MESSAGE

“To reduce expenses on overtime, CPC and CPSTL have not been operating on Sundays and public holidays in the last 4 months,” Wijesekera said.

“Non-placement of orders by fuel stations from last Saturday, anticipating a price reduction, not maintaining minimum stocks, immediate increase in demand by consumers after the price revision, and quota increase have created shortages in the fuel stations.”

The Minister in April 2023 said all fuel stations would be required to maintain a minimum of 50 percent of stock tank capacity.

“I have asked CPC to review and suspend the license of fuel stations that had not maintained minimum stocks.” (Colombo/ June 02/ 2023)

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Sri Lanka bonds yield up at close, rupee at 291.75/292.50 against the US dollar

ECONOMYNEXT – Sri Lanka’s bonds closed steady on Friday, dealers said, following the central bank’s decision to cut its main policy rate by 250 basis points.

The Spot US dollar closed at 291.75/292.50 rupees, dealers said.

The rupee opened at 290.25/75 to the US dollar Thursday and closed at 292.50/295.50 to the US dollar.

A bond maturing on 15.09.2027 closed at 24.70/90 percent up from 24.50/90 percent a day earlier, dealers said.

A bond maturing on 15.05.2026 closed at 25.75/26.25 percent up from 25.00/26.00 percent a day earlier.

A bond maturing on 01.05.2025 closed at 27.00/30 percent, up from 26.30/27.00 per cent at last close.

A bond maturing on 01.07.2032 closed at 20.25/21.00 percent, up from 20.00/40 per cent at last close.
(Colombo/ June 02/2023)

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Sri Lanka’s shares edge up on positive macroeconomic sentiments

ECONOMYNEXT – Sri Lanka’s shares closed higher in trade on Friday, over positive macro-sentiments encouraging investors to redeem their interest towards buying, an analyst said.

The main All Share Price Index was up 0.72 percent or 62.19 points to 8,753.80,  while the most liquid index S&P SL20 was up 0.68 percent or 16.87 points to 2,487.29.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

Prior to the Monetary Policy investors were quite optimistic that inflation is to lower and interest rates will decrease and since exp, an analyst said.

Sri Lanka Central Bank is waiting for the government proposal on the domestic debt restructuring (DDR), the central bank governor Nandalal Weerasinghe said amid uncertainty over DDR and speculations over instability in the banking sector.

“On debt restructuring, the borrower is the ministry of finance’s treasury. Certainly we will announce what the strategy will be. We are waiting for a government proposal,” Weerasinghe said.

Sri Lanka’s investors are waiting on assurances to be made on debt restructuring and optimization, Central Bank Governor Nandalal Weerasinghe said, “It is up to the government to clear the uncertainty, because from our side we have done that part.”

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

The speculation of DDR has hit the market and the risk premium has kept the market lending rates well above the central bank’s policy rates. The government has yet to present its plans on DDR.

Weerasinghe said the central bank has done its best to reduce the risk premium through bringing down the market lending rates while keeping the policy rates unchanged.

Sri Lanka’s President Ranil Wickremesinghe has discussed progress of International Monetary Fund program and debt restructuring during a visit of Deputy Managing Director Kenji Okamura, statement said.

“The discussion primarily focused on the progress of the IMF program between Sri Lanka and the IMF,” a statement from President’s office said.

“Attention was also paid to the on-going debt restructuring negotiations.”

However Officials from IMF have said Sri Lanka has to focus on expanding taxes.

“We discussed the importance of fiscal measures, in particular revenue measures, for a return to macroeconomic stability,” Deputy Managing Director Kenji Okamura said in a statement.

The finance ministry this week issued rules requiring everyone above 18 year of age to register to pay income tax.

“I was encouraged by the authorities’ commitment to negotiate a debt strategy in a timely and transparent manner.

The market generated a revenue of 738 million rupees, while the daily average was 1 billion rupees.

Top gainers in trade were Vallibel One, LOLC Finance and Browns Investment. (Colombo/June02/2023)

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