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Saturday May 25th, 2024

Sri Lanka needs ‘real depreciation’ World Bank economist claims

According to World Bank’s own REER indices, Korea, People’s Republic of China and Hong Kong have index number around 120 and 140.

ECONOMYNEXT – Sri Lanka will need “a real depreciation” of its currency in the longer term to stimulate its exports, World Bank’s chief economist for South Asia said articulating an oft-repeated claim by domestic Mercantilists.

“Let me make a longer term view on the currency, looking at the circumstances in Sri Lanka,” Hans Timmer, the Chief Economist for the World Bank’s South Asian region told a business forum organized by Sri Lanka’s Ceylon Chamber of Commerce.

Ever since Latin America style central bank was set up in 1950 by a US ‘money doctor’ to pursue ‘independent monetary policy’ despite operating a pegged regime, Sri Lanka’s rupee has fallen from 4.70 to 203 to the US dollar.

“Independent monetary policy” involving large scale liquidity injections in 2020 and 2021, on top of monetary instability in 2015, 2016 and 2018, which led to a ratcheting up of dollar foreign debt, has brought the country to the brink of external default.


How Sri Lanka’s IMF-backed ‘Young Plan’ fired a foreign debt death spiral: Bellwether

Timmer did not elaborate on how or whether Sri Lanka now had a “real appreciation” and if so by what measure.

A “real depreciation” can also be achieved (based on the measure used) by reducing domestic inflation or with deflation.

“Overvaluation” is generally defined by a real effective exchange rate, a nakedly Mercantilist measure of money, which is the basis of a social stability and incomes of people – on trade considerations.

A real effective exchange rate adjusts the nominal exchange rate by a consumer price index of trading partners. If it is above 100, it is claimed to be overvalued.

According to Sri Lanka’s central bank, the rupee is now ‘undervalued’ with the REER at 85 in October. Inflation however is rising.

A nominal depreciation destroys real wages of workers – including in non-export sectors – triggering strikes and social unrest in its wake as the price structure of the country is altered. The profits to exporters remain until wages catch up.

Sri Lanka for some time had been destroying the exchange to keep the REER below 100, an exercise which critics said from the begining would destroy sound money and get the country into trouble as it had done in other countries, throughout history.


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Sri Lanka to target real effective exchange rate (REER) index

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When currency pegs collapse due amid high ‘REER’ indices, Mercantilists blame ‘overvaluation’ rather than liquidity injections, though Sri Lankas

East Asian export powerhouses, which have strong currencies frequently have high REER Indices, compared to Latin America which depreciates like Sri Lanka and are generally referred to as ‘basket cases’ by some.

“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 the key theorist behind Prime Minister Lee Kwan Yew said explaining the three key reasons the country chose a strong exchange rate based on currency board principles (no policy rate).

“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.”

According to World Bank’s own REER indices, Korea, People’s Republic of China and Hong Kong have REER indices between 120 and 140.

Many Mercantilists claimed during the East Asian Crises claimed that ‘overvalued’ as non-credible pegs collapsed.

However Hong Kong which had a currency board did not collapse as it is legally barred from injecting money at a fixed rate despite having a REER in excess of 150 as defined by the World Bank.

Speculators who tried to generate liquidity to hit the peg as they had in Thailand and Malaysia found themselves with enormous losses as short term rates shot up.

The International Monetary Fund now claims that East Asian currencies are ‘undervalued’ in tandem with claims peddled by the US Treasury, if a country has a current account surplus and it collects forex reserves.

Vietnam which has a REER of 130 has been falsely blamed by the US for ‘manipulating’ its currency simply because the State Bank of Vietnam operated a peg with a higher level of credibility now using a somewhat wide policy corridor which responds to interventions.


Vietnam REER ignored by IMF buoying US Mercantilists as Sri Lanka rupee falls

Vietnam’s stable exchange rate is key to FDI-driven export economy Moody’s says as Sri Lanka downgraded

Sri Lanka’s peg with the US dollar had lost credibility and is now under pressure.

Countries with strong exchange rate, who do not need to borrow abroad much due to high real domestic savings and their central banks sterilizes inflows tend to have a current account surplus.

Countries who get financial inflows and spend them domestically tend to have current account deficits.


Trade deficits caused by foreign borrowings; Harvard economist at Sri Lanka forum

When money is printed, the current account deficit exceeds financial inflows and the currency peg collapses.

Whenever the US tightens – then Fed chief Janet Yellen tightened in 2014 and 2018 – both nominal and real effective exchange rate indices of countries with good central banks tend to go up as currencies of trading partners with bad central banks collapse,

REER indices can later moderate as inflation in countries with bad central banks in the basket catch up. (Colombo/Dec09/2021)

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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


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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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