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Saturday May 25th, 2024

Sri Lanka offers foreign exchange carrots amid monetary instability

ECONOMYNEXT – Sri Lanka has proposed a series of incentives to draw in black money, foreign exchange or discourage their outflow in a budget for 2021 without addressing the core cause of a Latin America style pro-cyclical soft-pegged central bank, which can drive a country towards default.

Prime Minister and Finance Minister Mahinda Rajapaksa said he proposed to pay a premium for foreign exchange remittances sent by foreign workers to banks in Sri Lanka, presenting a budget for 2021 to parliament.

“I propose to pay Rs. 2 per dollar above the normal exchange rate for the foreign exchange remittances sent by foreign workers to banks in Sri Lanka,” he said.

Banks generally keep a 4 to 5 rupee spread when dealing with customers. This week banks were buying dollars around 182 rupees and selling around 186.4 with the spot rate around 184/50.

It is not clear where the funds will come to pay the ‘extra’ two rupees. However, if the central bank does not print money, allows short term rates to fluctuate based on liquidity, exchange rates will stabilize and the spread will fall along with interest rates, analysts say.

Prebisch – Triffin

Sri Lanka has severe monetary instability from a central bank which was created in 1950 by a so-called Federal Reserve ‘money doctor’ based on a philosophy propagated by Raul Prebisch, the founder of Argentina’s central bank.

The disastrous central banks were created by the Latin American unit of the Fed under the tutelage of Robert Triffin a Keynesian who admired Prebisch.

Almost all countries with Prebisch-Triffin central banks ran into periodic currency collapses, import-substitution, default, dollarization, re-denomination or permutations of the outcomes.

In March 2020 Sri Lanka’s central bank printed unusually large volumes of money amid a credit surge pro-cyclically cutting rates and drove the rupee towards 200 US dollar, pushing down sovereign bond prices into steep discounts and triggering a credit downgrade.

Import controls and exchange controls followed.

Due to monetary instability, businessmen others also try to take money abroad and keep them denominated in money produced by better central banks or so-called ‘hard currency’ to stop the state from expropriating their value through currency depreciation or a crawling peg.

When private collapsed after April 2020, monetary has been partly counter-cyclical analysts say, but the economy is shackled in import controls.


How Sri Lanka, Latin America was busted by Fed money doctors creating strongmen, anti-Americanism: Bellwether

Sri Lanka central bank should look at credit and liquidity in a new way: Finance Minister

No attempt has been made to reform the central bank.

Prime Minister Rajapaksa called on the central bank to further change monetary policy.

“It is required to reform the banking and financial sectors to ensure availability of credit and financing for the production process and associated transactions,” he told parliament.

“We believe the Central Bank should have a new perspective on the monetary policy regarding money and liquidity management.”

His words are eerily reminiscent of Raul Prebisch.

“The different stages in the production process, from primary production to the sale of the final product in the market, take a certain amount of time,” Prebisch wrote (Five Stages in My Thinking on Development).

“This is where the role of the monetary authority comes in: to supply the larger amount of money needed to pay the growing wage and salary bill.

“This increase in money should be just enough to match the growth of final production owing to the growth of employment.”

More Incentives for foreign exchange

Meanwhile, lures were also offered to businessmen with undeclared funds including money taken breaking foreign exchange controls coming from the soft-peg.

“For the benefit of the country, I request from all entrepreneurs to utilize the funds hidden locally or internationally in order to evade laws relating to taxes and foreign exchange,” Minister Rajapaksa said.

“It is expected to make legal provisions to provide a tax pardon to entrepreneurs thus utilizing funds for any investment facilitated by this budget under the payment of taxes amounting to 1 per cent.”

Tax breaks were also offered to foreign companies and multi-nationals catering to the domestic market.

“I propose to exempt the tax on dividends of foreign companies for three years if such dividends are reinvested on the expansion of their businesses or in the money or stock market or in Sri Lanka International sovereign bonds,” PM Rajapaksa said.

“In order to encourage the exports of multinational companies which are import-based for requirements of the domestic market, it is proposed to reduce the tax imposed on their dividends by 25 per cent in 2021 and 50 per cent in 2023 under the condition that they increase their exports by 30 per cent and 50 per cent in the respective years.

“In order to maintain a similar amount as the import expenditure in foreign exchange in domestic banks, the interest income from such deposits will be exempted from taxes.”

The budget also had a series of import substitution measures.

Thought budget did not have new revenue proposals, maintaining policy stability and reducing regime uncertainty, it also did not have major expenditure proposals such as state salary hikes and many new subsidies. (Colombo/Nov18/2020-sb)

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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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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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