An Echelon Media Company
Thursday September 21st, 2023

Sri Lanka overnight injections top Rs400bn amid sterilized interventions

ECONOMYNEXT – Sri Lanka’s gross overnight liquidity injections topped 400 billion rupees by mid December as money was printed to offset dollar sales by the central bank (sterilized interventions) and sell downs of a Treasuries stock held outright.

The estimated Treasury bill stock of the central bank had also topped 1.8 trillion rupees, based on available data.

The central bank started to sell down its disclosed Treasury bills stock held outright which peaked at 1,469 billion rupees due to failed bill auctions coming from an obsession to control interest rates, after price controls on Treasuries auctions were removed.

However the central bank was unable to sell down the bills permanently, as the credibility on an exchange rate peg was lost due to earlier money printing, which had made outflows exceed inflows (a balance of payments deficit) and the emergence of parallel markets due to partial convertibility.

Any convertibility provided (dollars exchanged for rupees to protect the exchange rate from printed money also called an ‘intervention’) leads to a liquidity shortage, which is then re-filled with printed money (sterilized) preventing a correction in rupee reserves of banks and the reserve money, triggering more credit and imports.

In November the central bank sold 310.64 million dollars to exchange for already existing money and has injected about 60 billion rupees to sterilize the intervention and maintain the 6.0 percent policy rate.

Sterilized interventions to maintain a policy rate is the key tool through which Latin America central banks destroy currencies and end up in debt default even when budgets are in surplus.

“Sterilized outflows was the key tool through which Argentina style central banks sought to resist the balance of payments,” explains EN’s economic columnist Bellwether.

“In the frenzy of Keynesian interventionism in the post-Depression era, this idea led to the wholesale collapse of gold standard central banks as economies recovered. Later sterilized forex sales led to the collapse of soft-pegged currencies in post independent nations creating social unrest.

“The same argument was used to break stable currency boards and move towards “active” versus “passive” balance of payments policy, with devastating consequences for those countries and the poor. These countries were doomed be emerging or Latin American basket cases forever.”

Goh Keng Swee, Singapore’s first finance minister who retained the currency board, said countries with such central banks were doomed to be ‘miserable developing countries.’

“..[W]e wanted to indicated to academics, both local and foreign; that what is fashionable in the West is not necessarily good for Singapore,” Goh said in a landmark speech.

“A perceptive mind is needed to distinguish the peripheral form the fundamental, transient fads from permanent values.”

The Monetary Authority of Singapore, which was later modified to appreciate the currency in the wake of bad Fed policy, blocks sterilized sales through a law requiring 100 percent foreign reserve backing for the monetary base and no policy rate.

The Singapore dollar which was 3.0 to the US dollar when the Bretton Woods collapsed appreciated to 1.2 to the US dollar with each inflationist policy errors of the Fed.

“These mistaken ideas were propagated by US academics like John Henry Williams (key currency advocate) and Arthur Bloomfield, a colleague of John Exter who found instances when gold standard central banks supposedly engaged in sterilized interventions,” Bellwether says.

“That is why in the end the Bretton Woods collapsed and Sri Lanka is suffering now despite rupee bonds being rolled over.

“They taught at Harvard and Princeton so generations of susceptible young people were brainwashed with these ideas.”

Related

Hayek’s warning: lost generation economics kill Sri Lanka’s social market economy attempt: Bellwether

In Sri Lanka’s Latin America style clause of open market operations was put as Section 90 of the US driven monetary law.

“The principle use of open-market operatiosn would ordinarily be to offset the effects of surpluses and deficits in the balance of payments,” Exter explained in 1949.

Exter, who seems to have been a partial skeptic of Keynesianism however cautioned in his paper and advised not to try to resist any fundamental changes in interest rates through liquidity injections and built in warnings into the law itself such as through Section 89 (1) (a) where he advised the central bank “not to alter fundamentally movements in the market resulting from basic changes in the pattern or level of interest rates.”

To break a cycle of sterilized interventions a float or higher interest rate are required.

On November 24, the book value of central bank’s Treasuries stock was 1,767 billion rupees according to official central bank data, though the disclosed number was 1,387 billion rupees, with overnight and term repo injections not counted.

The central bank stopped disclosing the full Treasury bill stock after it stopped giving bills to depositors in its excess reserve window (Standing Deposit Facility) reducing transparency of balance sheet data.

The estimated Treasury Bill stock of the central bank had gone up to around 1,830 billion rupees by November 30 compared to a disclosed number from around 1,750 billion rupees by end October.

The disclosed number of Treasuries held outright was shown to fall to 1,433.91 billion rupees on November 30 from 1,466.84 billion on October 29.

By December 16 the estimated bill stock had gone up further to 1,850 billion rupees based on available data after taking out repo transactions.

It includes 103.5 billion rupees injected to sterilize a reserve ratio hike, an unusual move also made to enforce the policy rate after the reserve ratio hike.

The central bank also started repo auction on November 17 in a bid to take out liquidity injected to short banks overnight from plus banks, both overnight and through term repos.

By December 16, 24.5 billion rupees had been withdrawn through term auctions and 39.15 billion rupees overnight. (Colombo/Dec17/2021)

Leave a Comment

Your email address will not be published. Required fields are marked *

Leave a Comment

Leave a Comment

Cancel reply

Your email address will not be published. Required fields are marked *

Sri Lanka’s 2022 EPF returns falls to lowest, single digit in near two decades – CB data

ECONOMYNEXT – The 2022 annual average return on Sri Lanka’s largest contributory pension scheme, the Employees’ Provident Fund (EPF), has fallen to its lowest in nearly two decades, Central Bank data showed.

The annual average return in the last year fell to 9.52 percent from the previous year’s 11.40 percent, a central bank response to a Right to Information (RTI) request showed.

Returns on EPF has raised concerns among contributors after the government decided to include EPF investments in the government treasury bonds under the domestic debt optimization (DDO) process.

Last year’s lower return has been recorded despite market interest rates being more than 30 percent towards the end of the year. In contrast, the fund has given a double digit return in 2020 when the market interest rates hovered in single digits.

Analysts have predicted the returns to be further low with the central bank opting for the government’s DDO option.

A central bank analysis on DDO showed the return on EPF could fall to as low as 6.79 percent if the DDO option was not chosen within the next 12 years as against 8.02 percent if opted for DDO.

Trade unions and some politically motivated fractions opposed the government move to include the EPF investments under the DDO. However, parliament approved the move early this month.

According to the data made available from 2005, the central bank, which is the custodian of the EPF, has given the highest return of 16.03 percent in 2009.

The island nation’s largest pension fund has almost 21-million member accounts including 18.3 million non-contributing accounts due to some members having multiple number of accounts.

The 3.38 trillion-rupee ($10.6 billion) worth fund as of end 2022 is managed by the central bank, including its investment decisions.

As of end 2022, the central bank has invested 3.23 trillion rupees or 95.7 percent of the total EPF in government securities, while 84.1 billion rupees has been invested in listed companies in the Colombo Stock Exchange, the central bank said quoting the EPF audited financial statement. (Colombo/September 21/2023)

Continue Reading

Malaysia to support Sri Lanka’s bid to join RCEP

ECONOMYNEXT – Malaysia has agreed to support Sri Lanka’s application to become a member of the Regional Comprehensive Economic Partnership (RCEP), a major regional trade agreement.

The RCEP is a free trade agreement among the Asia-Pacific nations of Australia, Brunei, Cambodia, China, Indonesia, Japan, South Korea, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, Thailand, and Vietnam.

President Ranil Wickremesinghe met the Malaysian Prime Minister Anwar Ibrahim during bilateral discussions on the sidelines of the United Nations General Assembly in New York yesterday (20).

During the meeting, the Malaysian Prime Minister expressed a strong desire to bolster economic ties between the two nations, according to a president’s media division statement.

He emphasized Malaysia’s eagerness to facilitate increased investments from Malaysian companies in Sri Lanka.

Ibrahim also expressed positivity towards Sri Lanka’s request to commence negotiations for a free trade agreement (FTA) between the two countries, which could potentially open up new avenues for trade and economic cooperation.

Wickremesinghe is in a drive to bolster international ties and integrate the country with the global economy.

So far this week he met with the leaders of Bangladesh, Nepal, Malaysia, Iran, South Korea, as well as representatives from global bodies such as the World Bank, International Monetary Fund, USAID, Meta, the Commonwealth, and attended other forums.

Sri Lanka aims to expand its economic reach first within South Asia and then extend further.
Data shows that Sri Lanka has been able to boost exports with FTAs.

Over the past two decades Sri Lanka’s exports have not grown as much as competitors.

Economists involved in trade have pointed out that Sri Lanka should make joining the RCEP a priority instead of trying to negotiate multiple smaller deals for which it does not have the bandwidth in government, or the technical resources to do multiple trade agreements. (Colombo/Sep21/2023)

Continue Reading

Is Tibet Prepared for a Post-Dalai Lama Era?

ECONOMYNEXT – Tibetans have shaped and sustained their lives for more than 60 years under the leadership of the 14th Dalai Lama. The spiritual leader turned 88 in July, and as his longevity is discussed amongst his followers, there is also concern about Tibet’s future without his physical presence.

In 2011, the Dalai Lama divested himself of all political authority, yet, as the architect of democratic governance, he continues to remain a larger-than-life figure for Tibetans.

Along with that come other challenges; safeguarding the democratic system he initiated, engaging younger generations in the cause for Tibet’s freedom, protecting the country’s environment, the influence of external forces and the possible geopolitical fallout of India’s continued support of the Tibetan cause.
Ever since the Lhasa uprising of 1959, and the setting up of a government in exile in Dharamsala, India, the first Tibetan Constitution introduced by the Dalai Lama in 1963 has undergone many changes.

In 1991 the Supreme Justice Commission was added to the other two pillars of democracy, the Legislature and the Executive. Along with that, an Independent Audit Commission, an Independent Public Service Commission and an Independent Election Commission were set up, and women were assigned two seats in the Legislature. The current operational body of the Tibetan government in exile is known as the Central Tibetan Administration (CTA).

The debate on Tibet’s sovereignty, which fell under the control of the Chinese in 1951, is ongoing, with the Chinese government terming it the “Peaceful Liberation of Tibet’ and the CTA and Tibetan diaspora referring to it as the “Chinese invasion of Tibet.”

Despite the reforms and the Dalai Lama divesting himself of all political power the spiritual leader exerts considerable influence and therefore there is still, a heavy dependence on him, notes MP Youdon Aukatsang. Speaking at a webinar titled “Tibetan Democracy in Exile’ organised by the Friedrich Naumann Foundation for Freedom, South Asia, on September 15, Ms Aukatsang pointed to a recent constitutional crisis which was finally resolved following the Dalai Lama’s intervention. “Tibetans must take full responsibility for political matters as envisaged by His Holiness the Dalai Lama,” she said.

There is also the challenge of dealing with the internal dissent amongst Tibetans, which she claimed is spearheaded by China.

The webinar moderated by Ms Tenzin Peldon, the Director and Editor-in-Chief of Voice of Tibet, included Ven Geshe Lhakdor, Director, Tibetan Library and Archives and honorary Professor, University of British Columbia, Gondo Dhondup, President of the Tibetan Youth Congress and Sujeet Kumar, an Indian parliamentarian and the Convenor of the All Party Indian Parliamentary Forum for Tibet.

The current Sikyong, Tibet’s political leader Penpa Tsering and Dr Jurgen Murtens, a member of the German Bundestag also addressed the webinar.

The democratic model, Aukatsang states is successful, yet it is a work in progress. The current make up of the Tibetan Parliament in Exile (TPiE) has 45 members representing the three provinces of U-Tsang, Do-med and Do-tod, the four schools of Tibetan Buddhism as well as the traditional Bon faith, Europe, North America and Australasia. It is headed by the Speaker and the Deputy Speaker.

Aukatsang would like to see a modification in the composition with more representation from the diaspora, and less from the provinces to better reflect the changing demography. She also proposes an increase in the number of members of the Standing Committee from 11 to 15 and calls for the establishment of a dispute resolution mechanism rather than the direct impeachment process, which is the current practice.

Though the 1991 reforms made way for women’s representation in the TPiE, (currently 10 ministers and the Deputy Speaker are women), Aukatsang is hopeful there would be “more meaningful engagement of women in leadership roles,” for, as she points out, they are the custodians of Tibetan culture and language. Women have also distinguished themselves as founders of several non-governmental organisations and in the field of education.

Her sentiments were reflected by the Sikyong, Penpa Tsering when he said that unless the administration is ready to adapt to demographic and social realities, its relevancy will be challenged.

When the Buddha was on his deathbed, and his followers were fearful of being on their own, the Buddha had advised that the focus should be on his teachings and not his physical presence. Likewise, says Ven Geshe Lhakdor, Tibetans must continue to abide by the teachings of the Dalai Lama, and not worry about his absence. When Tibetans were prohibited from displaying photos of the Dalai Lama, they hung up empty picture frames, he said, aware that the Dalai Lama remains within them.

Ven Geshe Lhakdor also advocates a separation of Church and State, pointing out that clergy must involve themselves in the spiritual upliftment of society, rather than in politics. The idea of the religious ruling a country is outdated, he points out, adding that once clergy get into a “political mindset” they are unable to send out good signals to the people. He adds that their responsibility is to safeguard culture and harmony and be role models.

The principles of democracy are a reflection of Buddhist teaching the Venerable noted, pointing out its time to extricate oneself from a tribal mentality. The focus must be on a long-term, robust vision, rather than quick fixes. He also believes that Tibetans must safeguard themselves from internal fragmentation, even more than external threats.

One unique feature of the administration is that it is free of corruption, the Venerable notes, despite being surrounded by corrupt systems.

Even though Jawaharlal Nehru, the first Prime Minister of independent India, sought and had the cooperation of all Chief Ministers to offer refuge to Tibetans in 1959, MP Sujeet Kumar is of the opinion that the current Indian Parliament is rather diffident in openly rooting for Tibet against China.

While acknowledging that Indian parliamentarians have huge constituencies and are busy, he is hopeful his colleagues would take more interest in Tibet and her issues.

Tibetans alone have the right to decide on the Dalai Lama’s successor, says Kumar, and India must back that. India should also rally the support of other nations to help Tibet charter her own course in a post-Dalai Lama scenario.

Kumar would like to see more Tibetan youth become part of India’s trillion-dollar digital industry.
He is concerned, however, at the lack of enthusiasm amongst the youth to use social media to fight disinformation being circulated about Tibet.

Acknowledging that youth could be more engaged in social media to fight disinformation, Gondo Dhondup says all Tibetans are “born to be activists” and to the cause, even though it is difficult to envisage a freedom movement without the Dalai Lama.

Youth are the agents of change, and Tibet’s future citizens, therefore they must stay informed. The TYC organises leadership training, and Tibetans, even those scattered around the globe must take advantage of the programmes, Dhondup says.

While calling on India to introduce a national policy on Tibet, Dhondup cautions that India’s waterways that originate in Tibet are under threat. The rivers are either “diverted or polluted” affecting downstream villagers, and India must ensure her water security, Dhondup explains.

The recently concluded G20 summit was themed “One Earth, One Family, One Future”, and that gives India an opportunity to be more vocal about the environment, he says.

Continue Reading