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Saturday May 25th, 2024

Sri Lanka policy rate floor unchanged, central bank to slap loan price controls

ECONOMYNEXT – Sri Lanka’s central bank has kept its floor policy rate at 4.50 percnet, which has prevented rates from falling further amid negative private credit, but has imposed price controls on a range of credit products.

Sri Lanka’s call money rates have been around floor 4.50 percent and the central bank has been a net buyer in forex markets showing that liquidity is generated from dollar purchases amid negative private credit, and money need not be printed to bring rates down and trigger further monetary instability.

However last month money was printed to target Treasuries yields further down the yield curve, which Sri Lanka’s central bank is also controlling.

The agency said its rate setting monetary board decided to hold the policy corridor at 4.50 percent (at which excess money is withdrawn in times of weak credit) and 5.5 percent (at money is printed when credit picks up).

But it will shortly issue price controls on lending rates.

The central bank also resorted to price controls in the wake of the 2018 currency crisis, triggered by liquidity injections below the ceiling rate as credit picked up.

“The Board decided to adopt targeted measures to reduce specific interest rates that it considered to be excessive, which would help marginal borrowers,” the agency said.

“Considering bank lending rates of certain financial products which continue to remain high, the Board decided to revise downward the caps on interest rates on credit cards to 18 per cent per annum, on pre-arranged temporary overdrafts to 16 per cent per annum and on pawning facilities to 10 per cent per annum.

“Moreover, the Board was of the view that penal interest rates need to be capped at 2 percentage points over the regular interest rates charged on the relevant credit facility.”

In April Sri Lanka imposed the worst import controls seen since the collapse of the Bretton-Woods system of soft-pegs in 1971 as the rupee was allowed to fall from money printed in March and private credit surged.

The extent to which the import controls contribute to the contraction in private credit as activities in domestic companies with global supply chains gradually grinds to a halt is not clear.

Several large firms have said they are putting off capital expenditure.

The full statement is reproduced below:

The Central Bank of Sri Lanka continues its accommodative monetary policy stance

The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 19 August 2020, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 4.50 per cent and 5.50 per cent, respectively. The Board recognised the necessity to continue the accommodative monetary policy stance, particularly as market lending rates are yet to reflect the full passthrough of policy easing measures implemented thus far. The Board decided to adopt targeted measures to reduce specific interest rates that it considered to be excessive, which would help marginal borrowers.

The Board anticipates a further reduction in overall market lending rates, thereby encouraging borrowing for productive economic activity and reinforcing support for COVID-19 hit businesses as well as the broader economy, given the conditions of subdued inflation.

Global monetary easing continued amidst the rapid spread of the COVID-19 pandemic The rapid spread of the COVID-19 pandemic and related containment measures have resulted in a significant downturn in the global economy in the first half of the year. In response, almost all central banks of advanced economies as well as emerging market and developing economies continued to implement monetary easing measures, alongside fiscal stimulus by respective governments, in support of the recovery of economic activity.

Domestic economic activities, which were adversely affected by the COVID-19 pandemic, are expected to recover in the second half of 2020.

As per the provisional estimates released by the Department of Census and Statistics (DCS), the Sri Lankan economy contracted by 1.6 per cent in the first quarter of 2020, contrary to the expectations of the Central Bank. As per the available indicators, the adverse impact of COVID-19 on economic activity during the second quarter of 2020 is likely to be substantial. However, a faster rebound of economic activity is expected, especially in the fourth quarter of 2020, supported by improved political stability, the resultant improvement in business confidence, and the lagged impact of monetary and fiscal stimulus. This expected rebound in the fourth quarter is essential for the country to record a positive growth rate during this year.

The enhanced focus on domestic production for import substitution as well as to export is expected to drive near term growth, with potentially significant implications on the longer horizon. Sustaining the growth momentum beyond the near term would require reforms to address structural issues in the economy.

External sector has improved with the support of proactive policy measures

The external sector continued to demonstrate resilience, reflecting the impact of prudent measures implemented amidst the COVID-19 outbreak. The trade deficit has narrowed during the first half of 2020, as the contraction of imports outpaced the contraction of exports, supported by import restrictions and subdued global petroleum prices.

Some improvement in workers’ remittances was observed in June, in contrast to the declining trend observed since March 2020. However, the tourism sector, which has been forced to rely on domestic tourism for its survival in the face of the pandemic, is poised to witness a sizable decline in foreign exchange earnings in 2020.

Depreciation of the Sri Lankan rupee against the US dollar has been limited to 1.3 per cent thus far during the year, following a significant depreciation recorded during March-April 2020. With the Central Bank buttressing its reserves through foreign currency purchases from the market and foreign currency swaps with the Reserve Bank of India and licensed banks, gross official reserves were estimated at US dollars 7.1 billion by end July 2020, providing an import cover of 4.7 months.

No demand driven inflationary pressure is expected during the forecast horizon

Headline and core inflation, based on the Colombo Consumer Price Index (CCPI) accelerated marginally in July 2020, yet remaining at relatively low levels. The National Consumer Price Index (NCPI) based headline and core inflation also accelerated in June 2020, mainly reflecting the impact of food inflation.

In spite of such short term fluctuations, inflation is expected to remain broadly within the desired 4-6 per cent range in the near to medium term, with appropriate policy measures.

,b>Slow growth of credit to the private sector is expected to recover gradually in the period ahead

Growth of credit extended to the private sector by commercial banks decelerated in June 2020, year-on-year, while the outstanding volume of credit contracted during June 2020 for the second consecutive month, in spite of the large surplus liquidity in the market. However, a gradual recovery in credit extended to the private sector is expected in the period ahead, driven by increased economic activity, improving business sentiment with enhanced political stability, declining market lending rates and rising credit disbursement on account of concessional credit schemes for businesses affected by the pandemic.

Credit to the public sector, in the meantime, soared in recent months reflecting the government’s heightened funding requirement, thereby causing a notable expansion of broad money thus far in 2020.

The impact of monetary easing measures is reflected in the recent notable decline in market interest rates

A noticeable decline in market lending rates was observed in July 2020 in response to the series of policy and regulatory measures adopted by the Central Bank thus far in 2020. With the gradual reduction in market lending rates, interest rates applicable on new lending by commercial banks, on average, have now reduced to single digit levels. The Average Weighted Prime Lending Rate (AWPR) has also declined significantly in recent weeks. While the recent decline in overall market interest rates is encouraging, some market lending rates still remain excessive, affecting marginal borrowers in particular. Overall market lending rates are expected to decline further, commensurate with monetary easing measures adopted in the recent past, enhancing the affordability of credit, which is imperative to support the recovery of economic activity in the period ahead.

Policy rates maintained at current levels, while further measures to promote lending introduced

In consideration of the current and expected macroeconomic developments as highlighted above, the Monetary Board, at its meeting held on 19 August 2020, was of the view that the current accommodative monetary policy stance is appropriate, and decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 4.50 per cent and 5.50 per cent, respectively.

Considering bank lending rates of certain financial products which continue to remain high, the Board decided to revise downward the caps on interest rates on credit cards to 18 per cent per annum, on pre-arranged temporary overdrafts to 16 per cent per annum and on pawning facilities to 10 per cent per annum. Moreover, the Board was of the view that penal interest rates need to be capped at 2 percentage points over the regular interest rates charged on the relevant credit facility.

Directions to effect these regulated interest rates will be issued shortly. The Central Bank will continue to monitor domestic and global macroeconomic and financial market developments and take further measures to support the economy to return to a higher growth path without delay, given subdued levels of inflation.

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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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