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Wednesday February 28th, 2024

Sri Lanka Port City Special Economic Zone to be dollarized

INVESTMENT MAGNET: The Colombo Port City is expected to attract around 15 billion US dollars in investments.

ECONOMYNEXT – Sri Lanka’s Colombo Port City Special Economic Zone would be dollarized, according to a draft law for the area, protecting its workers and businesses from the depreciation and monetary instability coming from a currency which does not have a credible anchor.

Foreign and domestic investors who conduct business (authorized persons) within the Economic Zone would have to be approved by a Colombo Port City Economic Commission, according to a draft law to be presented to parliament shortly.

All Investment applications would have to be made in foreign currency.

The money would also have to come from abroad. No domestic bank would be allowed to fund such investments through their foreign currency banking units.

“No foreign currency deposit in an account maintained or operated in Sri Lanka, in any licensed commercial bank or licensed specialised bank within the meaning of the Banking Act and no foreign currency raised through a foreign currency loan obtained from any such licensed commercial bank or licensed specialised bank, shall be used by an authorised person for the purpose of such investment, within the Area of Authority of the Colombo Port City,” the draft law says.

“As such, subject to the provisions of subsection (5) of this section and section 39 of this Act, all investments made to carry on business in and from the Area of Authority of the Colombo Port City shall, in the interest of national economy, be raised outside Sri Lanka.”

Land plots would be sold in US dollars. Workers in the zone would be paid dollar salaries.


Sri Lanka Port City Economic Zone workers to earn tax free, dollar salaries

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Resident workers would be allowed to remit their salaries to a bank account.

The salary which will be exempt from income tax “shall be deemed to be a permissible credit to a personal foreign currency account of such resident employee.”

The Commission is also expected to issue regulation to allow businesses to convert rupee proceeds made by “a citizen of Sri Lanka or resident when using retail facilities or services at restaurants, cinemas, entertainment facilities, shopping facilities, or parking facilities, within the Area of Authority of the Colombo Port City, into a designated foreign currency.”

The port city would also have an off-shore financial centre.

Dollarization allows people’s salaries and lifetime savings as well as the capital to be protected from monetary expropriation by soft-pegged central banks prone to currency depreciation and balance of payments crises.

Currencies depreciate due to a conflict in monetary anchors, where money is printed to keep rates down and the exchange rate is also targeted.

Dollarization involving adopting one or more free floating currencies such as the US dollar and Euro target a low inflation rate of around 2 percent (a credible domestic anchor).

It is possible to adopt more than one foreign currency at the same time (currency competition).

Currency boards also issue money which do not depreciate against the chosen strong currency it is pegged to (credible external anchor) as money printing is prohibited and overnight rates float.

But if money is printed to target a domestic interest rate or a higher level of inflation, that currency will depreciate.

Any attempt to defend the exchange rate (external anchor) while printing money to will trigger a ‘run’ on the foreign reserves of that central bank (a conflict between anchors), typically called a balance of payments deficit.

Sri Lanka’s rupee has depreciated from 4.77 to around 200 to the US dollar amid money printing and conflicts with domestic and external anchors.

Such central banks impose exchange controls and also import controls in order to be able to keep on printing money.

John Exter, a Federal Reserve ‘money doctor’ who helped set up a soft-pegged central bank abolishing the earlier currency board, observed as follows in explaining the planned new Monetary Law Act which later brought currency crises, chronic depreciation and output shocks.

Exter said the currency board was “particularly conducive to foreign investment because investors, especially those within the Sterling area had every assurance that the rupee exchange rate would not get altered in terms of Sterling and that there would be no impediments to realizing profits or repatriating capital”.

During Ceylon’s currency board era, Malaysian and other firms raised capital in the Colombo stock market.

However Exter claimed the automatic rule-based sustainable system was a “mark of Colonialism” and it was “tantamount to a renunciation of a basic element of monetary sovereignty”.

Ironically the Port City Economic Zone would now be dollarized, going beyond a currency board. A currency board, while preserving free convertibility of the rupee, would have given profits of note issue (seigniorage) to the Treasury.

The Port City, reclaimed by China Harbour Engineering group is expected to attract over 15 billion US dollars of investments. (Colombo/Mar28/2021)

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Sri Lanka rupee closes at 310.00/15 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 310.00/15 to the US dollar Wednesday, from 310.25/50 on Tuesday, dealers said.

Bond yields were broadly steady.

A bond maturing on 01.02.2026 closed at 10.60/80 percent from 10.60/75 percent.

A bond maturing on 15.09.2027 closed at 11.90/12.00 percent up from 11.80/95 percent.

A bond maturing on 15.03.2028 closed stable at 12.00/15 percent.

A bond maturing on 15.07.2029 closed at 12.20/50 percent from 12.25/50 percent.

A bond maturing on 15.05.2030 closed stable at 12.25/40 percent.

A bond maturing on 15.05.2031 closed at 12.55/75 percent down from 12.60/80 percent.

A bond maturing on 01.07.2032 closed at 12.50/90 percent down from 12.55/13.00 percent. (Colombo/Feb28/2024)

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Sri Lanka Treasuries yields edge up after steep fall

ECONOMYNEXT – Sri Lanka’s Treasury bill yields edged up across maturities at Wednesday’s auction with the 3-month yield up 09 basis points to 9.87 percent, data from state debt office showed.

The debt office sold 27.5 billion rupees of 3-month bills after offering 35 billion rupees.

The 6-month yield rose 09 basis points to 9.95 percent with 37.23 billion rupees of bills sold, after offering 47.5 billion rupees.

The 12-month yield went up 03 bis points to 10.05 percent, with 39.5 billion rupees of bills sold and 40 billion rupees offered.

Sri Lanka’s Treasuries yield have come down sharply in recent weeks.

The trend was partly helped by some banks which were earlier not buying into bills, starting to buy them.

Deposit in the central banks overnight window (private sector sterilization) has come down from around 200 billion to around 130 billion rupees in recent weeks.

Sri Lanka’s central bank in the past have triggered currency crises and eventual high corrective rates by not allowing Treasury bill yields to move when up private credit picks up and buying them into the balance sheet.

The resulting forex problems are then blamed on budget deficits (politicians) and current account deficits (mainly imports of the public usually petroleum, gold or cars).

The central bank can still buy Treasury bills outright from banks, term or overnight to inject money, alter rupee reserves of banks and encourage them to overtrade and trigger forex shortages, confidence shocks, capital flight and a second default, critics say.

The central bank recently lifted counterparty limits of standing facilities, which are given at the policy rate without a penalty unlike in countries with greater monetary stability.

In recent weeks the central bank has oversold bills outright and injected money long term and short term, though so far overall net injections have been deflationary. (Colombo/Feb28/2024)

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Sri Lanka stocks close up, retail activity coming in

ECONOMYNEXT – The Colombo Stock Exchange closed up on Wednesday, data on its site showed.

The broader All Share Index closed up 55.29 points, or 0.52 percent at 10,678; while the S&P SL20 Index closed up at 3,056 points, up 0.06 percent, or 1.73 points.

Turnover was at 1.2 billion.

Market participants said that “retail activity is also picking up.”

Hemas Holdings Plc saw large volumes being traded, contributing 90 million to the day’s turnover. The share closed up at 75.00.

Kapruka Holdings Plc announced that it had purchased 197,015 ordinary voting shares of its subsidiary Kapruka e-Commerce (Pvt) Ltd for 13.2 million rupees at 67 a share. The proceeds will be used by Kapruka e-Commerce “to fulfill the IPO objective of launching Kapruka Partner Central, the company said. The share closed down at 6.80.

E B Creasy and Company Plc announced a disposal of investment in its subsidiary, Lanka Special Steels Limited (LSSL) in accordance with the restructuring process of the E B Creasy Group. The Board resolved “to divest its 100% stake represented by 2,138,657 shares in its subsidiary Lanka Special Steels Limited (LSSL), to subsidiary company Laxapana Batteries PLC (Laxapana) for a total consideration of Rs694mn which will be settled in installments. Shares of E B Creasy and Company Plc closed up at 22.00.

Sectors that attracted investor interest were Capital Goods (376mn), Food, Beverage and Tobacco (181mn), and Banks (166mn).

Positive contributors to the indices in the day included Hayleys Plc (up at 82.00), Chevron Lubricants Lanka Plc (up at 104.00), Vallibel One Plc (43.30), and Cargills (Ceylon) Plc (up at 349.75) whose Chairman Ranjith Paige donated 3 million rupees to the ‘Children of Gaza Fund’ earlier today. (Colombo/Feb28/2024).

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