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Sri Lanka posts record US$2.32bn BOP deficit in 2020 with MMT

ECONOMYNEXT – Sri Lanka has posted a 2.3 billion US dollar balance of payments deficit in 2020, down from a surplus of 377 million dollars in 2019, official data showed as unprecedented volumes of money was printed under so-called Modern Monetary Theory.

Money was printed in 2020 mostly by rejecting market in for Treasuries auctions and placing price ceilings in an attempt to keep interest rates down despite having a pegged exchange capable of generating a balance of payments deficit by running down forex reserves.

The central bought about 651 billion rupees of Treasury bills in the course of 2021, in blatant debt monetization, which was said to be under MMT.

Helicopter Drops

The injections began in February 2020, witha 24 billion rupees central bank profit transfer conducted as a liquidity injection, in the first of a series of helicopter drops of liquidity that led to a steep fall in the rupee in March and triggered downgrade.

Related Sri Lanka sovereign rating downgraded to ‘B-‘ by Fitch, outlook negative

Analysts who are calling for central bank reform or its abolition to preserve monetary stability and allow the country to grow have called for profit transfers to be halted to build reserves or transfers to be done in dollars in the first instance instead of injecting liquidity which is then defended in forex markets.


Sri Lanka excess liquidity spike in Feb from central bank profit transfer

Sri Lanka makes helicopter drops of new money despite soft-peg

Where did the liquidity go?

In 2020 the central bank also cut the statutory reserve ratio 2020, but the entire liquidity seems to have been absorbed by an expansion in reserve money.

Reserve money grew by around 28 billion rupees (without excess liquidity) during 2020 to end at 964.4 billion rupees, despite the statutory reserve ratio cuts.

There seems to have been no provisional advances to the government (a type of printed money permanent overdraft that is allowed under Sri Lanka’s Latin America style monetary law) in 2020, amid an expected fall in tax revenues.

By end December 2020, 206.75 billion rupees of excess liquidity remained in the banking system from the printed money, up from 37.9 billion rupees at the beginning of the year, or a net increase of 168.85 billion rupees.

The central bank did not engage in large intervention to defend current account transaction in 2020, amid weak private credit.

Credit surged in March during a severe ‘flexible exchange rate’ episode or (highly non-credible pegging period) and then collapsed amid lockdowns, allowing the central bank to buy dollars for several months.

Weak Confidence

During a ‘flexible exchange rate’ episode money is printed and peg defence is delayed long enough to panic importers in to borrowing and early covering of import bills, exporters to hold back, and any rupee bond investors to flee.

The March-April, ‘flexible exchange rate’ episode then triggered downgrades, and the fall in confidence worsened outflows through the financial account. Sri Lanka’s credit had been already downgraded after a tax cut was announced in December 2019.

After August 2020 private credit started to pick-up, leading to some defence of the currency peg. Low interest rates from liquidity injections also encouraged forward covering.

But most of the liquidity flowed out through the financial account as government debt was repaid with dollars issued against the liquidity.

Foreign stock investors also steadily sold out, while stock prices rose amid low interest rates and excess liquidity.

Approximately 454 billion rupees had been absorbed by a 2.37 billion dollar balance of payments deficit in 2020, at an average rate of around 190 rupees to the US dollar.

The MMT driven BOP deficit is the highest in Sri Lanka’s history.

However in the third quarter Sri Lanka had registered a current account surplus amid the biggest BOP deficit in history.

“Classical Mercantilists used to focus on the trade deficit,” explains EN economics columnist Bellwether. “The holy grail of modern or neo-Mercantilists is the current account deficit.”

“The current account deficit is simply an outcome of foreign borrowings and foreign direct investment being spent domestically. In countries like Sri Lanka current account surplus occur in severe crises, when financial account turns negative and there is capital flight.


External current account surplus in Sri Lanka amid credit bust

Sri Lanka records current account surplus in 3Q 2020, 2021 expected: CB Governor

“Because Sri Lanka’s soft peg has created exchange controls, the possibility of current account surpluses occurring in normal times is almost zero.

“In country like Sri Lanka which has a 20 percent domestic private saving rate, BOP surpluses and even current account surpluses can be generated very easily with prudent monetary policy. Sri Lanka is having monetary instability with a peg, due controlling interest rates a final target with money printing.”

“There is no special benefit in generating a current account surplus, it is simply an outcome of savings behaviour. However a BOP surplus is useful to build external confidence and more importantly in the course of creating a BOP surplus the central bank is forced to follow prudent policy.”

Open Market Crises

The previous highest BOP deficit was in 2015, when liquidity was pumped in by terminating term repo deals to create unsustainable credit and imports mostly through the current account.

In early 2015 large volumes of money was pumped in to keep call money rates near the bottom of the corridor.

In 2017, the central bank generated a 2.0 billion dollar BOP surplus, mopping up reserves and selling down its Treasury bill stock as credit contracted after the 2015/2016 currency crises.

In 2018 the central bank began injecting large volumes of money as credit recovered, almost entirely through open market operations, to target the middle of a policy corridor and trigger a currency crisis, generating a 1.1 billion dollar BOP deficit.

In 2019, as credit slowed the central bank again mopped up reserves, running prudent policy and building reserves until July 2019.

By July 2019 there was a balance of payment surplus of 1,490 million dollars.

Policy then reversed as money was printed under a milder version of MMT and liquidity was injected to target an output gap with artificially low interest rates and excess liquidity.

The ‘flexible exchange rate/non credible peg’ episodes that followed then also put bond investors to flight.

The 1.49 billion BOP surplus in July then reduced to 377 million dollars by January after policy reversed.


Sri Lanka prints Rs2.2bn 10-month money below overnight policy rate

Sri Lanka intervenes to defend rupee after liquidity injections

Sri Lanka sells US$76mn in August after liquidity injections

Sri Lanka central bank buys Rs20bn in bonds to inject cash amid currency volatility

The tax in December 2019, which triggered an outlook downgrade, reduced tax revenues, triggering more money printing, came amid weakening monetary policy. In early 2020, monetary policy was further loosened. (Colombo/Feb15/2021)

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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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