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Sunday June 16th, 2024

Sri Lanka President asks China to reduce trade deficit, invest in tech university

ECONOMYNEXT – Sri Lanka’s President Gotabaya Rajapaksa has asked China to purchase more goods to reduce a large trade deficit and also invest in a technology university during a visit of a delegation led by ex-Foreign Minister Jang Jiechi.

“Sri Lanka has a strong private sector,” President Gotabaya had said.

“They manufacture various products. Open the Chinese market for these items. Encourage Chinese investors to invest in Sri Lanka. Promote Chinese people to visit Sri Lanka.”

Most Sri Lankans buy Chinese goods because they are more cost-effective than buying from a third country. Chinese investments and loans however contribute to the overall trade deficit of the country, when the money is spent by recipients on imports or cement and steel is imported.

Income earned from Chinese tourists, will also contribute to a trade deficit with China or other countries when tourism workers and hotel owners spend the money.

President Rajapaksa had asked China to participate in Sri Lanka’s tea auction. Sri Lanka however taxes bulk tea exports to discourage them.

He had also invited China to set up a University of Technology to provide more higher educational opportunities for young Sri Lankans.

“Extending President Xi’s congratulations to President Rajapaksa over landslide victories at recent elections, Mr. Yang recalled that he visited Sri Lanka 35 years ago as an interpreter assisting a visiting Chinese delegation,” a statement from the President’s office said.

“He noted that Sri Lanka is the first country in his four-nation tour of Asia adding that the President of China gives high priority to the enhancement of bilateral relations with Sri Lanka.”

Yang Jiechi is an ex-Foreign Minister and had served as the ambassador to the United States.

Chairman of the China International Development Cooperation Agency, Wang Xiaotao; Assistant Foreign Minister of China, Deng Lee and Chen Song, Deputy Director General of Department of Asian Affairs were also in the delegation.

China has identified several areas conducive for the development of bilateral relations with Sri Lanka.

In addition to completing large-scale projects already underway, these include agriculture, education, tourism, water supply, healthcare, medical supplies, modern technology, digital economy, Blue Economy and labour training.

Sri Lanka intends to re-start talks on a China – Sri Lanka Free Trade Agreement and also complete an industrial zone in Hambantota.

Hambantota Port is now operated by a Chinese company with an equity stake bought by China.

“Constructing a port in Hambantota is an idea of Sri Lanka and not China’s,” President Rajapaksa had said.

“We were convinced that it woulld be a project with a vast potential for generating income and employment opportunities. China offered to fund it.

“Many geo-political analysis interprets this project as ‘debt trap’ set up by China to gain control over Sri Lankan affairs.

“I want to prove that it is not the case and that this large-scale project will help improve the living standards of the people. Assist us in this endeavour.”

President Rajapaksa had said he had toured China 13 times and see how the country developed.

“I have seen massive development especially in rural areas,” he had said.

“My target is to bring about similar development especially in rural areas in Sri Lanka and to raise the living conditions of the people in this country, especially that of the poor.

“I look forward to seeing a visible progress in the Port City project over the next four years.”

The Port City is awaiting the passing of a Special Economic Zone Law by Sri Lanka to attract investors. (Colombo/Oct09/2020)

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Sri Lanka state airport agency swimming in cash after sovereign default

ECONOMYNEXT – State-run Airport and Aviation Services (Sri Lanka) Ltd is swimming in cash after a sovereign default halted debt repayments allowing it to post a profit of 29.7 billion rupees with 10.4 billion rupees in interest income, official data showed.

In April 2022 Sri Lanka declared a sovereign default after printing large volumes of money over more than two years to enforce rate cuts and blowing the biggest hole in the balance of payments in the history of the island’s money printing central bank.

Interest earnings of Airport and Aviation Services also shot up to 10.4 billion rupees in 2023 from 6.1 billion in 2022 and 3.3 billion rupees in 2021 before the sovereign default.

Under the terms of the default or ‘debt suspension’, state agencies like the Airport and Aviation Services, and Sri Lanka Port Authority were also not required to service loans, even if they had the cash to repay loans.

AASL’s finance income shot up in 2023 “mainly because the company has invested surplus cash saved by not servicing the foreign loans obtained by the company due to the temporary debt moratorium policy of the country,” the Finance Ministry said in a report.

Sri Lanka’s rupee and foreign currency interest rates also shot up in 2022 and 2023 as rate cuts enforced by money printing were lifted to clear anchor conflicts.

After inflationary rate cuts kill confidence in a currency triggering capital flight and parallel exchange rates, excessively high rates are needed to kill domestic credit and stabilize the currency.

Countries with such flawed operating frameworks in central banks tend to have chronic high nominal interest rates in any case.

AASL’s rupee revenues went up to 48.8 billion rupees in 2023 from 32.2 billion rupees in 2022 as passenger movements increased to 7.5 million from 5.5 million with a recovery in tourism and local traffic.

Sri Lanka’s currency crisis hit in 2022 just as the island was recovering from Coronavirus pandemic triggering fuel shortages and power cuts as money printing triggered forex shortages.

From 2022 March the rupee collapsed from 200 to 370 levels an attempt to float the rupee was failed by a surrender rule (a type of buy-side pegging which pushes the exchange rate down).

In 2023, after hiking rates to kill credit, the surrender rule was removed, leading to a currency appreciation.

The airport agency also made an exchange gain of 6.1 billion rupees in 2023 against an exchange loss of 10.5 billion rupees in 2022 the rupee appreciated. (Colombo/June16/2024)

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Sri Lanka car import relaxing roadmap given to IMF: State Minister

ECONOMYNEXT – Sri Lanka has submitted a roadmap on relaxing vehicle imports to the International Monetary Fund, State Minister of Finance Ranjith Siymabalapitiya said as the country recovers from the worst currency crises in the history of its central bank.

The import relaxation will allow vehicles for public transport, goods transport, then motor cycles and cars use by private individuals and after that, luxury cars, Minister Siyambalapitiya said.

Luxury cars however attract the highest taxes for each dollar spent on imports.

Economic analysts have characterized vehicle import controls as a ‘cascading policy error’ that follows inflationary rate cuts, which then deprive taxes to the state and triggers more money printing and more forex shortages, requiring even higher corrective interest rates and a contraction of economic activities to save the rupee.

According to the latest IMF report car import controls may have led to revenue losses of 0.7 to 0.9 percent of GDP.

Sri Lanka started controlling imports few years after a central bank was set up in 1950 and also tightened exchange controls progressively, so that macroeconomists using post-1920 spurious monetary doctrines taught at Anglophone universities could print money through various mechanisms to suppress rates.

Sri Lanka is working with the IMF as a guide on many issues and the roadmap was submitted to the agency on June 14, Minister Siyambalapitiya said.

The IMF in an economic report released last week the plan was expected to be submitted by June 15.

Whatever the IMF’s faults, which some wags have called ‘progressive Saltwaterism’, the agency does not advocate import controls as solution to balance of payments problems, despite a Mercantilist fixation with the current account deficit in countries with reserve collecting central banks, analysts say.

Import controls have the same effect as import substation on the balance of payments, which is none, classical economists have pointed out and is now mainly a problem associated with macro economists and economic bureaucrats of so-called basket case countries.

Any pressure on the currency or missed reserves targets in the IMF program has come in the past only if the central bank printed money to suppress rates as credit growth picked up from car imports.

Sri Lanka had 3,000 items under import controls when rates were suppressed with printed money from 2020 to 2022 but eventually ended up with the worst currency crisis triggered by macro economists in the history of the country and eventual external default.

A committee made up of the Department of Trade and Fiscal Policy of the Finance Ministry, the Department of Registration of Motor Vehicles, the Central Bank and two associations representing vehicle imports were appointed to come up with the roadmap, he said. (Colombo/June15/2024)

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Chitrasiri Committee presents draft constitution for Sri Lanka Cricket

ECONOMYNEXT – A draft constitution for Sri Lanka Cricket, the governing body for cricket in the island, prepared by a committee headed by retired Supreme Court judge K T Chitrasiri, was presented to President Ranil Wickremesinghe today (15).

The Sri Lanka team were ignominiously knocked out of the Men’s T20 World Cup tournament this week, sparking renewed criticism of the team and the governing body.

Last November, a cabinet sub-committee was appointed to address challenges faced by Sri Lanka Cricket and provide recommendations after consecutive losses became a hot topic in parliament.

After parliament decided to remove the administrators of the sport, the International Cricket Council (ICC) Board suspended Sri Lanka Cricket’s membership.

Based on the sub-committee’s recommendations in its report, the Cabinet then appointed an expert committee to draft a new constitution for Sri Lanka Cricket.

The committee headed by judge K T Chitrasiri includes President’s Counsel Harsha Amarasekara, Attorney-at-Law Dr Aritha Wickramanayake and Chairman of the Sri Lanka Chamber of Commerce Duminda Hulangamuwa.

Deputy Solicitor General Manohara Jayasinghe, and Shamila Krishanthi, Assistant Draftsman representing the Legal Draftsman’s Department, and Loshini Peiris, Additional Secretary to the President were also on the committee. (Colombo/Jun14/2024)

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