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

ECONOMYNEXT- Sri Lanka had recorded a surplus in the external current account in the third quarter of 2020 and is expecting a marginal surplus in 2021, Central Bank Governor W D Lakshman said.

“In 2020, a very rare thing has happened although it was still affected by Covid-19,” Governor Lakshman told reporters.

“This rare thing was that we experienced a decline in the current account deficit, and in one of the quarters, I think quarter three, there was a surplus in the current account – very rare thing in Sri Lanka.”

According to central bank data, Sri Lanka recorded external current account deficit of 792 million dollars in the six month to June 2020, up from 351 million dollars in 2019.

In the nine months to September 2020, the current account deficit had fallen to 630 million dollars, indicating a surplus of around 142 million dollars in the third quarter.

In 2019, the central bank was re-building foreign reserves and selling down its Treasury bill stock to mop up inflows (creating a balance of payments surplus through ‘below the line outflows’ to central bank reserves) amid weak and sometimes negative private credit.

Current Account Surplus

In 2019, there was also a quarterly current account surplus, but amid prudent monetary policy.

“For the first time in 10 years in the first quarter of this year, there was a surplus in the current account of the balance of payments,” then Governor Indrajit Coomaraswamy told reporters in 2019.

“That is the first time that has happened since 2009,” he said. “Of course it’s only one quarter, but still it’s a positive development.”

Related

External current account surplus in Sri Lanka amid credit bust

Analysts had pointed out that ‘stimulus’ oriented imprudent policy to target an output gap began largely after July 2019 ending monetary stability and the BOP turned, despite very weak credit.

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Sri Lanka’s credit again collapsed in the second quarter of 2020 amid lockdown, and started to pick up from around August.

Though the central bank was printing money and injecting liquidity 2020, most of it flowed out as foreign reserve sell-downs to repay debt, as ‘above the line’ outflows or a balance of payments deficit.

“If you go through past data, current account surpluses were observed in Sri Lanka 1950/51, 1954/55 and then 1977 and nothing after that,” Governor Lakshman said.

“All throughout the period after 1977 has been negative current account deficits. These deficits became very very large in more recent times.”

“So this rare thing we hope to able to achieve again, during this year, or at least by next year.”

The Beginning

In 1950 Sri Lanka had just set up a money printing central bank, abolishing a currency board that had kept the exchange rate fixed to the Indian rupee one to one (4.76 to the US dollar and 13.33 to the sterling at the time) from 1885 and money printing had not started.

In the first year the central bank Governor was John Exter, who analysts say set up Latin America style central bank in Sri Lanka but did not use it tools to de-stabilize the country. The peg was written into the law as a tool of monetary discipline.

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A current account deficit (or a trade deficit) is an outcome of savings behaviour and is usually driven in Sri Lanka due to domestic spending of financial sector inflows, such as foreign financing of budget deficits and foreign direct investment (foreign savings).

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Money printing by the central bank can create spikes in the current account deficit above financial account inflows through import surges when domestic credit is driven to unsustainable levels with central bank liquidity injections.

In 1952 the central bank printed money and ran down forex reserves from 216.4 million dollars (9.6 months of imports at the time) to 164.8 million dollars.

The soft-pegged central bank then enacted a new exchange control law, instead of halting money printing.

The exchange control law stopped financial and capital account outflows, making it impossible for domestic savings to be invested outside and tilting the playing field towards current account deficits analysts say.

In 1953, forex reserves were run down to 114.3 million dollars. In 1954 and 1955 the then government implemented corrective measures including budget surpluses of 0.5 percent of GDP and 2.2 percent of GDP and rebuilt foreign reserves back to 210 million dollars by the end of 1955.

Deficits

In 1977 Sri Lanka’s economy re-opened and there was also a balance of payments deficit and the budget deficit 4.5 percent of GDP from 8.4 percent a year earlier.

Deficit spending went in to full gear from 1978, and monetary instability worsened.

The central bank’s law was also changed to take the restraint of the peg out plunging the country into continuous depreciations and 20 percent inflation until a central bank governor who knew monetary policy came in form of A S Jayewardene to stem the slide in 1995.

In 2020 the current account surplus in the third quarter came in year of balance of payments deficits and outflows through the financial account due to inability to raise foreign debt due to loss of confidence due to previous money printing and tax cuts.

Governor Lakshman said Sri Lanka was expecting a current account surplus in 2021 as well.

“And we are indeed expecting a marginal current account surplus this year,” he said. Marginal, but the conditions will further improve in the medium term.”

It is not clear whether the ‘current account surplus’ in 2021 would be created with a balance of payments surplus (central bank ending money printing and re-building forex reserves) or continued financial sector outflows. (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

(Colombo/May25/2024)

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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.

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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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