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Tuesday February 7th, 2023

Sri Lanka remittances up after tight money kills parallel FX gap, Pakistan down

ECONOMYNEXT – Sri Lanka’s remittances through official channels picked up to 476 million US dollars in December 2022 up from 353 million dollars a year earlier as parallel market premiums disappeared money printing reduced, while Pakistan is seeing a fall.

Pakistan is seeing an external meltdown as foreign reserves are spent and money is printed to stop interbank rates from going up (sterilized forex sales).

Severe pressure from liquidity injections which fire domestic credit, imports as well as capital flight fro the lost credibility of the exchange rate, then create parallel exchange rates to which remittances are channeled.

Sri Lanka’s kerb dollar rate which topped 400 to the US dollar, fell to 371.50 to the US dollar the same or a little lower TT selling rate of banks in December after interest rates were allowed to go up, reducing private credit and money printing was halted.

However central bank in January started a series of domestic operations in January 2023, injecting 340 billion rupees term, largely replacing overnight injections made to sterilize reserve losses in 2022.

Analysts have warned the central bank not to overdo the injections and jeopardize gains in external domestic stability made so far by externally anchoring the currency at 360/370 to the US dollar, with largely complementary domestic operations. (Sri Lanka central bank caught between peg and hard place).

Expat workers leaving, but no official dollars seen

“In the first 11 months of 2022 about 0.75 million Pakistanis moved abroad mainly for jobs and other purposes like education, but the inflow of remittances has been declining instead of showing an improvement,” Pakistan’s Dawn newspaper said.

“Banks offer Rs228 per dollar while exchange companies offer Rs238 but the grey market offers even higher than Rs270.”

Sri Lanka also saw hundreds of thousands of persons fleeing the country after the currency collapsed from 200 to 360 to the US dollar in a botched float, but remittances through official rates did not improve until rates were hiked and domestic credit reduced.

Pakistan has the worst central bank in South Asia after after Sri Lanka. Sri Lanka’s central bank has busted the rupee from 4.70 to 360/370 since its creation denying sound money to the people.

Both the Pakistan and Sri Lanka rupees are derived from the Indian rupee at 4.70 to the US dollar at independence from British rule.

The Pakistan rupee has fallen to 228 to the US dollar and parallel exchange rates are around 270 to the US dollar.

In Sri Lanka, a currency board 1 to 1 to the Indian rupee (13.70 to Sterling) was broken legislatively in 1950, to set up an anchor conflicting central bank with extensive Latin America style sterilization powers, sealing the country’s economic fate of the country the next seven decades.

Over the past decade, despite ending a 30 year war, monetary instability has dramatically worsened in SriLanka under flexible inflation targeting, probably the deadliest impossible trinity regime ever devised by Western Mercantilists and peddled to third world countries without a doctrinal foundation in sound money.

Easy Prey to Flexible Policy

A World Bank survey last year found that only 2 percent of ‘experts’ in a regional survey knew that forex shortages were created by the central bank, making the region easy prey for flexible inflation targeting or other impossible trinity regimes. (South Asia, Sri Lanka currency crises; only 2-pct know monetary cause: World Bank survey).

Both ‘fear of floating’ and a currency board phobia among economic bureaucrats prevent the establishment of single anchor non-impossible trinity regimes.

Un-accountable soft-pegged central banks and their supporters in the private sector have devised a narrative to find scapegoats. A favorite is to scapegoat exporters : this is not an export oriented-economy or exporters are not bringing dollars.

Another is to blame expat workers: they are not bringing dollars through official channels and are using Hawala. Importers are usual suspects: there is a trade deficit.

In Sri Lanka, a reserve collecting central banking regime is bombarded with floating rate style liquidity injections to generate double the inflation rate found in stable floating regimes (about 5 percent compared to 2 percent), until the peg collapse time after time.

Sri Lanka ran out of reserves and defaulted in April 2022, after taking on large volumes of monetary stability driven external borrowings each time forex shortages made it impossible to make external payments under flexible inflation targeting.

In Sri Lanka monetary instability borrowings are quaintly referred to as ‘bridging finance’ by economic bureaucrats.

Pakistan is also now running hither than thither looking for external loans as foreign reserves melt and parallel exchange rates widen due to money printed.

In Pakistan banks are unable to give dollars for relatively small imports, a situation Sri Lanka faced last year.

“Manufacturers associated with the Karachi Chamber of Commerce and Industry claimed recently that banks weren’t even processing $1,500 payments for the import of spare parts — a phenomenon that’s bringing the entire supply chain to a standstill,” the Pakistan’s Express Tribune newspaper said.

Pakistan’s official reserves dropped to 4.343 billion dollars in January 07, 2023 from 17.597 billion dollars on January 06 last year.

On January 13, reserves picked up to 4.601 billion dollars.

Pakistan has also banned ‘non-essential’ imports a favourite tactic of economic buraucrats who print money and busts the flexible exchange rate (soft-peg).

Politicians Misled

Over the years economic bureaucrats have misled legislators into enacting exchange and import control laws, helping economic bureaucrats more room to delay interest rate corrections and worsen balance of payments trouble.

Sri Lanka is due to legalize the flexible exchange rate and flexible inflation targeting regime under a reform program with IMF, a highly unstable impossible trinity regime, which triggered serial currency crises in recent year and drove the country to default

Sri Lanka is going to the IMF for the 17th time instead of bringing tight laws to prevent the central bank from operating an impossible trinity regime and hold the agency accountable for external instability.

Bangladesh, which operates reserve money targeting framework with a peg (another impossible trinity regime which works fine as long as reserve money is under-supplied with sterilized purchases, but collapses as soon as sales are sterilized to suppress rates) has also gone to the IMF after mis-targeting rates as credit recovered from a Coronavirus crisis.

“..[W]hile more than 11.35 lakh Bangladeshis left for jobs abroad in 2022 – nearly doubling the figure from 2021 when 6.17 lakh flew abroad – remittances sent in through formal channels actually registered a 6.65 percent drop,” Bangladesh’s Daily Star newspaper said.

“The amount in 2022 was USD 21.28 billion; in 2021, it was USD 22 billion. How to explain this inverse effect? Why have we failed to translate a record migrant outflow into an increase in remittance inflow?”

Many third world reserve collecting central bank have seen worsened conflicts between money and exchange policies under so-called ‘monetary policy modernization’ in recent years with more aggressive floating rate style open market operations encouraged.

In Sri Lanka money was printed from 2020 mostly to close an ‘output gap’ after the IMF gave technical assistance to the trigger happy central bank to calculate it. (Colombo/Jan22/2022)

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Sri Lanka Railways to seek PPPs to boost revenue streams

CURFEW RUSH: Commuters scrambling to get home after curfew was declared in Sri Lanka on March 20, 2020.

ECONOMYNEXT – Sri Lanka Railway department hopes to expand Public Private Partnerships and earn more non-passenger revenues to offset recurring operational costs, an official said.

“For the past 10 years, except the last few years, the Railway operational income only covers around 50 percent of the operational expense of the Department,” the General Manager of the Railway, D.S. Gunasinghe told EconomyNext.

“Our plan is to increase the non-passenger revenue of the Railway department.

“And we cannot expect and do not hope for money from the government.”

Sri Lanka Railways already has agreements with Prima, a food firm, and Insee Cement, which is bringing in additional income, Gunasinghe said.

“We had agreements for material transportation such as sand in the past, however it was canceled but we hope to start it again” he said.

The department will rent out its storage facilities and circuit bungalows for the tourism sector to create additional revenue streams.

Sri Lanka Railways recorded an operating loss of 10.3 billion rupees during 2021, compared to a loss of 10.1 billion rupees in 2020, the Central Bank 2021 annual report showed.

The total revenue of the SLR stood at 2.7 billion rupees, a 41.3 percent drop from a year ago.

(Colombo/ Feb 06/2023)

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Sri Lanka’s doctors distribute anti-tax hike leaflets to train commuters

ECONOMYNEXT – Doctors representing Sri Lanka’s Government Medical Officers Association (GMOA) distributed leaflets outside the Colombo Fort railway station against a progressive tax hike, threatening to address the government in a “language it speaks”.

GMOA Secretary Haritha Aluthge told reporters outside the busy Fort railway station Monday February 06 afternoon that all professional associations have collectively agreed to oppose the personal income tax hike.

“The government is taking a lethargic approach. They cannot keep doing this. They have a responsibility towards the citizens, the country and society,” said Aluthge.

The medical officer claimed that the government was acting arbitrarily (අත්තනෝමතික).

“If it cannot understand the language they’ve been speaking, if the government’s plan is to put all professionals out on the street, if it doesn’t present a solution, all professional unions have decided unanimously to address the government in a language it speaks, ,” he said.

Aluthge and other GMOA members were seen distributing leaflets to commuters leaving the railway station. Doctors in Sri Lanka in general are likely to earn higher salaries than the average train commuter, and a vast majority of Sri Lanka’s population, most of whom take public transport, don’t fall into the government’s new tax bracket. Many doctors, though certainly not all, collect substantial sums of money at the end of every month as doctor’s fees in private consultations.

About two miles away from the doctors, the Ceylon Blank Employees’ Union, too, engaged in a similar distribution leaflet campaign on Monday at the Maradana railway station. A spokesman promised “tough trade union” action if there was no solution offered by next week.

Sri Lanka’s cash-strapped government has imposed a Pay As You Earn (PAYE) tax on all Sri Lankans who earn an income above 100,000 rupees monthly, with the tax rate progressively increasing for higher earners, from 6 percent to 36 percent.

A person who paid a tax of 9,000 rupees on a 400,000 rupee monthly income will now have to pay 70,500 rupees as income tax, the latest data showed. This has triggered a growing wave of anti-government protests mostly organised by public sector trade unions and professional associations.

Even employees of Sri Lanka’s Central Bank recently joined a week-long “black protest” campaign organised by state sector unions against the sharp hike in personal income tax, even as Central Bank Governor Nandalal Weerasinghe said painful measures were needed for the country to recover from its worst currency crisis in decades.

The government, however, defends the tax hike arguing that it is starved for cash as Sri Lanka, still far from a complete recovery, is struggling to make even the most basic payments, to say nothing of the billions needed for public sector salaries.

Economists say Sri Lanka’s bloated public service is a burden for taxpayers in the best of times, and under the present circumstances, it is getting harder and harder to pay salaries and benefits.

Sri Lanka’s new tax regime has both its defenders and detractors. Critics who are opposed to progressive taxation say it serves as a disincentive to industry and capital which can otherwise be invested in growth and employment-generating business ventures. Instead, they call for a flat rate of taxation where everyone is taxed at the same rate, irrespective of income.

Others, however, contend that the new taxes only affect some 10-12 percent of the population and, given the country’s economic situation, is necessary, if not vital, at least for a year or two.

Critics of the protesting workers argue that most of the workers earn high salaries that most ordinary people can only dream of, and, they argue, though there may be some cases where breadwinners could be taxed more equitably, overall, Sri Lanka’s tax rates remain low and are not unfair.  (Colombo/Feb06/2023)

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Sri Lanka bond Yields end steady

ECONOMYNEXT – Sri Lanka’s bond yields closed steady on Monday, dealers said while a guidance peg for interbank transactions remained unchanged.

A bond maturing on 01.07.2025 closed at 32.15/30 percent, steady from Friday’s 32.05/10 percent.

A bond maturing on 01.05.2027 closed at 28.90/29.10, steady from Friday’s 28.90/20.05 percent.

The Central Bank’s guidance peg for interbank US dollar transactions appreciated by one cent to 361.96 rupees against the US dollar.

Commercial banks offered dollars for telegraphic transfers at 370.35 rupees on Monday, data showed. (Colombo/Feb 06/2023)

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