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Saturday May 25th, 2024

Sri Lanka rupee hobbled by 203 decree, priority lists, three bonds quoted

ECONOMYNEXT – Sri Lanka’s bonds market saw more activity Thursday after auction yields rose a day earlier after bond auctions were freed from price controls while the rupee continued to be hobbled with decreed 203 to the US dollar, despite convertibility having been suspended for trade transactions.

This week American Express, a credit card started rejecting all personal overseas transactions above 100 US dollars.

Banks are operating ‘priority lists’ after central bank stopped providing convertibility (taking rupees out and giving dollars) for trade transactions to hold the peg.

However convertibility is provided to de-stabilize the (taking dollars and creating new rupees) through a surrender requirement slapped on exporters and remittances.

At the moment however there is a liquidity short after statutory reserve ratio hike to which it can disappear. It is not clear why the SRR was hike before getting the crippled bond markets to work again.

Settlements are being done off-market among exporters and importers who are friendly. Others are on waiting lists and paying demurrage to the port.

Newly appointed central bank Governor Nivard Cabraal lifted price controls and has allowed rates to move up. Only half the offered volume of 39.5 billion rupees was sold.

However some secondary market activity had been kindled.

In bond markets a 15.07.2023 maturity which had not traded for weeks or months was quoted at 7.40/50 percent.

A 01.11.2023 bond which had also not been traded for a long time was quoted at 7.50/8.00 percent, dealers said.

A 01.12.2024 quoted at 8.30/50 around the same as yesterday’s 8.25/45 percent.

Confidence in Sri Lanka’s bonds had been badly hit by central bank purchases and liquidity injections and auction price controls, which had created the worst foreign exchange shortages since the 1970s.

The gradual collapse of the bond market started with so-called State III auctions in the last regime.

At the time it was said to have been recommended by an expert whose own country did not use such a control. The US for example has single price auctions with a portion offered for non-competitive bids.

The US Fed is now triggering inflation around the world through its Powell Bubble, making an unfunny claim that inflation is ‘transient’, criics say.

In recorded history among major central banks the Fed has been responsible for the worst policy errors.

The last one was the Great Recession from the Greenspan-Bernanke bubble also known as the ‘mother of all liquidity bubbles’, though it is not clear whether the Powell Bubble will out do it.

The Fed also created the Great Depression after the Roaring 20s or Benjamin Strong bubble, and busted a centuries old gold standard and collapsed the Bretton Woods system after the Arthur Burns output targeting debacle.

As long as bond markets do not work to channel private savings into a runway budget deficit or even monetizes debt from past deficits by placing price controls on one year bonds and above, the external sector can unravel and drive a country towards default.

Turning government securities into money

In 1951 a premature collapse of the Bretton Woods, was avoided by Marriner Eccles, a Fed Governor who was a banker who resisted pressure to buy a war finance security known as a Liberty Bond as inflation rose and price controls and rationing took place.

“There is going to be nothing for us to protect in this country unless we are willing to do what is necessary to protect the dollar,” Fed Governor Marriner Eccles who was a former chairman said in comments set out in the Fed minutes of February 6-8, 1951, which are now public.

“Our responsibility is not a minor one; it is a very great one under the conditions that exist, and if we fail, history will record that we were responsible, at least to a very great measure, in bringing about the destruction or defeat of the very system that our defense effort is being made to protect and defend.

“You only protect the public credit by maintaining confidence in the Government and in its securities and to the extent the public will buy and hold those securities. The thing we are doing is to make it possible for the public to convert Government securities into money and to expand the money supply of this country by $7 billion in six months.”

The central bank had turned over 1.3 trillion rupees into government securities since around February 2020, losing about 5 billion US dollars to a balance of payments deficits.

The balance been absorbed in an ‘internal drain’ raising public currency holdings, at least a part of which may have come from precautionary holdings from the pandemic and the rest had likely accommodated inflation, including from the weakening of the currency.

“We are almost solely responsible for this inflation…the whole question of having rationing and price controls is due to the fact that we have this monetary inflation, and this Committee is the only agency in existence that can curb and stop the growth of money,” Eccles said in 1951.

Sri Lanka is now mired in price controls. The parliament on Wednesday passed passed a law to hike fines on traders as prices off basic good rocketed and price controls created shortages.

When Eccles and Chairman Wade McCabe hiked rates, Ceylon’s newly set up central bank after abolishing had its first currency troubles and enacted an exchange control law in 1952.

Birth Defect

Among prices that can be controlled by states, interest rate controls probably have the most dangerous effects economic activity, analysts say.

“I think that move away from the currency board to discretionary central banking was perhaps one of independent Ceylon’s, early birth defects in light of what’s happened subsequently,” Razeen Sally, a classical economist said at an event to mark 69 years of Sri Lanka’s central bank.

“What was essentially a pretty strict, a pretty strict rule regime to limit political and bureucratic discretion – very roughly equivalent to a fixed and non adjustable peg – was transformed in 1950, thanks to the design the tutelage of John Exter, let’s not forget, under a UNP government with J R Jayawardene as Finance Minister, into discretionary, central banking,” he said.

“And since then, we’ve had at least some periods where monetary policy with discretion over the rules has reinforced the mistakes of fiscal policy rather than leaning against it as it were.”

The last administration was defeated by the public as its economic program of trade liberalization and investment promotion lay in tatters amid trade controls and currency falls. (Colombo/Sept25/2021)

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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.

Related

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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