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Saturday May 25th, 2024

Sri Lanka SMEs in trouble over 7-pct output gap targeting loans

ECONOMYNEXT – Sri Lanka’s small and medium businesses are in more trouble over 7 percent loans taken during a time when interest rates were kept down by authorities, than recent tax hikes, a senior accountant who is linked to a business chamber said.

Sri Lanka’s central which has printed money (mis-targets policy rates) for 73 years to create forex shortages and balance of payments crises went overboard more than usual in 2020-2022 to suppress rates and try to boost growth or bridge an ‘output gap’ using Keynesian ‘stimulus’

SME’s were now in a ‘debt trap Anoji De Silva, Partner at Ernst Young, Chartered Accountants, and also a head of Sri Lanka’s Womens’ Chamber of Commerce and Industry told a business forum.

“Because when the interest rates were very good, they went and borrowed with a seven percent interest without realizing that some of those are also variable interest rates,” she told seminar organized by the Sri Lanka’s Institute of Chartered Accountants.

“And now they can’t manage the debt they are in. That is actually a bigger problem for them than the tax.”

The central bank printed money to enforce artificially low interest rates, and directed that loans be given at 7 percent to boost economic output.

Sri Lanka has been dabbling with output gap targeting since\the International Monetary Fund gave technical assistance to the central bank to calculate ‘potential output’, giving the perfect opportunity for the country’s trigger-happy economic bureaucrats to print money.

From 2015 to 2019 the country suffered two currency crises in rapid succession and growth fell as money was printed to target an output gap as well as inflation as high as 5 percent, despite having a reserve collecting central bank.

When reserves are collected (and exchange rate is targeted or there is exchange rate policy) any inflation targeting through inflationary open market operations (term or overnight reserve repo auctions and outright purchases of bills and bonds), leads to forex shortages and the currency collapses.

During the 2020-2022 when the central bank printed even more money than in 2015-2019.

Separately, taxes were also cut to boost potential output on the claim that there was a ‘persistent output gap’ after two currency crises in the wake of flexible inflation targeting cum output gap targeting up to 2019, triggered growth shocks.

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After suppressing rates to target inflation or boost growth, rates then shoot up as the currency crisis develops.

It generally takes about 1.5 years for domestic inflation to develop, but exchange rate troubles come far more quickly in a reserve collecting peg.

Rates then go up abnormally and growth falls as the pegged central bank loses control of both interest rates and the exchange rate, a phenomenon critics have dubbed ‘rawuluth ne kendeth ne’.

Interest rates went up close to 30 percent in the latest flexible inflation targeting crisis.

The central bank has enormous powers, but no accountability for its actions, critics say.

When forex shortages emerge, the government loses the ability to settle maturing debt or petroleum imports, leading to a spike in monetary instability linked borrowing by both the central government and the Ceylon Petroleum Corporation, amid forex reserve losses.

The monetary instability driven loans are quantly called ‘bridging finance’ by economic bureaucrats.

Meanwhile De Silva said small businesses were puzzled by what had happened.

“We deal with a lot of micro level people,” de Silva said. “And one of the biggest problem they have is not tax but the confusion they are in on what has happened to this country.
 
“Because they do not understand. They just listen to what people say and are completely confused.
 
“We explained to them in a different manner. We take this analogy of a family that suddenly finds themselves out of money, and bankrupt.”

Several countries with similar central banks to Sri Lanka operating inflation targeting with a flexible exchange rate, which is neither a clean float nor hard peg, including Ghana, Zambia and Surinam, as well Argentina have defaulted.

Sri Lanka’s new IMF program’s Performance Criteria involving a reserve target, with a downward sloping net domestic asset ceiling as well high inflation target also has conflicting money and exchange rate policies, analysts warn.

Sri Lanka’s planned controversial new monetary law, in addition to having money and exchange rate policy conflicts also appears to legalize output gap targeting (monetary stimulus) which brought Sri Lanka which survived a 30-year war to default in peacetime, critics have said. (Colombo/Apr02/2023)

Comments (2)

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  1. K.wijesuriya says:

    Central bank governor has always taking bankers and
    financial operators side and allow them to exploit their
    customers as much as they can.
    Now there is no any reduction of the lending interest rates
    while they have reduced savings interest rates,
    If the Governor is closing his eyes and allow bankers to collect money from the market who are going to benefit

    K.ijesuriya.

  2. Bandu Abey says:

    I wonder how much of all available printed cash has been in circulation, including in the bank accounts and what proportion has been hidden under the mattress to evade the taxation or the revelation of the (criminal) origin (sin money: bribery, drugs, stolen etc.)

    When N M Perera became Finance Minister one of the first things he did was to cancellation of existing currency and introduce brand new notes. This enabled the hidden notes to re-appear and exchange with new notes and destroy the old worthless notes, instead of repeatedly printing truckloads of notes, which disappear no sooner they are printed.

    Central Bank needs to check and force people to let the currency circulate. This will help less amount of rupees officially in circulation and hence increase the comparative exchange rate.

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Comments (2)

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Your email address will not be published. Required fields are marked *

  1. K.wijesuriya says:

    Central bank governor has always taking bankers and
    financial operators side and allow them to exploit their
    customers as much as they can.
    Now there is no any reduction of the lending interest rates
    while they have reduced savings interest rates,
    If the Governor is closing his eyes and allow bankers to collect money from the market who are going to benefit

    K.ijesuriya.

  2. Bandu Abey says:

    I wonder how much of all available printed cash has been in circulation, including in the bank accounts and what proportion has been hidden under the mattress to evade the taxation or the revelation of the (criminal) origin (sin money: bribery, drugs, stolen etc.)

    When N M Perera became Finance Minister one of the first things he did was to cancellation of existing currency and introduce brand new notes. This enabled the hidden notes to re-appear and exchange with new notes and destroy the old worthless notes, instead of repeatedly printing truckloads of notes, which disappear no sooner they are printed.

    Central Bank needs to check and force people to let the currency circulate. This will help less amount of rupees officially in circulation and hence increase the comparative exchange rate.

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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