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Tuesday May 30th, 2023

Sri Lanka unions agitating against IMF-backed reforms to meet president’s secretary

ECONOMYNEXT – Sri Lanka’s trade unions and professional associations agitating against an IMF-backed tax hike are to hold talks with the secretary to the president ahead of a discussion with President Ranil Wickremesinghe.

Media spokesman of the Federation of University Teachers Association (FUTA) Charudaththa Illangasinghe told reporters Friday March 17 morning that the meeting with President’s Secretary Saman Ekanayake was to be held that noon.

The discussion had been scheduled for March 21 but had been brought forward, which Illangasinghe said was a step in the right direction.

However, talks so far have been futile, he noted, adding that FUTA and other unions would like to end the talks on a positive note with a fair outcome that is acceptable to them.

Illangasinghe further said that if their March salary was taxed, all trade unions and professional unions – some of whom had by Thursday morning called off a strike – would continue their trade union action.
FUTA’s strike is still ongoing, and Illangasinghe said it will continue until a favourable decision has been made.

In the days leading up to Friday’s meeting, trade unions in Sri Lanka threatened to cripple the economy if the government did not reverse International Monetary Fund (IMF)-backed reforms, with one main opposition SJB-affiliated union leader promising a total shutdown of power & energy, medical, banking and other vital sectors starting midnight March 14.

The threat did not come to pass in its full form, with government spokesmen painting it a failure. A majority of the unions including the Government Medical Officers Association (GMOA) had called off the strike by Wednesday morning.

Related:

Sri Lanka unions threaten to cripple economy against IMF-backed reforms

However, severe trade union action by medical doctors had by then already brought the state health sector to a near-standstill. Doctors were on strike in several provinces against the income tax hike, greatly inconveniencing patients, before the strike was eventually called off.

High-income earning public servants in higher education, medical, banking, ports and other sectors have for weeks been threatening to up the ante in ongoing trade union action against Sri Lanka’s IMF-backed reforms, including a progressive income tax hike that sees the cash-strapped government collect from anyone earning over 100,000 rupees a month.

Minister of Ports, Shipping and Aviation Nimal Siripala de Silva told parliament on Thursday that 17 ships en route to the Colombo Port had turned back as a result of a recent anti-tax protest organised by port unions. He also claimed that one protesting port worker earns over 170,000 rupees a month.

Sri Lanka’s new tax regime has both its defenders and detractors. Critics who are opposed to progressive taxation said it serves as a disincentive to industry and capital which can be invested in business. They argue that a flat rate of taxation is implemented where everyone is taxed at the same rate.

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.

Critics of the protesting workers argue that most of the workers earn high salaries that most ordinary people can only dream of, and 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/Mar17/2023)

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Sri Lanka rupee appreciation squeezes exporters

ECONOMYNEXT – Sri Lanka’s recent appreciation is starting to squeeze apparel exporters as their domestic costs including wages and energy, were hiked over recent months, when the rupee fell steeply, an industry official said.

Companies had raised salaries and emoluments at rates averaging 25 percent for workers while transport costs have also gone up but not has come down, Yohan Lawrence Director General of the Join Apparel Association Forum said.

Apparel factories in particular also provide transport and some meals for workers.

Electricity prices have also been hiked, based on the rupee which was weaker. A tariff cut is expected from June after the rupee appreciated and imported fuel prices fell.

Sri Lanka’s rupee collapsed in 2022 from 200 to 360 to the US dollar as interest rates were suppressed with liquidity injections and a failed attempt was made to float the rupee with surrender requirement in place.

From the second half of 2022, with higher interest rates and negative private credit, the central bank has avoided printing money under conditions which are generally accepted to be difficult, and is broadly running deflationary open market operations, triggering a balance of payments surplus and putting the rupee under upward pressure.

Central bank net credit to government which was 3,302 billion rupees in September in 2022, was down to 3,209 billion rupees by March 2023, part of which was due to rollovers, analysts say.

Market pricing of fuel and electricity by the Ministry of Energy and also spending controls and tax hikes buy have also helped contain domestic credit.

Sri Lanka also has mandatory conversion rules, imposed on exporters, which is a concern for exporters.

“We believe rupee should be at its natural level, but with forced conversions you won’t get the correct picture,” Lawrence said.

Sri Lanka has to release a plan to remove import controls, exchange controls and other restrictions imposed in the period where policy rates were suppressed with liquidity injections (so-called multiple currency practices and capital flow measures) by June under the IMF program.

Apparel exporters have also seen orders fall amid tighter conditions in Western markets.

The central bank has to peg (intervene actively in forex markets and create money) to meet reserve targets under an IMF program and cannot free float (avoid creating money through international operations) the rupee.

The newly created money has generally been absorbed in an overnight liquidity shortage.

There have also been foreign purchases of rupee Treasuries. Amid a contraction in credit, the inflows also do not turn into imports fast as the money if the money is spent.

By making purchases a little below what is allowed by the contraction in domestic credit, the rupee can be allowed to appreciate, analysts say.

The central bank has so far allowed the rupee to appreciate to around 300 to the US dollar from 360 levels under a transparent guidance peg up to February.

Except after the 2008/2009 currency crisis, Sri Lanka’s central bank has not previously allowed to the rupee to appreciate under IMF programs where the first year in particular sees balance of payments surpluses, before private credit and domestic investments picks up again.

One of the considerations used by third world central banks are Real Effective Exchange Rate indices.

The REER of the Sri Lanka rupee based on a basket of currencies calculated by the central bank was 61.12 points in February before the rupee was allowed to appreciate by lifting a surrender rule.

In March the index went up to 69.55 points, but remained steeply below 100. Real effective exchange rates are calculated also taking into account inflation in counterpart trading nations.

Sri Lanka’s inflation index had hardly risen since September amid rupee gains. Falling food prices can help contain pressure for further wage hikes, analysts say. (Colombo/May30/2023)

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Sri Lanka forum to discuss central bank independence vs sound money

ECONOMYNEXT – Central bank independence and sound money will be under discussion at a public event organized by the Sri Lanka chapter of the Bastiat Society today, May 30, as island is recovering from the worst episode of monetary instability since independence.

The forum will feature Lawrence H White, Professor of Economics at George Mason University in the US, and W A Wijewardene, former Deputy Central Bank Governor, of the Central Bank of Sri Lanka.

“The discussion will compare the current system against alternative systems and explore the relationship between such banking systems and sound money,” the organizers said.

White specializes in the theory and history of banking and money. He is the author of “The Clash of Economic Ideas” (2012), “The Theory of Monetary Institutions” (1999), “Free Banking in Britain” (2nd ed., 1995), and “Competition and Currency” (1989).

Wijewardene has been speaking on central bank independence in Sri Lanka long before it became a topic of wider discussion, but also on accountability.

In April, a Central Bank Independence and Other Matters, which includes a collection of his orations on the subject over the years as well a recent development was published.

The discussion comes as independent central banks in the West have created the worst inflation since the 1970s and early 1980s and are apparently unaccountable to parliaments and the public.

The early 1980s also saw the first wave of external debt crises in so-called soft-pegged countries in Latin America and Eastern Europe in particular as the US and UK tightened policy to end the Great Inflation.

The discussion will be held at 7.00 pm at the Lakmahal Community Library and those interested can register online, the organizers said. (Colombo/May30/2023)

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Sri Lanka teachers withdraw from A/L paper marking again over unresolved payments

ECONOMYNEXT – Paper marking of GCE Advanced Level exam has been delayed again as teachers withdrew from duties after Sri Lankan government failed to pay the promised allowances, All Ceylon Teachers Union said.

Teachers were promised an allowance of 15,000 rupees, however, the Union complained that only 10,000 rupee was given by the government for the teachers who have been involved in paper correction in over 30 centers across the country.

“As many teachers are stationed in examination centres away from their home towns, the government promised a 15,000-rupee allowance for these teachers,” Joseph Stalin, the Secretary of the All Ceylon Teacher’s Union, told EconomyNext.

“However, due to the constraints imposed by the dwindling treasury, the examinations department states they can only pay 10,000 rupees. This is insufficient to cover the teacher’s expenses and has led to protests.”

Meanwhile, upon inquiry denying the allegations, the Examination Commissioner Amith Jayasundara said, allowance was specified earlier.

“There was no such promise of a 15,000 rupee advance,” Jayasundara told EconomyNext.

“This was merely a consideration that was discarded after consulting the financial regulations. We have decided on a performance-based pay system with 10,000 rupees being paid after five days of paper marking.” (Colombo/May 29/2023)

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