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Saturday May 25th, 2024

Trade deficits caused by foreign borrowings; Harvard economist at Sri Lanka forum

ECONOMYNEXT – Trade and current account deficits are a result of foreign borrowings, a US economist told a forum in Sri Lanka as US President Donald Trump mistakenly attacked trade deficits based on false Mercantilist doctrine.

Exporting more will not reduce a trade deficit, Robert Lawrence, a professor at Harvard University’s Kennedy School of Business told an economic forum organized by Advocata Institute, a Colombo-based think tank.

“Fundamentally a trade balance – basically the current account – is a reflection of the spending patterns of the nation," Lawrence said.

“And it tells you that a country with a (current account) deficit is borrowing. So it tells you that it is not saving enough domestically and it can’t finance its domestic investment, it has to borrow.

“One component of that will be fiscal policy. If the government runs a surplus, the country will have a smaller trade deficit. If private citizens save the country will have a smaller trade deficit.”

He was responding to a question by moderator Murtaza Jafferjee, Chief Executive of J B Securities that in Sri Lanka many people and writers claimed that raising exports will reduce a trade (or current account) deficit.

That exports are ‘good’ (exports represents delayed consumption and people get the benefit when the money earned is spent on imports) is a false idea that was spread by classical Mercantilists of Europe, before Adam Smith and others came up with reasoned analysis, which is now called ‘economics’.

Most people who believe that exports are ‘good’ and imports are ‘bad’ and countries should aim for trade surpluses are echoing the false doctrine of the likes of Thomas Mun, a classical Mercantilist of the 17th century who was also a director of the British East India Company.

“The ordinary means therefore to increase our wealth and treasure is by Forraign Trade, wherein wee must ever observe this rule; to sell more to strangers yearly than wee consume of theirs in value,” he wrote in 17th century English.

Countries like Germany and others East Asia such as Taiwan which run trade surpluses have tight government budgets with even surpluses in some years. In Malaysia, state enterprises run large surpluses.

East Asian central banks also collect reserves (sterilizing domestic liquidity) and invest them in the US, reducing credit and spending within the country. The money invested in the US come back as export demand, when spent in America.

Japanese and Korean firms have been investing heavily abroad and have foreign aid budgets, which tend to reduce domestic spending and transfer capital out. China has shifted some of its investments in US debt to its ExiBank and similar foreign projects.

The US, which has a chronic current account deficit, used to run a trade surplus after World War II, when Marshall Law aid was given to Europe.

The US is the world’s largest recipient of foreign direct investment and central banks in countries that operate dollar pegs buy US government bonds at low rates.

Trump’s plans to deficit spend on infrastructure, cut taxes and also invite foreign firms to invest in the US, which run counter to his obsession with reducing the trade deficit has left economists between despair and laughter.

“My own country – the United States – is currently following utterly contradictory policies”; Lawrence said.

“The Trump administration is obsessed with bilateral deficits we have with individual countries So they to make the aggregates trade deficits smaller.”

“At the same time what the US government has done is to pass large tax cuts and is currently sweet talking about increasing spending on defence and non-defence.

“So the government is going to run a bigger budget deficit.”

The Trump administration is talking about reducing deficits on one side and taking action which will lead to a bigger trade gap, Lawrence said.

“So when it comes to the (trade) deficit, it seems to be much more about spending patterns in the country, its savings and investment behaviour, than whether it is going to export more or import less.”

If someone wants to reduce the trade deficit a ‘good way’ to do it would be to cut budget deficits, and a ‘bad way’ would be to reduce investments, Lawrence said. (Colombo/Feb09/2018)

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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


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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.


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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300 out of 1,200 Sri Lanka central bank staff works on EPF: CB Governor

ECONOMYNEXT – About 300 central bank staff out of 1,200 are employed in the Employees Provident Fund and related work, Governor Nandalal Weerasinghe said, with the function due to be transferred to a separate agency after a revamp of its governing law.

“When it comes to the EPF there is an obvious conflict of interest. We are very happy to take that function out,” Governor Weerasinghe told a forum organized by Colombo-based Advocata Institute.

“We have about 300 staff out of 1,200 including contract staff, almost 150 of permanent staff is employed to run this huge operation. I don’t think the central bank should be doing this business,”

The EPF had come under fire in the past over questionable investments in stocks and also bonds.

In addition, the central bank also faced a conflict of interest because it had another agency function to sell bonds for the Treasury at the lowest possible price, not to mention its monetary policy functions.

“There has been a lot of allegations on the management of this fund. This is the biggest fund of the private sector; about 2.6 million active, I think about 10 million accounts.

“When it comes to EPF, obviously there’s another thing. We obviously have, in terms of resources, on the Central Bank, that has a clear conflict because we are responsible for the members.

“We have to give them a, as a custodian of the fund, we have to give them a maximum return for the members.

“For us to get the maximum return, on one hand, we determine the interest rates as multi-policy. On the other hand, we are managing public debt as a, raising funds for the government.

“And on the third hand, this EPF is investing 90 percent in government securities. And also, interest rates we determine, and they want to get the maximum interest. That’s a clear conflict, obviously, there’s no question.”

A separate agency is to be set up, he said.

“It’s up to the government or the members to determine to establish a new institution that has a trust and credibility and confidence of the members that this institution will be able to manage and secure an interest and give them a reasonable return, good return for their lifetime savings,” Governor Weerasinghe said.

“The question is that how whether we have whether we can develop that institution, whether we have the strong institution with accountability and the proper governance for this thing.

“I don’t think it should be given completely to a private sector business to run that. Because one is that here we have no regulatory institution. Pension funds are not a regulated business.

“First one is we need to establish, government should establish a regulatory agency to regulate not only the EPF business fund, there are several other similar funds are not properly regulated.

“Once we have proper regulations like we regulate banks, then we can have a can ensure proper practices are basically adopted by all these institutions.

“Then you can develop an institution that we who can run this and can be taken back by the Labour Department. I’m not sure Labour Department has the capacity to do all these things.”

While some EPF managers had come under scrutiny during the bondscam and for questionable stock investments, in recent years, it had earned better returns under the central bank management than some private funds that underwent debt restructuring according to capital market analysts with knowledge of he matter. (Colombo/May24/2024)

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