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Monday March 4th, 2024

US retracts Vietnam ‘currency manipulation’ claim, repeats lie on ‘one sided’ interventions

ECONOMYNEXT – The Office of the US Trade Representative issued a formal determination saying it will not take action against Vietnam after falsely branding the country a ‘currency manipulator’ in 2020 for operating a monetary system based on an external anchor for domestic stability.

The USTR determination came shortly after Treasury Secretary Janet Yellen met State Bank of Vietnam (central bank) Governor Nguyen Thi Hong and issued a joint statement saying the Dong will not be devalued for trade advantage.

“The determination finds that the Treasury-SBV agreement provides a satisfactory resolution of the matter subject to investigation and accordingly that no trade action is warranted at this time,” a USTR statement issued on July 23 said.

“USTR, in coordination with Treasury, will monitor Vietnam’s implementation going forward.”

Vietnam has insisted that the strong exchange rate is used for domestic stability and is not related to trade and promised not to devalue the Dong.

“I commend Vietnam for its commitment to addressing U.S. concerns with its currency practices and setting an important example for the Indo-Pacific region,” the USTR said, while adding language to cast doubt on the SBV external anchor based monetary policy and instead went barking up a proverbial Mercantilist tree.

“American workers and businesses are stronger when our partners value their currency fairly and compete on a level playing field.

“Going forward, in coordination with Treasury, we will work together with Vietnam to ensure implementation, and we will continue to examine the currency practices of other major trading partners.”

Vietnam dong collapsed in 2010 from 15,000 to 21,000 after trying to do ‘stimulus’ when the Fed’s housing bubble burst. Since then the currency has been kept around 22,000-23000 to the US dollar.

The US and International Monetary Fund has falsely accused Vietnam of ‘undervaluing’ the Dong despite having a real effective exchange rate index of around 130 because the country has a current account surplus.

The surplus comes partly from SBV mopping up of inflows (sterilized forex purchases) and partly from outward investments by Viet Nam companies due to the strong currency.

The US Treasury in 2020 based on Mercantilist dogma falsely labeled the Vietnam Dong and Swiss Franc – one of the strongest currencies in the world – for manipulation (read undervaluation) much to the amusement of classical economist.

The July 23 state also repeated false accusations made in January that interventions were ‘one-sided’.

“On January 15, 2021, USTR issued a determination that Vietnam’s acts, policies, and practices including excessive and one-sided intervention in the foreign exchange markets and other related actions, taken in their totality, are unreasonable and burden or restrict U.S. commerce,” the statement said.

Vietnam however intervened heavily in forex markets, ran liquidity shortages and pushed up short term rates in 2015 losing billions of dollars in forex reserves when Yellen tightened policy by quantity tightening and also in 2018, when she hiked rates and engaged in further quantity tightening.

Related

Vietnam promises US it will not devalue, dreaded Sri Lanka style ‘monetary modernization’ looms

Sri Lanka’s non-credible ‘flexible exchange rate’ collapsed on both occasions as liquidity was injected.

SBV promised US not to devalue its peg which has built up substantial credibility and promised more ‘exchange rate flexibility’. (Colombo/July23/2023)

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Sri Lanka rupee opens at 308.20/50 to the US dollar

Sri Lanka stocks reversed its falling trend and gained for the first time in six sessions on Tuesday closed stronger on Tuesday (21).

ECONOMYNEXT – Sri Lanka’s rupee opened at 308.20/50 to the US dollar Monday, from 308.80/90 on Friday, dealers said.

Bond yields were broadly steady.

A bond maturing on 01.08.2026 was quoted stable at 10.90/11.00 percent.

A bond maturing on 15.09.2027 was quoted at 11.90/12.00 percent from 11.90/12.05 percent.

A bond maturing on 01.07.2028 was quoted at 12.20/30 percent from 12.15/35 percent.

The Colombo Stock Exchange opened up; The All Share was up 0.60 percent at 10,755, and the S&P SL20 was up 1.24 percent at 3,077. (Colombo/Mar4/2024)

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Sri Lanka central bank swaps top $3.2bn by December

ECONOMYNEXT – Sri Lanka’s central bank borrowed US dollars from various counterparties through swap transactions, which had topped 3.2 billion US dollars by December 2024, official data show.

The net short position, including swaps disclosed by the central bank, grew by over almost 1.28 billion US dollars from December 2022 to 3,280 million dollars.

The gross position grew from 2,263 million dollars to 3,280 million US dollars over the year.

The central bank supported some state banks with dollars to cover their dollar exposures, which had since been paid back.

By December reported gross reserves of the central bank was 4,491 million US dollars, against swaps of 3,280 billion US dollars.

Swaps of around 1500 related to the People Bank of China.

Swaps allow a central bank to increase gross reserves, without raising domestic interest rates.

Swaps with domestic counterparties lead to liquidity being injected into money markets, which can be mopped if domestic credit growth is moderate.

At the moment many private banks have large dollar positions invested outside the country, which cannot be used for transactions domestically because of a money monopoly given to macro-economists. (Sri Lanka repays debt or collects reserves of U$5bn via banking system since rate correction)

However unwinding swaps after private credit has picked, or engaging in swaps after private credit has picked up, may lead to money being injected to maintain the policy rate, leading to excess credit by banks and balance of payments deficits and or currency collapses, analysts say.

Central bank swaps in the third quarter of 2018 led to a collapse of the currency under the ‘exchange rate as the first line of defence’ policy peddled to Sri Lanka, critics have said earlier.

Domestic currency proceeds of swaps were the primary ammunition to bust East Asian currencies in 1997-98.

Any depreciation after the swap proceeds have been used for imports (effectively mis-targeting rates) a central bank will run a forex loss.

The PBOC however had put a rule, preventing the use of the swap after gross reserves fell below 3 – months of imports, preventing Sri Lanka from getting into further trouble through the use of official reserves for private imports.

Sri Lanka’s central bank also used borrowings from the Reserve Bank of India, via the Asian Clearing Union to run BOP deficits.

Losses from exposed dollar positions of central banks which have gained ‘independence’ from fiscal rules and parliaments and engaged in macro-economic policy, including the Fed, have led to taxpayers bearing the losses in the end.

Swaps were invented by the Fed in the early 1960s, as it deployed macro-economic policy (printed money for growth) threatening its gold reserves and the Bretton Woods system.

Sri Lanka has other borrowings also, including from the IMF, which has made net foreign assets of the central bank negative. (Colombo/Mar05/2024)

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Sri Lanka loses MICE tourists to Thailand on minimum room rates

ECONOMYNEXT – Sri Lanka has lost Meetings, Incentive Travel and Exhibition travelers to competitors in East Asia and India due to minimum room rates as higher standard rooms were available in other countries at lower prices, industry officials said.

President of the Sri Lanka Association of Inbound Tourist (SLAITO) Nishad Wijetunga said they the industry managed to retain a majority of booking made before the minimum room rates were imposed by the state last year.

“However, there were MICE groups that were supposed to come and cancelled Sri Lanka and went to places like Thailand and other parts of India and we lost,” Wijetunga told EconomyNext.

“We know that large groups of MICE (tourists) are affected.”

India is a key source of MICE tourists to Sri Lanka.

Sri Lanka’s businesses have got used to protectionism and try to push up prices with import taxes to extract more money from customers using the coercive power of the state, with tiles and steel being among the most prominent examples.

RELATED: Stand-alone hotels unviable in Sri Lanka due to high construction, capital costs

High priced tiles and steel in turn makes hotels expensive to build and make the leisure industry less competitive, analysts say.

However, in tourism, unlike in building materials customers are not trapped within the country and are free to move to other markets.

Managing Director of CEC Events and Travels, Imran Hassan, said the industry lost groups to East Asia due to minimum room rate.

In one instance, an operator was in discussions to get a group of 900 passengers.

“And that moved out to Thailand,” Hassan said. “Like that, there are many instances that the minimum room rate was not conducive.”

Thailand in 2023 attracted 28.04 million tourists.

A group that used to come to Sri Lanka annually used to take 40 to 50 five-star hotel rooms. This time Sri Lanka competed by offering lower standard.

“This year, they’re only giving 10 rooms to the five-star hotels,” Hassan explained. “They are staying in smaller hotels because they can’t afford it because it has become so expensive.”

“But overall, we are working with the authorities to correct it.

“We don’t mind demand and supply situation taking the rates up as in the Maldives. But what we are saying is keep an open market.”

RELATED : Sri Lanka should say good bye to minimum room rates: President

President Ranil Wickremesinghe has said Sri Lanka cannot progress with protectionism and the country has to learn to face competition. (Colombo/Mar04/2024)

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