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Thursday December 1st, 2022

Vietnam signs free trade agreement with UK as Sri Lanka controls imports

ECONOMYNEXT – Vietnam said it has signed a free trade agreement with UK moving beyond an existing deal with the European Union, which will come in to effect on December 31 as Sri Lanka is mired import controls after printing money.

The UK Vietnam Free Trade Agreement (UKVFTA) deal was signed by Vietnamese Ambassador to the United Kingdom (UK) Tran Ngoc An and British Ambassador to Viet Nam Gareth Ward.

The two were authorized to sign the deal after a Minister of Industry and Trade Tran Tuan Anh and UK Secretary of State for International Trade Elizabeth Truss signed the agreed minutes after ending negotiations over the UKVFTA earlier on December 11.

UK is exiting the European Union and has to sign its own agreements to preserve access to exports.

“UKVFTA was negotiated based on principles that were inherited from commitments in the EU-Viet Nam Free Trade Agreement (EVFTA) and were amended in accordance with the bilateral trade framework between Viet Nam and the UK,” a Vietnam government news release said

“Currently, the two sides are rushing to complete domestic procedures in accordance with the laws of each party so as to ensure the agreement can be implemented from 23:00 on December 31.”

Vietnam said the FTA with UK “will create a comprehensive, long-term and stable economic-trade cooperation framework between the two countries, thus contributing to deepening their multifaceted cooperation,” soon after a strategic partnership was extended.

Though tariffs are already minimal under the EU-Vietnam existing deal, the new agreement will have a further tariff elimination schedule.

Under tariff elimination plan, British residents will be freed from about 114 million Sterling in trade taxes on Vietnamese goods and Vietnam citizens will be freed from tariff burden of 36 million Sterling from UK made goods.

Vietnam’s free trade agreement with UK comes as Sri Lanka is mired in import controls after printing money. Sri Lanka is practicing modern monetary theory, and has printed over half a trillion rupees (the equivalent of about 3.2 billion US dollars).

Vietnam recently joined the Regional Comprehensive Economic Partnership where which involves free trade between the Association of South East Asian Nations, China, the world most populous nation, Japan, Korea, Australia and New Zealand,

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In Sri Lanka there is a strong Mercantilist/Keynesian belief that imports contribute to monetary instability involving currency weakness and balance of payments troubles rather than money and credit.

Sri Lanka’s last administration also controlled imports, after the central bank printed money leading to the rupee collapsing from 131 to 182 to the US dollar in two currency crises.

Its free trade agenda was torpedoed after full independence was given to the central bank to conduct unusually discretionary policy under a ‘flexible’ inflation targeting’, flexible exchange rate targeting, real effective exchange rate targeting, yield curve targeting with ‘operation twists’ involving long bond purchases jettisoning a ‘bills only’ rule, and lending and deposit rate targeting with blunt administative price controls, critics say.

The currency was depreciated under false claim spread by US Mercantilists that East Asian currencies were u’ndervalued’.

The US in December falsely labelled Vietnam a ‘currency manipulator’ after it kept the Dong fixed around 23,000 to the US dollar from over 10 years, while Sri Lanka’s rupee fell from 113 to 182 over a similar period.

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After Vietnam opened its economy in 1984 money printing led a series of currency collapses, with the economy imploding from 42 billion US dollars to 6.3 billion dollars until the State Bank of Vietnam was reformed for domestic stability.

The SBV was reformed starting 1989 ending central bank re-financing of commercial bank credit, which was a key trigger of monetary instability.

Several former SBV credit units which were financing agriculture, industry and trade, contributing to monetary instability are now partly foreign owned commercial banks listed in the Ho Chi Minh and Hanoi Stock Exchanges. (Colombo/Dec30/2020)

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Sri Lanka electricity losses from overpriced fuel, no tariff hike considered: regulator

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Board’s high operating costs are partly due to excessive prices paid for fuel and no tariff hike is being considered, Chairman of the Public Utilities Commission of Sri Lanka, Janaka Ratnayake said.

The CEB itself does not buy fuel but depends on state-run Ceylon Petroleum Corporation and Lanka Coal, another state firm to buy fuel. Both firms are periodically caught in procurement scandals.

“They are paying about 385 plus rupees per litre for furnace oil,” Ratnayaka told EconomyNext.

“That is too much. From the global market we can buy it to much lower price. It can be imported below 200 rupees,”

“I ask the government to take the necessary steps to create a system to import furnace oil, like they did for fuel, to be imported at the lower price levels. If that happens, we can go without going for a price hike.”

Sri Lanka’s CEB generally gets furnace oil and residual oil from the domestic refinery and usually do not import furnace oil.

The refinery however is not regularly operating due to inability to get crude amidst the worst currency crisis in the history of the island’s intermediate regime central bank.

Ratnayake had earlier brought to light import costs of the CPC.

Pushing for operations efficiency of the CEB is a role of the regulator. Regulating costs based on global benchmark prices to push for procurement efficiencies is a standard practice. However the PUCSL is not the official regulator of the petroleum sector.

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Sri Lanka power tariff revisions sought in Jan and July: Minister

Power and Energy Minister Kanchana Wijesekera told parliament that cabinet approval was sought to twice yearly tariff hikes in January and July of each year.

No Electricity tariff hikes are being considered yet, Ratnayake said.

Wijesekera blamed the regulator as well as successive administrations for not regularly revising power prices and pushing the sector into crisis.

In Sri Lanka activists had also blocked cheap coal power. (Colombo/Dec01/2022)

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Sri Lanka banks may need more regulatory, accounting forbearance: Coomaraswamy

ECONOMYNEXT – Sri Lanka’s banks may need more regulatory forbearance ex-Central Bank Governor Indrajit Coomaraswamy said as the country imposes stabilization measures after the worst currency crisis since independence.

“We need to look at regulatory forbearance,” Coomaraswamy told a forum organized by CT CLSA Securities, a Colombo based brokerage.

“For CA Sri Lanka to do some more accounting forbearance. They have given some already.”

Sri Lanka’s central bank has given some regulatory loosening in the mark to market losses and also in liquidity ratios.

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Sri Lanka relaxes bank capital rules to cushion bond losses as rates spike

Sri Lanka’s banks are seeing higher levels of bad loans after the latest currency crisis as well as mark-to-market losses, and the impact of dollar sovereign bonds in default.

Sri Lanka’s stage 3 loans were 7.9 percent of total advances (net 8.7) by the end of the second quarter of 2022.

It compares with a 6.6 percent NPL ratio in the first quarter of 2020 as the Coronavirus pandemic started, which also triggered bad loans just as the roots of the current currency crises started.

In a currency crisis, a soft-pegged or reserve collecting (flexible exchange rate) central bank will inject liquidity to either monetize mostly maturing Treasuries from past deficits (in Latin America mainly failure to roll-over sterilization securities) to suppress rates.

When forex shortages begin to emerge from the excess credit, the flexible exchange rate central bank will intervene and sterilize the dollar sales to keep suppressing rates and prevent reserve money from contracting. Both moves allow banks to give credit without deposits, worsening their loan to deposit ratios and blowing a hole in the balance of payments.

When interest rates correct to stabilize the currency crisis and injections end, bad loans pile up. During the Coronavirus crises however economic activity was muted, compared to previous credit cycles and large volume of injected liquidity piled up in the banking system.

Before the twin crises, the central bank had earlier made banks boost capital.

Coomaraswamy who was Central Bank Governor until the beginning of 2020 said the then head of bank supervision A Thassim had insisted that banks comply with the Basle III capital standards as early as possible, when he himself was prepared to give some more time.

As a result, Sri Lanka banks were well capitalized at the start of the crisis, he said.

In the crisis with government finances already weakened, the banks were made to give relief and took the pressure, Coomaraswamy said.

After Sri Lanka default in April and interest rates were normalized to stop the currency crisis, banks were now facing pressure.

CA Sri Lanka, the island’s accounting body had already given some leeway to re-classify trading portfolios of securities to reduce the impact of mark-to-market losses.

In previous currency crisis, the IMF makes the briefly float the currency to establish confidence in the exchange rate after raising rates to curb domestic credit. This time rates were raised after a float failed by a surrender rule.

A successful float leads to early exporter conversions and a resumption of delayed import settlements which leads to a gradual fall of interest rates. Fixes to the budget and utilities also help.

The falling rates help boost capital gains of banks, offsetting some of the loan loss provisions.

This time however though external stability has large been reached, there has been no successful float to convince the market but taxes have been raised and utility prices adjusted to reduce domestic credit.

Lack of clarity over domestic debt re-structuring has also kept rates elevated. But long term rates have now started to ease.

Meanwhile President Ranil Wickremesinghe had already proposed an asset management company to take-over bad loans. (Colombo/Dec01/2022)

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Sri Lanka power cuts expanded on low water levels

ECONOMYNEXT – Due to water level reduction in reservoirs and high usage of fuel in generating electricity was the main reason the Public Utilities Commission has approved power cuts of 2 hours and 20 minutes, Chairman Janaka Rathnayaka said.

Sri Lanka power cuts were two hours earlier. The Ceylon Electricity Board had requested a 3 hour cut which was not granted.

“The reason it was brought to 2 hours and 20 minutes, was the water levels are lowering in reservoirs and we need to maintain a certain water level to generate hydro power,” Rathnayaka told EconomyNext.

“And also we are using more fuel which is costlier, and therefore we had to increase the power cuts period”.

CEB unions had warned of extended power cuts from July unless coal for 2022 was brought before the April monsoon season starts, when ships cannot be unloaded.

Sri Lanka has already secured seven coal shipments which will complete in the next two days, and should work to secure 38 more shipments in order to secure the necessary coals for 2023. (Colombo/ Dec 01/2022)

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