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Monday June 24th, 2024

War in Ukraine and its implications in South Asia

RESISTANCE: Putin’s Pan-Russia project meets resistance from Ukraine back by the West. Decades ago Soviet Union received Western military aid to resists Hitlers Pan-German Generalplan OST.

ECONOMYNEXT – In December of 1971 as the war in then East Pakistan was reaching a turning point the United States, at the time allied with Pakistan sent in the Seventh Fleet with an Aircraft carrier to the Bay of Bengal. The objective was to intimidate the Indian-backed Mukti Bahini rebels fighting for the independence of East Pakistan to create the new country of Bangladesh.

However, the then Soviet Union sent in a flotilla inclusive of a cruiser and several submarines. This caused the US Navy to withdraw allowing the Indian forces to liberate East Pakistan.

That is part of South Asia’s complex history why the countries of the region have refrained from the outright condemnation of Russia’s invasion of Ukraine, although they agree Russia’s actions goes against the accepted world order a webinar hosted by the Friedrich Naumann Foundation for Freedom (FNF) was toldon March 31.

The webinar entitled “The War in Ukraine and its implications in South Asia” drew speakers from India, Bangladesh and Sri Lanka as well as representatives from the German Bundestag (Federal Parliament.)

At the webinar Member of the Bundestag Dr Markus Faber called on the South Asian countries to support the stance taken by Germany and NATO against the Russian aggression. Faber, who is a member of the Defense Committee of the Bundestag asked the countries of South Asia to support the sanctions imposed on Russia and the security architecture that exists in the Indo-Pacific region.

“Democracies must support each other,” he said adding that democratic countries make more reliable allies as they are dependent on the support of the people.

Faber said that his country as well as the NATO alliance were phasing out dependence on Russian oil and gas and beefing up its defense spending.

For India, the biggest and most influential country in the region, the main concern was that the Western powers, the United States and the European Union taking a hostile position against Russia would change the world order.

“We are concerned that this war would weaken Russia, make it a Pygmy and drive it into the arms of the Chinese Dragon,” India’s former Ambassador to the Netherlands Bhaswati Mukherjee told the webinar.

India, the veteran diplomat said, considers China its biggest concern and this conflict may make the country’s contentious neighbor stronger. She pointed out that India is “anchored to the West” and isstrategically allied with the United States.

She says India “views with alarm at the possibility of Russia becoming weaker and weaker” due to the conflict and sanctionsand drawing closer to China.

“This will change the world order and it will leave India having to confront China alone.” She said after the Russian invasion of Ukraine India is concerned that China would attack Taiwan and also make incursions into the disputed Himalayan regions on the Indo-Chinese border.

She also pointed out that India remains dependent on Russia for armaments and spare parts for military hardware. Much of India’s fighter aircraft are Russian. It also needs Russian petroleum to come out of the Covid pandemic caused recession.

She also quoted from the writings of former US Secretary of State Henry Kissinger who had written in 2014 that “far too often the Ukrainian issue is posed as a showdown: whether Ukraine joins the East or the West. But if Ukraine is to survive and thrive, it must not be either side’s outpost against the other — it should function as a bridge between them.” She said she agrees with Kissinger although she has no admiration for him.

Moderator Saikat Dutta, Founding Partner of the think tank Deep Strat India,acknowledged the request made by Dr Faber for the South Asian democracies to support the West in isolating Russia, but he said that may be more complicated because of historical events.

Those events are specifically related to the 1971 conflict between India and Pakistan that eventually saw the birth of Bangladesh. Mukherjee said that in the case of India, it had found the former Soviet Union a reliably ally during that conflict with the then US backed Pakistan.

She recalled that when the Bangladeshi armed liberation movement, the Mukti Bahini were fighting the Pakistan Army with Indian military support to create Bangladesh in December 1971 the US sent the Seventh Fleet to the Bay of Bengal. It was a threatening move. However, a Soviet Naval Task Force comprising Cruisers and two submarines reached there first and after a tense standoff in December of that year the Americans withdrew.

At that time, Mukherjee said, Moscow gave the Indians a deadline to complete the mission. The primary issue was the fight for airspace and Indian Pilots flying Soviet-made MIG 21s fighter-bombers cratered the airfields in what was East Pakistan and declared air superiority in four days.

For the Bangladeshis also, the Russian connection is still strong ever since. Prof Lailufar Yasmin of Bangladesh’s Dhaka University said the incident is etched into the Bangladeshi psyche. In more recent times Bangladesh has also enteredinto technology partnerships with Russia, including the building of a Nuclear-powered electricity generating plant.

Yasmin agreed that that the world is not in a post-Second World War era, andcountries like Bangladesh have moved on and charted their own course. However, she pointed out that neutrality does not mean the country has no policy. She pointed out that Bangladesh does strongly believe that the sovereignty of a country is “sacrosanct”, and that aggression in the manner of Russia’s cannot be condoned.

Bangladesh has also improved economically and with a relatively large population of 170 million people is attracting investment from around the world, particularly Japan. The economic ties with China have also grown, she said.

In the case of Sri Lanka, which also along with India and Bangladesh did not vote against Russia at the UN Resolution condemning the invasion of Ukraine, a neutral stance has been a continuation of its foreign policy.

At the same time the US and the EU are the biggest markets for Sri Lanka’s exports, particularly apparel, but at the same time Russia continues to support Sri Lanka at international fora where resolutions have been proposed to punish Colombo’s record on Human Rights and alleged War Crimes.

Imran Furkan who was the Sri Lankan representative at the Webinar said that however Sri Lanka always stresses the importance of the Rule of Law as it is a very small country and keeping its independence and territorial integrity is of paramount importance.

Furkan, a management accountant who advises businesses in the Asia Pacific region, also said that Sri Lanka’s ties to the Soviet Union and thereafter Russia go back many decades with many Sri Lankans studying in Russian Universities on scholarships, particularly administrators and Civil Servants.

Mukherjee went on to say that while India is “firmly anchored” to the US and the West, it also has a relationship with Russia which cannot be broken. She said the West understands India’s position. She also said that in history the Russians have shown a lot of resilience in war, taking massive casualties in the battle of Leningrad for instance in WW2.

She also agreed with some Western commentators who have been critical of the “demonization” of Russian President Vladimir Putin saying that it was counterproductive.

Datta pointed out that in the case of the West it treats India differently when it comes to engagement with Pakistan and Afghanistan, while maintaining the closeness with India. “This is a duality that we need to understand and negotiate,” he added.

The webinar also discussed why the former Soviet Union and now Russia has engaged with South Asia. In response Prof Yasmin said “international relations are not conducted due to altruism. In international relations there is anarchy because each country is acting on its own interests.”

In the case of the Ukrainian refugee crisis, she said that Bangladesh has voted to support their plight, as it is battling the Rohingya refugee issue.

The Rohingya are a Muslim minority in Buddhist majority Myanmar who have fled their country in their millions to Bangladesh due to persecution by Myanmar’s military. “The reaction from South Asia to the current conflict is therefore very complex as it is very inter-connected,” she added.

China’s relations with the rest of South Asia have shown that it has been mostly a development partner. Prof Yasmin said that China had lent her country cash for infrastructural development, but Bangladesh has also receivedassistance from other countries such as Japan, the EU and the US.

In the case of Sri Lanka, Furkan said that Sri Lanka has a good record of balancing the powers around it but during the past ten years or so came closer to China. “China came with development aid after the (Civil) war ended in 2009,” he pointed out. Many new post-war infrastructure projects were completed with Chinese loans.

Furkan also said that the older generation of Sri Lankan leaders have a good impression of Russia. However, as this current war has broken out in the age of Social Media, the younger Sri Lankans would possibly not have such a favorable view of Russia as it is portrayed as aggression against a sovereign state, he said.

Yasmin and Furkan both concluded that in the case of Bangladesh and Sri Lanka as their exports go to the EU, the US and Japan it s vital that they keep good relations with the West, while retaining “strategic continuity and autonomy” in its dealings with Russia.

Moscow has been a long-standing partner to South Asian countries before and after the fall of the iron curtain on key defense, economic and energy-related issues; partnering with India, Bangladesh, Nepal, and Sri Lanka amongst others.
The ongoing invasion of Ukraine by Russia has wide-reaching geo-economic, geopolitical, and strategic implications for South Asia. The complicated balance of priorities for countries in South Asia has led to vastly muted reactions on the international diplomatic stage.
The session would cover these implications for countries in South Asia and the broader implications of the war in the wider Indo-Pacific region.

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Sri Lanka central bank appoints two Deputy Governors

ECONOMYNEXT – Sri Lanka’s central bank said Assistant Governors A A M Thassim and J P R Karunaratne were promoted to the post of Deputy Governor.

The full statement is reproduced below:


In terms of the provisions in the Central Bank of Sri Lanka Act, No. 16 of 2023, Hon. Minister of Finance, as recommended by the Governing Board, has appointed Mr. A A M Thassim, Assistant Governor and Secretary to the Governing Board, and Mr. J P R Karunaratne, Assistant Governor, as Deputy Governors of the Central Bank of Sri Lanka with effect from 20.06.2024 and 24.06.2024, respectively.

Mr. A A M Thassim

Mr. A.A.M. Thassim has over 31 years of service at Central Bank of Sri Lanka (CBSL) in different capacities in the areas of Supervision and Regulation of Banking Institutions, International Operations, Communication, Payments and Settlements, Employees Provident Fund, Finance, Risk Management, Deposit Insurance, Security Services and Information Technology.

He has served as the Director of Bank Supervision (DBS), Director of International Operation (DIO) and Director of Communications (DCM) and has contributed towards strengthening the legal framework, governance, implementation the Basel 3 international guidelines for capital and liquidity and adoption of International Financial Reporting Standards (IFRS) 9 to the banking sector, thereby strengthening the resilience of the Financial Sector.

Further, as the DIO, Mr. Thassim was responsible for the investments and management of foreign reserves of the country and exchange rate management. Mr. Thassim has also gained experience and knowledge in the field of payment systems and was involved in the implementation of the Cheque Imaging and Truncation System. In addition, he has also served on several high-level internal committees including in the areas of monetary policy, financial system stability and international reserves.

Prior to the appointment as the Deputy Governor, Mr. Thassim held the position of Assistant Governor and was in charge of several key departments including the Bank Supervision Department. He also served as the Secretary to the Governing Board, Monetary Policy Board, Audit Committee, Board Risk Oversight Committee, Ethics Committee and Financial Sector Crisis Management Committee.

At present, Mr. Thassim is a board member of the Sri Lanka Export Credit Insurance Corporation and the Vice Chairman of the Institute of Bankers of Sri Lanka (IBSL). Further, he has also served as a board member of the Credit Information Bureau of Sri Lanka and LankaClear (Pvt) Ltd.,

Mr. Thassim is an Associate member of the Chartered Institute of Management Accountants (ACMA) United Kingdom and possesses a Masters in Business Administration (MBA) from the Postgraduate Institute of Management (PIM), University of Sri Jayewardenepura (USJ). He has also completed a programme on Gold Reserves Management from Hass School of Business, University of California, Berkeley, USA.

He is also an Alumni of Harvard University, USA having successfully completed the executive programme on Leaders in Development conducted by the John F. Kennedy School of Government.

Mr. J P R Karunaratne

Mr. J P R Karunaratne has over 33 years of service at the Central Bank of Sri Lanka in different capacities in the areas of supervision and regulation of Banks and Non-Bank financial institutions, Currency management, public debt, Secretariat, Finance, policy review and monitoring. He has served as the Director of Supervision of Non-Bank Financial Institutions (DSNBFI) and the Superintendent of Currency (SC) and has contributed towards strengthening the legal and regulatory framework in the Non-Bank Financial Institutions sector and has played a prominent role in the consolidation of the Non-Bank Financial Institutions sector. Prior to the appointment as a Deputy Governor, Mr. J P R Karunaratne held the position of Assistant Governor and was in-charge of the Department of Supervision of Non-Bank Financial Institutions, Finance Department and the Facilities Management Department.

As an Assistant Governor Mr. Karunaratne has previously overseen several other departments namely, Macroprudential Surveillance, Resolution and Enforcement, Foreign Exchange, Currency, Regional Development, Legal and Compliance, Risk Management, Center for Banking Studies, Security Services and Staff Services Management.

He has also served as the Secretary to the Monetary Board, Secretary to the Board Risk Oversight Committee, Monetary Board Advisory Audit Committee and the Ethics Committee. Further, He was on release to the Ministry of Defence, where he served as a Financial Advisor. He was also appointed as the Chief Operating Officer for the Secretariat of Committee of Chartered Accountants appointed by the Supreme Court in 2009.

He has served as the Chairman of the Sri Lanka Accounting and Auditing Standards Monitoring Board and has been a Council Member of the Certified Management Accountants (CMA) of Sri Lanka. Mr. Karunaratne was awarded the CMA Sri Lanka Business Excellence Award at the CMA Sri Lanka National Management Accounting Conference 2023 in recognition of his service to the profession. He has also received “Long Service Award” of the IBSL in 2019 in recognition of his long career and contribution as a resource person at IBSL.

He was the Project Team Leader of the South East Asian Central Banks (SEACEN) Malaysia, research project on “Implementation of Basel III Challenges and Opportunities in SEACEN Countries” and SEACEN published the research in 2013. He serves as a member of several internal and external committees at present.

Mr. Karunaratne holds a Master of Commerce Degree in Finance from the University of New South Wales, Australia and a Postgraduate Diploma in Applied Statistics and a Bachelor of Science (Physical Science) Degree with a First class from the University of Colombo. He is a Fellow Member of the Chartered Institute of Management Accountants (CIMA), UK and a Chartered Global Management Accountant (CGMA). Further, he is an Associate Member of the CMA Sri Lanka.

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Sri Lanka opposition questions claims that IMF housing tax is only for kulaks

ECONOMYNEXT – Sri Lanka’s opposition has questioned claims made by government spokesmen that a tax on housing proposed in an International Monetary Fund deal is only limited to rich people but if as promised by President one house is exempt, it is welcome, legislator Harsha de Silva said.

Sri Lanka President Ranil Wickremesinghe made a promise in parliament that the first house of a citizen will be excluded from the property tax.

Related Sri Lanka to exempt one house from imputed rent wealth tax: President

But opposition legislator Harsha de Silva pointed out that the IMF program documents clearly says taxes will be levied on owner occupied houses on ‘imputed taxes’, not second houses.

Under current inland revenue laws, actual rent income from a second house is already captured as part of taxable income.

The IMF document mentions a threshold value from which taxes will be exempt but not that a whole owner-occupied primary residence will be exempt.

“The tax is imposed on the income of individuals (rather than real property itself) and thus raises central government revenue in accordance with the constitution,” IMF staff said in their report.

“A similar tax was previously included in the Inland Revenue Act. No. 10 of 2006.

“Under this regime, primary residences were exempt and the assessed values for rating purposes were used to determine the base.

“Given the broad exemption and the use of outdated and downward biased annual values, the tax generated hardly any revenue.”

Meanwhile Sri Lanka has promised to impose the housing tax from April 01, 2025.

“…[W]e will introduce an imputed rental income tax on owner-occupied and vacant residential properties before the beginning of the tax year on April 1st, 2025,” the memorandum of economic policies agreed with the IMF said.

“An exemption threshold and a graduated tax rate schedule would make this tax highly progressive.

“The full revenue yield from this tax is estimated at 0.4 percent and would materialize in 2026 (with a partial yield of 0.15 percent in 2025).

“This yield would still fall short by 1 percent of GDP relative to the expected yield of 1.2 percent of GDP from the property tax envisaged for 2025 onwards.”

Presidential Undertaking

“Whatever the President said the IMF agreement says owner occupied house,” De Silva told in parliament.

“It is not the second house that is mentioned in the agreement.

“But there is one thing. I am happy as Samagi Jana Balawegaya, that we have been able to save the middle class in society from a massive tax that was to be imposed.”

In Sri Lanka there is a belief that the most productive citizens are fair game for excessive or expropriationary taxation, just like kulaks were targeted in the Soviet Union for actual expropriation, critics say.

Wealth taxes have had disastrous effects on some US cities like Baltimore, leading to falling populations and dilapidated houses.

Sri Lanka is currently facing a brain drain due to high income tax after on top of depreciation from severe monetary debasement from a flexible exchange rate, which is neither a hard peg nor a clean float.

Sri Lanka has imposed a wide range of taxes on the people to maintain a bloated state, after inflationists engaged in extreme macro-economic policy (tax and rate cuts) glorified in Saltwater-Cambridge doctrine to boost growth, throwing classical economic principles and monetary stability to the winds and driving the country into external default.

The IMF itself gave technical assistance the central bank to calculate potential output inviting the agency to cut rates to close the perceived econometric ‘output gap’.

In the run up to the default, rate cuts triggered multiple external crises, leading to output shocks as stabilization programs were implemented.

Macro-economic Policy

Macro-economic policy as known now was devised by Cambridge academic J M Keynes in the wake of the Great Depression triggered by the Federal Reserve after it invented open market operations and policy rates in the 1920s and also popularized by Harvard academic Alvin Hansen among others.

Macro-economic policy started to de-stabilize countries in peacetime in the interwar years and after World War II it led to the collapse of the Bretton Woods system.

The Great Depression was also a peacetime collapse of what was later known as the roaring 20s’ monetary bubble.

“They have blithely ignored the warnings of economists,” classical economist Ludwig von Mises wrote of European nations which got into trouble from rate cuts and Keynesian stimulus, which brought currency depreciation and protectionism in its wake from the 1930s.

“They have erected trade barriers, they have fostered credit expansion and an easy money policy, they have taken recourse to price control, to minimum wage rates, and to subsidies.

“They have transformed taxation into confiscation and expropriation; they have proclaimed heedless spending as the best method to increase wealth and welfare.

“But when the inevitable consequences of such policies, long before predicted by the economists, became more and more obvious, public opinion did not place the blame on these cherished policies…”


In Sri Lanka however there is some understanding of the role played by macro-economists in the most recent crisis.

There are rumblings of unhappiness about ‘central bank independence’ given to an agency to create 5 to 7 percent inflation and currency debasement under a flexible exchange rate and its constitutional status relating to parliamentary control of public finances.

Sri Lanka’s central bank’s current flexible inflation targeting (inflation targeting without a floating rate) regime as well as its 1980s money supply targeting without floating rate has busted the national currency for decades and made it impossible to run budgets, made it difficult for people build houses which are now to be taxed, and also for millions to live and work in the country of their birth.

Fiscal metrics deteriorate each time rate cuts drive the country into currency crises and new taxes are brought in stabilization programs, ousting reformist governments and leading to policy reversals.

Sri Lanka’s citizens have suffered for decades from the privilege given to a few macroeconomists to print money to cut rates with inflationary open market operations and trigger forex shortages.

Related How Sri Lanka’s elections are decided by macro-economists and the IMF: Bellwether

Critics have pointed out that since 1954 in particular, central bank rates cuts which drive the country into external crises and the stabilization programs that follow, have been the main determinant of elections in the country and election of fringe political parties. (Colombo/June13/2024)

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India supports Sri Lanka Coast Guard to boost maritime security

ECONOMYNEXT – India has given 1.2 million US dollars’ worth spare parts to Sri Lanka’s Coast Guard to be used in a vessel also gifted to the Indian Ocean Island on an earlier occasion, the Indian High Commission in Colombo said.

“Handing over of the large consignment of spares symbolizes India’s commitment to support capability building towards addressing the shared challenges of Maritime Security in the region,” the Indian High Commission said

The spare parts were brought to Sri Lanka on the Indian Coast Guard Ship Sachet, an offshore patrol vessel that was on a two-day visit to the island.

The spares were formally handed over to the Sri Lanka Coast Guard Ship Suraksha which was gifted to Sri Lanka in October 2017 by India.

India has gifted spare parts for the ship in June 2021 and April 2022 and also provided assistance in refilling of Halon cylinders in January 2024. (Colombo/June23/2024)

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