Lanka Free Library

ECONOMYNEXT – A Saudi Arabian delegation will visit Sri Lanka to look into investment opportunities in renewable energy and other projects, outgoing Saudi envoy has told President Gotabaya Rajapaksa on Tuesday (29).

“A high-level Saudi delegation will soon visit Sri Lanka to explore the investment opportunities in the renewable energy sector and other sectors,” the President’s Media Division (PMD) said quoting the outgoing Ambassador Abdulnasser Hussain Al-Harthi.

“The President pointed out the vast opportunities available in Sri Lanka for direct investment in the pharmaceutical, technology and
apparel industries.”

Rajapaksa’s attempts to shift into renewable energy is yet to be prove success. Already U.S.-based New Fortress Energy is given green light for a Liquefied Natural Gas (LNG) project through an unsolicited project and India’s privately owned Adani group is given approval to build a solar plant in the northwestern coast of Mannar.

Another 100 MW solar power plant has been signed with India to build in Sri Lanka’s eastern port district of Trincomalee after a planned 500 million US dollar 500 MW coal-fired plant was cancelled due to environmental concerns.

Sri Lanka is facing energy crisis due to severe shortage of dollars deprived the island nation of importing fuel for power generation. The country is facing around 7.5 hour power cut on a daily basis.

President Rajapaksa also invited the Saudi government to explore investment opportunities associated with the Chinese-owned Colombo Port City and the proposed ship repairing and manufacturing facility to be built at the Chinese-managed Hambantota Port.

Rajapaksa thanked the Saudi Arabia for its development assistance provided through the Saudi Development Fund.

Outgoing Saudi envoy Al-Harthi stated that Saudi Arabia intends
to continually provide the assistance of the Saudi Development Fund to Sri Lanka. (Colombo/March29/2022)

ECONOMYNEXT – US Ambassador for Sri Lanka Julie Chung has hinted a credit line from  the United States Agency for International Development (USAID) for renewable energy projects in the island nation, President Gotabaya Rajapaksa’s office said on Monday (28).

The Ambassador said this when she called on President Rajapaksa at the Presidential Secretariat on Monday, the Presidential Media Division (PMD) said without giving any further details on the credit line.

The US Ambassador was not immediately available for comments on her pledge. However, Chung in her official twitter feed said she met President Rajapaksa to to discuss Sri Lanka’s economic challemges and human rights.

“The recent US-Sri Lanka Partnership Dialogue underlined our commitment to a democratic, prosperous, and sovereign Sri Lanka,” Chung said in her twitter message.

“I met with President Gotabaya Rajapaksa to discuss Sri Lanka’s economic challenges and how we can work together to promote inclusive governance and protect human rights.”

Sri Lanka is facing an economic crisis along with severe shortage of dollars which has resulted in extended power cuts due to lack of fuel imports and drought.

India has provided 500 million US dollar credit line to purchase fuel. However, government officials say the amount is only adequate for nearly 6 weeks.

A Liquefied Natural Gas (LNG) deal with New Fortress Energy, a US private company, has been delayed after it was challenged by many activists and legislators including former Energy Minister Udaya Gammanpila and Industrial Minister Wimal Weearawansa.

The Supreme Court dismissed the case soon after both ministers were sacked from their government by President Rajapaksa.

The deal was signed through a back-door process and could be worth up to 6 billion US dollars but is coming in as the sale of share of a power plant, engineers of the state power utility have warned.

They have also said energy security would also be undermined as the national grid would be dependent on a single company for the supply of LNG to the entire country and will also block state-run Ceylon Electricity Board from using cheapest energy source based on market prices.

ECONOMYNEXT – Sri Lanka’s central bank has banned money changers from selling US dollars above the commercial bank rates as the country grapples from a forex crisis triggered by money printed to keep rates down and a surrender requirement.

Sri Lanka has an exchange rate regime with anchor conflicts (flexible exchange rate) which is neither a true float with a domestic inflation anchor nor a credible peg (external anchor).

An attempt to shift to a clean float has so far not succeeded. The central bank has been urged by classical economist to hike rates and drop a surrender requirement to make the float work so that shortages in imported energy, medicines and food.

Sri Lanka has had external crises ever since a credible peg was abolished in 1950.

Stable single anchor monetary regimes (hard peg or clean float) have been relentlessly opposed by those who want to depreciate the currency and transfer wealth from the working class to business owners (competitive exchange rates).

Sri Lanka’s banks are offering to sell dollars at 285 to the US dollar. In the kerb market, the rupee hit 360 to the US dollar this week.

When money is printed to keep rates down and exchange controls are imposed, the kerb market and Undiyal rates go up with money trying to rush out of the country and pay for imports.

The outward flow of money at high prices in turn are financed by higher rates paid to inward worker remittances.

There now calls to set up a currency board to end 72 years of monetary instability and social upheavals from the dual anchor conflicting ‘flexible exchange rate’.

Related

Sri Lanka currency board will preserve rupee, impose discipline: Wijewardena

The full statement is reproduced below:

Department of Foreign Exchange
28.03.2022

NOTICE TO THE PUBLIC – MONEY CHANGERS

The public is hereby notified that in terms of the provisions of the Foreign Exchange Act, No. 12 of 2017, Money Changers have been prohibited from offering higher exchange rates to customers beyond the exchange rates offered to such Money Changers by Licensed Banks.

The Money Changers have been informed that their licenses would be suspended/ revoked if they transact any foreign currency transactions at rates beyond the rates stipulated by Licensed Banks.
The public is requested to inform the Department of Foreign Exchange via the following telephone numbers or the email address of any instances that a Money Changer offers higher exchange rates for any transaction.

Telephone :
0112398523
0112398827
0112477375
0112398568

Email : [email protected]

ECONOMYNEXT – India’s Foreign Minister S Jaishankar who is on an official visit in Sri Lanka met the island nation’s Finance Minister Basil Rajapaksa Monday (28) morning and discussed India’s assistance to its southern neighbour in battling a worsening economic crisis.

Began the visit by meeting Finance Minister @RealBRajapaksa.

Discussed the economic situation and India’s supportive response. We will continue to be guided by Neighbourhood First pic.twitter.com/D6K7Wq1JZd

— Dr. S. Jaishankar (@DrSJaishankar) March 28, 2022

Jaishankar also visited a Lanka IOC (Indian Oil Corporation) filling station in Colombo some hours later, where he was briefed by Lanka IOC Managing Director Manoj Gupta on the fuel supply situation.

Visited Lanka IOC in downtown Colombo. MD Manoj Gupta briefed me on fuel supply situation.

Indian LoC of US$ 500 million is helping Sri Lankan people in their everyday life. pic.twitter.com/1EmTpXmzSp

— Dr. S. Jaishankar (@DrSJaishankar) March 28, 2022

India has given a 500 million US dollar credit line for fuel, a 400 million dollar central bank swap, a billion US dollar loan for food and medicines as the island kept interest rates low to inject money and dollar inflows were siphoned out of the banking system through a surrender requirement for new money.

India wrapped up long delayed undertakings by Sri Lanka on a fuel tank farm and a joint venture power plant in Trincomallee in Eastern Sri Lanka. India is also to invest in renewable energy and have maritime co-ordination.

The rupee has fallen steeply under a so-called flexible exchange rate amid an attempt to establish a clean float which has not happened, as the rupee was allowed to fall gradually under a ‘flexible exchange rate’.

The Indian foreign minister is in Colombo to participate in a meeting of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), an organisation set up in 1997 for regional co-operation with Sri Lanka, India, Thailand and was later joined by Myanmar, Nepal and Bhutan. (Colombo/Mar28/2022)

ECONOMYNEXT – Power cuts of 5 hours for some areas in Sri Lanka and over three hours for other areas were approved in two blocks for March 26 Saturday, Public Utilities Commission Chairman Janaka Ratnayake said as a forex crisis creates power shortages in the dry season.

Areas PQRSTUVW will have 2 hours and 15 minutes of power cuts from 8.30am to 5.30pm and 1 hour and 50 minutes from 5.30pm to 11.00pm.

Areas ABCDEFGHIJKL will have 3 hours and 20 minutes of power cuts from 8.00am to 6.00pm and 1 hour and 40 minutes from 600pm to 1100pm.

Download the power cut schedule for March 28 from 28-03-2022-Power-Interruption-Schedule

Over the weekend the PUCSL increased the power cuts after demand went up. The regulator has not yet given a price increase for power and people are shifting to electricity as gas prices went up and shortages emerged.

Sri Lanka is facing forex shortages due to money printed to keep interest rates low and the country has run out of reserves and the currency has been floated.

However, the float has not yet taken place and the rupee has fallen from 203 to 275 to the dollar and prices are getting validated at that level. (Colombo/March28/2022)

ECONOMYNEXT – A currency board for Sri Lanka will stabilize the rupee for the future and impose discipline on both politicians as well as monetary authority officials who want to print money, top economist W A Wijewardena has said.

Sri Lanka had a currency board from 1885 to 1950 until a Latin America style central bank was set up under American advice.

Second Coming

“Sri Lanka is no stranger to currency boards,” top economist W A Wijewardena told EconomyNext.

“With Ceylon’s decision to abolish the currency we lost was the discipline on politicians and the ability of the central bank to maintain the value of the currency.

“A currency board will also impose discipline on the leadership of the monetary authority.”

“As a result of the depth of the crisis we are facing there is no alternative but to establish a currency board.”

Under a currency board no money can be printed for open market operations and all interventions are unsterilized and short term rates fluctuate freely.

However there were several challenges to setting up a currency board at this time which has to be overcome, Wijewardene said.

One was that new capital was needed to match the domestic monetary base (MO) as the credibility of a currency board comes from being fully backed by foreign reserves.

If invested in save securities of only one currency – the anchor currency – a currency board will make profits every year (seigniorage) which be used to set up an externally invested bank bailout fund.

Challenges

Sri Lanka’s reserve money was 1,780 billion rupees by March 24 and was rapidly growing with the currency fall being fully accommodated at a 7.5 percent policy rate.

Commercial Banks were selling US dollars to customers at around 295 to the US dollar by Friday.

At current exchange rates about 4.5 billion US dollars were needed to fully back the currency issue, he said.

“Central Bank’s assets were also negative by 3.2 billion dollars according to the latest data available,” Wijewardena said.

“That is a challenge.”

However there are options including taking the liabilities into a special purpose vehicle.

A currency board will prevent governments from destroying the value of money which the ordinary people earn though hard work, Wijewardena said.

Wijewardena’s comments came as US economist Steve Hanke tweeted that Sri Lanka should establish a currency board to end 72 years of monetary instability from the flexible exchange rate of soft-peg.

Related

Sri Lanka should set up a currency board to stop rupee depreciation: US economist

It is not clear where the rupee will eventually stop with surrender requirements and low interest rates hampering a clean float.

Usually a currency board is set up in a crisis country under Hanke’s formula after a free float is established for several weeks and the effects of previous money printing is fully dissipated in the banking system.

Monetary Authority Under the rule of law

Most Sri Lankans alive first learned about currency boards from Wijewardena.

Wijewardene had for many years showed the virtues of a currency board, pointing out how Singapore’s economic architect Goh Keng Swee maintained the ‘Colonial’ currency board as its foundation to build a free trading low inflation economy without social unrest.

Goh said the country did not believe in Keynesianism which became fashionable after the US Fed triggered the Great Depression but believed in hard work.

Sri Lanka’s monetary policy had deteriorated rapidly after Wijewardene retired as Deputy Governor of the Central Bank shortly after the country went through a massive civil war in 2009 amidst the collapse of the Greenspan-Bernanke bubble.

Observers say a country cannot depend on the personality and knowledge of one person to maintain currency and rogue policy and un-anchored or dual anchor monetary policy (flexible exchange rate) must be constrained by law.

From the time of his retirement when the rupee was around 114 to the US dollar and it is now around 295 to the US dollar and counting.

But knowledge about currency board was lost and unusual beliefs about currency boards were propagated at key UK universities (except LSE) and so-called ‘saltwater universities of the US, where Keynesianism was adopted as a ‘new religion’ as the saying went.

Wijewardene had dubbed the unusually volumes of money printed in the last two years the ‘Lakshman’ shock.

Independence to print money

A key reason for abolishing the currency board was to give ‘monetary policy independence’ to central bankers to practice rogue policy.

A key reason for setting up a currency board is that the general public and legislators no longer believe economists who want to engage in open market operations and competitive exchange rate to give profits to businesses at the expense of workers.

The Hong Kong Monetary Authority which operates on currency board principles raised policy rates by 25 basis points on March 17 after the US Federal Reserve raised its own rates.

Related

https://www.scmp.com/business/article/3170744/hong-kong-raises-base-rate-25-basis-points-first-time-2018-after-first-us

The UAE Monetary Authority which operates the Dirham on the principles very similar to a currency board (currency board like as dubbed by Hanke), also raised rates.

https://gulfnews.com/business/uae-central-bank-hikes-interest-rate-by-25-basis-points-1.1647457290932

Interest rates in countries with currency board are very low and barely above that of the anchor currency which can be the US dollar or any larger country with a very good central bank. The US dollar is generally chosen because it is a large importer of goods and has open capital markets.

Without the legal powers to depreciate the currency, a currency board cannot inflate away peoples wealth and push interest rates up by destroying real capital.

Currencies that collapse steeply lead to spontaneous dollarization as people adopt foreign currencies to make transactions and demand dollar salaries from their employers.

A central bank usually imposes legal tender laws to prevent the use of alternative currencies and force people to use their bad depreciating money.

Sri Lanka is now in the middle of the Powell bubble where US rates are going up. (Colombo/Mar28/2022)

ECONOMYNEXT – India’s Foreign Minister S Jaishankar has arrived in Sri Lanka for bi-lateral talks and to participate in a meeting of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation in Colombo as the island is in the grip of a monetary crisis.

“Arrived in Colombo for bilateral visit and BIMSTEC meeting,” Minister Jaishankar said in a twitter.com message after arriving in Colombo on the night of March 27.

“Look forward to my discussions over the next two days.”

The BIMSTEC meetings are to start on March 20. BMISTEC is an organization set up in 1997 for regional co-operation with Sri Lanka, India, Thailand and was later joined by Myanmar, Nepal and Bhutan.

At the time Sri Lanka was an outward looking nation and the so-called import substitution oligarchs that stifled the people with protectionist taxes did not yet have a strong influence on the polity.

India has been engaging closely with Sri Lanka as the island’s currency peg (flexible exchange rate) which has more than one anchor was shattered again by two years of money printing (monetary stimulus) and tax cuts (fiscal stimulus).

India has given a 500 million US dollar credit line for fuel, a 400 million dollar central bank swap, a billion US dollar loan for food and medicines as the island kept interest rates low to inject money and dollar inflows were siphoned out of the banking system through a surrender requirement for new money.

A tranche of money due to India for imports under a regional clearing arrangement was also deferred.

India wrapped up long delayed undertakings by Sri Lanka on a fuel tank farm and a joint venture power plant in Trincomallee in Eastern Sri Lanka. India is also to invest in renewable energy and have maritime co-ordination.

The rupee has fallen steeply under a so-called flexible exchange rate amid an attempt to establish a clean float which has not happened, as the rupee was allowed to fall gradually under a ‘flexible exchange rate’. (Colombo/Mar28/2022)

ECONOMYNEXT – Sri Lanka is paying the price for carrying out policies based on comprehensive falsehoods spread to win an election and a woeful lack of science or evidence, opposition legislator Eran Wickramaratne said.

The 2019 election was fought on a series of cooked up issues, including targeting minorities and foreigners, external internal enemies and anti-science, in which the country’s professional associations sadly also colluded, he said.

False Foundations

Wickramaratne who was state Minister of Finance the last administration and a banker said it was dangerous to build a policy framework on false foundations because the real issues are neglected.

“Sri Lanka politicians they themselves on politics but are very poor on governance,” he said. ,

“That is very, very obvious. They are building stories, and spreading falsehoods, manipulating the voter and winning elections.

“But governance is completely different. There is a big gap between the two.”

Wickramaratne as Minister for Finance in the last administration had to fix the fiscal damage created from the 100-day program and end the economic imbalances created from fuel subsidies with a price formula.

However its benefits were undermined by the central bank which printed money to create a forex crisis by operating un-anchored monetary policy, critics have said.

A series of non-issues were built-up in the run-up to the last elections including the Sri Lanka – Singapore free trade agreement Wickramaratne said.

Free trade agreements benefit the poor by reducing the monopoly powers of big businesses that exploit the poor and others with higher than world prices.

In addition to making false claims about the potential negative effects of the FTA based on its clauses, entirely cooked-up claims were made about service liberalization which was not a part of the agreement.

Professionals

Professional organizations ganged up to spread the lie.

“It is very shameful that professional organization would propagate such falsehoods,” Wickramaratne said.

“Now three year’s since the signing, nothing anything they said materialized. But there was no basis for what was claimed and everything had claimed had proved to be false.”

Professional associations had repeated a lie that there was service sector liberalization, Singaporeans would ‘flood’ the country and steal the jobs of professionals.

Pointing out that Sri Lanka’s salaries were far lower than Singapore and that services liberalization was not even part of the agreement had no effect. The same lies were repeated in Gobelsian fashion and amplified by the media without a fact check.

In case of the Millennium Challenge Corporation grant unusually false claims were made.

“There was a claim that the country will be divided and there will be a corridor where permission from the US embassy had to be sought,” Wickramaratne said.

Other claims were made on the basis of alleged ambiguity of the wording of the agreement. It was claimed that the agreement was against the constitution.

“The MCC agreement could not have moved ahead without parliamentary approval,” Wickramaratne said. “It is a condition of the MCC. Any clause could have been challenged in the Supreme Court.”

Such strategies are based on a plan to create ‘external enemies’, he said.

Creating a non-issue and bashing them on election platform as if they are true is known as a ‘straw man’ strategy in Western politics and is by students who study logic (https://www.logicallyfallacious.com/logicalfallacies/Strawman-Fallacy). In Sri Lanka the logical fallacy it is known as ‘billek ma-weemer’ (magicking up a bogey man) in local parlance.

Though MCC was not enacted for people to see its actual effects, Singapore FTA was signed. However were no flood for Singaporeans to Sri Lanka.

Making election platforms going against science was also dangerous, Wickramarante said.

“Science was igonored in the case of the fertilizer,” Wicremeratne said. “In the case of the case burial of Covid-patients also science was ignored.”

Sri Lanka banned Muslims from burying dead family members despite the World Health Organization saying it should be allowed and forced them to be cremated.

While foreigners were made into external enemies, minorities were made into domestic enemies.

There was a severe negative hit on the agriculture sector and people’s well-being in the case of anti-science in the case of the fertilizer ban.

Policies and strategies based on a false foundation also leads to an erosion of trust and confidence, Wickremarante said.

“Before an investor gets into a project international investor would look into country risk before project risk or financial risk.

“The country risk is based on political, social and economic stability,” Wickremeratne said. “All three are intertwined.”

Money Printing

One of the new false claims made was regarding money printing.

“There were claims that money printing does not lead to inflation,” Wickremeratne said. “But now Sri Lanka has the highest inflation in Asia.”

Money printing also leads to balance of payments trouble in pegged monetary regimes, making it impossible to have free trade.

However in Sri Lanka both inflation and currency depreciation has been blamed on other factors based on Mercantilist dogma which had been defeated in stable countries with low inflation, strong currencies, free trade and no exchange controls.

Such countries have central banks which base monetary policy on a single anchor (external anchor or domestic anchor) instead of having two or more which are in conflict and will be create monetary crises.

Sri Lanka is now in the middle of a massive economic crisis and monetary meltdown long predicted by analysts.

However analysts have pointed out that in the of the last administration the central bank also printed money including in 2018 to create balance of payments trouble and depreciate the currency and destroy its free trade agenda and strengthen the hands of import substitution oligarchs.

When Wickremeratne as State Minister of Finance and the late Mangala Samaraweera corrected the excesses of the 100-day program and brought the deficit down, the central bank printed money to manipulate the yield curve.

Money was printed and bought bonds from previous deficits to create excess demand and break the exchange rate peg which fell to 182 to the US dollar using ‘monetary policy independence’.

As public pressure mounted against economists who were purchasing bonds at auctions to create money, new tactics were used by the central bank to buy Treasury bond outside auctions such as through term reverse repo auctions and outright auctions.

The central bank also separated its permanent bill stock from the overnight and term bill stocks which had the effect of under-stating the bill purchases (central bank credit) and misleading the public.

With large volumes of Treasury bills being bought, the rupee is now collapsing.

The money printing central bank was set up during a United National Party administration in 1950, and Keynesian economists (primarily Cambridge/Oxford and US ‘saltwater’ universities) have used ‘monetary policy independence’ to manipulate interest rates, create inflation and balance of payments troubles.

Modern Monetary Theory

Sri Lanka’s latest crisis was triggered by tax cut in December 2019 (fiscal stimulus) and money printing from early 2020 (monetary stimulus) to push up growth, which instead blew the balance of payments apart and made it difficult to service foreign debt.

The stimulus measures were apparently based on Modern Monetary Theory, a more radical version of the output gap targeting exercise pursued by the central bank under the previous administration.

Analysts have faulted the IMF for giving tools to calculate an output gap to central bank known for being increasingly activist. From 2014 September to 2019 the central bank created two currency crises involving stop-go policies which led to output falls.

Sri Lanka is expected to seek International Monetary Fund assistance again soon.

A similar strategy of VAT cuts and monetary stimulus was followed by Conservative Finance Minister Anthony Barber in the early 1970s who wanted to create a Barber boom (go policy).

Instead the resulting inflation triggered massive labour unrest in the UK amid oil price rises as the US also printed money for output gap targeting and the Bretton Woods system collapsed.

World oil prices are also rising following US money printing by Fed Chief Jerome Powell.

Sri Lanka now has to impose a ‘stop policy’ to save the currency. However warnings have been raised that a steep fall in the currency would lead to dollarization and renewed calls have been made to set up a currency board.

Both measures will stop economists from trying ‘stimulus’ and delivering economic shocks to the people. (Colombo/Mar28/2022)

Sri Lanka: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Sri Lanka