Thursday, June 24, 2021

GSP+ and the intentions of European Parliament and NATO


Yes, the regime should be ashamed, and they might lose self-respect since an outsider is pointing out to the regime how to protect the basic human rights of Sri Lankan citizens. By doing so the country would get a double benefit, the GSP+ and the human rights of its citizens

 


The European Parliament (EP) adopted a resolution on the situation in Sri Lanka on 10 June calling on the Commission and the European External Action Service to use the GSP+ as a leverage to push for advancement on Sri Lanka’s human rights obligations and demand the repeal or replacement of the Prevention of Terrorism Act (PTA), to carefully assess whether there is sufficient reason, as a last resort, to initiate a procedure for the temporary withdrawal of Sri Lanka’s GSP+ status and the benefits that come with it, and to report to Parliament on this matter as soon as possible.

Although the content of the resolution was stronger than the motion which was placed on 8 June, the situation is not that grave as claimed by many since the outcome expected by EP is mild. However, this resolution should be read along with a point mentioned in the body of it that it expresses concern about the growing role and interference of China in Sri Lanka which has nothing to do with the GSP+ scheme and the communique of NATO on 14 June which confronted military ambitions of China for the first time, saying Beijing presents ‘systemic challenges’ for the transatlantic security alliance.

Considering the situation during the Trump era that Europe was eager to engage in business transactions with China and also with Russia, it can be concluded that the communique of NATO was a result of the influence of the US President Joe Biden. This shows the narrowness of the America First policy of Donald Trump which focused merely on the trade deficit of the US and the broadness of Joe Biden’s ‘US is back’ policy which focused on strategic alliance of the allies of the US against China with the intention of broadening it to the democratic states worldwide which shares the common values. 

As commented by political analysts, we are experiencing the early stages of a new cold war between China and Russia on one side and the US-led democratic alliance on the other side. During the previous cold war, Sri Lanka adopted a non-aligned foreign policy and the current regime of Sri Lanka is dragging the country towards China which will be harmful to the people of the country. The bilateral relationship of Sri Lanka with China which is a long-time friend of Sri Lanka would also be affected by Sri Lanka trying to be an ally of China since the latter relationship would be vulnerable with the force of the rival block.

The move of the European Parliament should be looked at in this background. The assistance of the European Union (EU) under the scheme of generalised tariff preferences, which applies reduced import duties to certain items of certain countries, is threefold. Firstly, it provides assistance under the general arrangement. Secondly there is a special incentive arrangement for sustainable development and good governance which is called GSP+ and Sri Lanka is benefited under this scheme. Thirdly there is a special arrangement for the least-developed countries called Everything But Arms.

GSP+ was granted to Sri Lanka in 2005 to support the Tsunami-affected economy. The EU in return expected that Sri Lanka would honour 27 international conventions on human and labour rights, environmental protection and good governance which were ratified by Sri Lanka. The EU had withdrawn this facility in 2010 on the grounds that Sri Lanka had not honoured three conventions, International Covenant on Civil and Political Rights, Convention against Torture and other Cruel, Inhuman or Degrading Treatment or Punishment and Convention on the Rights of the Child. The EU readmitted Sri Lanka to the GSP+ scheme in 2017 due to the initiatives taken by the previous government. 

The intention of the EU is innocent. They grant concessionary tariff to their market to the deserved countries which comply with the 27 international conventions to which these countries are parties as members of the United Nations. These international conventions represent the values, the EU is adhering. If Sri Lanka is not willing to adhere to these conventions Sri Lanka can, not only leave the GSP+ scheme but also the United Nations.

Therefore, Sri Lankans should not think that the EU by this resolution is interfering with the internal matters of Sri Lanka. They have just pointed out the instances where Sri Lanka has deviated from the agreed norms, and it is their right to do so. However, they have stepped outside of the mandate when they mentioned the Chinese influence.

In this resolution it is noteworthy to point out that they have named Shani Abeysekara, Hejaaz Hizbullah and Ahnaf Jazeem as victims of non-compliance of those conventions by the present Government. 

These examples show two basic streams where the autocratic power is exercised by the present regime. The first and foremost is to save themselves from the judicial proceedings against them. In this direction they have appointed a commission to investigate political victimisation which was a Kekille commission headed by a former Supreme Court judge, and it was a disgrace to Supreme Court to be associated with such a person. In democratic countries right from the US it was reported of happening certain deviations from the accepted rules. 

However, this was a blatant violation of all democratic norms and I believe that it was the most extreme example one can cite against the natural justice and rule of law. Shani Abeysekara was arrested to punish him since he was the investigator of most of these cases.

The second is to victimise ethnic and religious minorities where Hejaaz Hizbullah and Ahnaf Jazeem fit in. Shakthika Sathkumara who was released later without any punishment also came into this category. All of them were detained under PTA.

Ethnocentrism and religiocentrism were the main causes that brought votes to the present regime at last two elections. In this respect the President shows his intentions very openly. After becoming the President, he has never met TNA. The first meeting with TNA scheduled on 16 June about constitutional reforms was postponed indefinitely. The regime wants to safeguard this ‘values’ and the associated vote base which goes against the values of the EU, the West and for that matter against the entire civilised world. This friction drives Sri Lanka towards China and Russia, two authoritarian regimes who do not care for those values. The Government is of the view that China is the rising star and would be the most powerful superpower of the world in time to come so that it would be beneficial to be an ally of China.

This is happening in the economic arena as well. The Government, when they came into power, slashed the taxes with the blessings of the private sector which were imposed by the previous regime to consolidate the fiscal structure. Affected by corona as well the country is having a high budget deficit. The Government does not want to go to IMF which will certainly impose conditions which will be beneficial to the country in the long run. 

When Greece was in similar difficulties few years back both IMF and EU supported Greece with strong conditions. As a result, now Greece was able to reduce the budget deficit and the current account deficit. Sri Lanka also will have to go in this path if it wants to get out of this tragic economic situation. Instead, the Government increasingly relying on the other avenues of financing including currency swaps and Chinese loans which will postpone and may prolong the adverse effects.

The path taken by Sri Lanka to lean towards China politically and economically is challenged by the US, EU and NATO. More importantly India who dared to invade our air space in the 1980s during the time of the cold war is with the West and is a member of the Quad, an alliance of the US, Japan, Australia and India against China. President Jayewardene had only one remark to make when the Indian planes dropped humanitarian aid in Jaffna. He said all Sri Lankans are prepared to die facing the enemy in the event of an invasion. 

In 1980s President Jayewardene was perceived to be aligned with the US and India was in the opposite block. After the incident he was asked by the US to settle the matters with India. During the cold war Sri Lanka managed well when the foreign policy was perceived to be non-aligned especially during the time of Prime Minister Sirimavo Bandaranaike. 

The President is fond of learning and probably applying here the governing methods of the Communist Party of China. In 1971 North Korean Mission in Sri Lanka was closed on suspicion of involving in an uncovered plot to overthrow the government. 

All the problems are interwoven. Around 60% of the exports of Sri Lanka are to the EU, the UK and North America. The US is the biggest importer of our goods amounting to 25% of our total exports. The problem should be viewed in this light. 

The actions we have to take to safeguard the GSP+ scheme are the actions safeguarding the basic human rights of the citizens of Sri Lanka. Those are a drawback for an autocratic regime. Therefore, those actions have nothing to do with the sovereignty of Sri Lanka which is vested with the people and not with the leaders. Yes, the regime should be ashamed, and they might lose self-respect since an outsider is pointing out to the regime how to protect the basic human rights of Sri Lankan citizens. By doing so the country would get a double benefit, the GSP+ and the human rights of its citizens. 

https://www.ft.lk/opinion/GSP-and-the-intentions-of-European-Parliament-and-NATO/14-719481

Published in DailyFT on 22 June 2021

Sunday, June 6, 2021

රාජ්‍ය ණය : ජපානය සහ ග්‍රීසිය අතර ඇති වෙනස සහ ශ්‍රී ලංකාවේ ස්ථාන ගත වීම

 government debt in sri lanka harsha gunasena

ඇමෙරිකා එක්සත් ජනපදය සහ චීනය හැරුණු කොට ලොව බලවත්ම ආර්ථිකය ජපානය යි. එමෙන්ම වර්ෂ 2020 සඳහා රාජ්‍ය ණය දල දේශීය නිෂ්පාදිතයේ ප්‍රතිශතයක් ලෙස ගත හොත් ලෝකයේ ඉහළින්ම සිටින්නේ වෙනිසියුලාව වන අතර දෙවනියට සිටින්නේ ජපානයයි. එම ප්‍රතිශතය 266% කි. තුන්වෙනුව සිටින්නේ සුඩානය වන අතර හතරවෙනුව  සිටින්නේ ග්‍රීසිය යි. එරටට  අදාල ප්‍රතිශතය 206% කි. ශ්‍රී ලංකාව 23 වන ස්ථානයේ සිටියි. අදාල ප්‍රතිශතය 101% කි. ජපානය ශ්‍රී ලංකාවටත්  සංවර්ධන ණය දෙන දියුණු රාජ්‍යයකි.

ග්‍රීසියද සංවර්ධනය වූ රටකි. එහි එක පුද්ගල අදායම (රටේ සමස්ත නිෂ්පාදනය රටේ ජනගහනයෙන් බෙදු විට ලැබෙන අගය) ලෝක බැංකු වාර්තා අනුව වර්ෂ 2019 දී ඇමරිකන් ඩොලර් 19,583 කි. ශ්‍රී ලංකාවේ අදාල අගය ඩොලර් 3,853 වන අතර ජපානයේ එය ඩොලර් 40,247 කි. ග්‍රීසිය ජාත්‍යන්තර මුල්‍ය අරමුදලෙන් ලබාගත් ණය ගෙවීමට නොහැකිවූ ප්‍රථම සංවර්ධිත රාජ්‍යයයි. මෙම ණය තත්ත්වයෙන් ගොඩ ඒම සඳහා ග්‍රීසියට ජාත්‍යන්තර මුල්‍ය අරමුදල මතු නොව යුරෝපා සංගමයත් ආධාර කළේය. ග්‍රීසිය යුරෝපා සංගමයේ සාමාජික රටකි.

ග්‍රීසියේ රාජ්‍ය ණය ද අයවැය හිඟයද පහත දැක්වේ. එක්තරා අවස්ථාවක ග්‍රීසියේ අයවැය හිඟය ද දේ නි යේ ප්‍රතිශතයක් වශයෙන් 15% සීමාවටද ආසන්න වේ. 2020 වසරේදී කොවිඩ් හේතුවෙන් සියළුම රටවල අයවැය හිඟය වැඩිවිය. මෑත කාලයේදී විවිධ බලපෑම් මධ්‍යයේ අයවැය හිඟය අඩු කර ගැනීමට  ග්‍රීසියේ පිස්කල් ප්‍රතිපත්තිය සමත් වී ඇත. ග්‍රීසියේ අයවැය හිඟයද රාජ්‍ය ණය ද වැඩිවන අතර එරට වෙළෙඳ ශේෂයද හිඟයක් පෙන්නුම් කරයි. අයවැය හිඟය යනු රාජ්‍යයේ අදායම සහ වියදම අතර පරතරයයි. වෙළෙඳ හිඟය යනු ජාතික ගිණුම් වල එනම් රටේ ගිණුම් වල අපනයන හරහා රටට ලැබෙන අදායම සහ අපනයන වෙනුවෙන් පිටරටට ගෙවන වියදම අතර පරතරයයි. අයවැය හිඟය රාජ්‍ය ගිණුම් වල හිඟයක් වන අතර වෙළෙඳ හිඟය ජාතික ගිණුම් වල හිඟයකි. ග්‍රීසියේ වෙළෙඳ හිඟයද පහත දැක්වේ. දීර්ඝ කාලයක වෙළෙඳ ශේෂ හිඟයකින් පසු වර්ෂ 2008 සිට 2015 දක්වා වෙළෙඳ ශේෂ හිඟය සීග්‍රයෙන් අඩුකර ගැනීමට ග්‍රීසිය සමත්වී ඇත.

රාජ්‍ය ණය- ග්‍රීසිය ද දේ නි යේ ප්‍රතිශතයක් වශයෙන්

government debt in sri lanka harsha gunasena

අයවැය හිඟය ග්‍රීසිය- ද දේ නි යේ ප්‍රතිශතයක් වශයෙන්

 

government debt in sri lanka harsha gunasena

මුලාශ්‍රය  :        https://tradingeconomics.com

වෙළෙඳ ශේෂයේ හිඟය ග්‍රීසිය- ද දේ නි යේ ප්‍රතිශතයක් වශයෙන්

government debt in sri lanka harsha gunasena

මුලාශ්‍රය  :        https://data.worldbank.org/

ජපානයේද රාජ්‍ය ණය, අයවැය හිඟය සහ වෙළෙඳ ශේෂය පහත දක්වා ඇත. ග්‍රීසිය සහ ජපානය අතර වෙනස නම් වසර කිහිපයක් හැරුණු විට දීර්ඝ කාලීනව වෙළෙඳ ශේෂයේ අතිරික්තයක් ජපානය විසින් පෙන්නුම් කර තිබීමයි. ග්‍රීසිය වෙළෙඳ ශේෂයේ හිඟය අඩු කර ගෙන ඇත්තේ මෑත කාලයේ දිය. ජපානය වෙළෙඳ ශේෂයේ අතිරික්තයට අමතරව වෙළෙඳ ශේෂයද ඇතුළත් වන විදේශ යන් ගෙන් ලැබෙන ප්‍රේෂණ, පොලි අදායම්, ආයෝජන ආදායම් වැනි සියළුම ලැබීම් ඇතුළු ගෙවුම් ශේෂයේද අතිරික්තයක් පෙන්නුම් කරයි. ජපන් රාජ්‍ය ණය වලින් වැඩි ප්‍රමාණයක් දේශීය ණය වේ. ජපානයේ පොලි අනුපාතය ඉතා අඩු අගයක් ගනී. පිටරටින් ලැබෙන මුදල් පාවිච්චි කර ජපන් ව්‍යාපාරිකයෝ රාජ්‍ය බැඳුම් කර වල ආයෝජනය කරති. එබැවින් ජපානයේ තත්ත්වය ග්‍රීසියේ මෙන් නොවේ. මෙහි ප්‍රධාන වෙනස වන්නේ ජපානයේ ඇති වෙළෙඳ ශේෂයේ සහ ගෙවුම් ශේෂයේ දීර්ඝ කාලින අතිරික්තයයි.

රාජ්‍ය ණය- ජපානය  ද දේ නි යේ ප්‍රතිශතයක් වශයෙන්

government debt in sri lanka harsha gunasena

අයවැය හිඟය ජපානය – ද දේ නි යේ ප්‍රතිශතයක් වශයෙන්

government debt in sri lanka harsha gunasena

වෙළෙඳ ශේෂය ජපානය – ද දේ නි යේ ප්‍රතිශතයක් වශයෙන්

government debt in sri lanka harsha gunasena

මුලාශ්‍රය  :        https://data.worldbank.org/

 

ශ්‍රී ලංකාව මේ අතර ස්ථානගත වන්නේ කෙසේද? පසුගිය ලිපි වල සාකච්ඡා කළ පරිදි ශ්‍රී ලංකාවේ අයවැය හිඟයක් ද වෙළෙඳ ශේෂයේ හිඟයක්ද රාජ්‍ය ණය වල වර්ධනයක්ද තිබේ. ශ්‍රී ලංකාවේ අයවැය හිඟය, වෙළෙඳ ශේෂය සහ රාජ්‍ය ණය පිලිබඳ  ප්‍රස්ථාර පහත දක්වා ඇත.  මේ අනුව ශ්‍රී ලංකාව ලං වන්නේ ජපානයට නොව ග්‍රීසිය ටයි. ග්‍රීසිය අතීතයේ ගමන් කළ මාවතේ අපි ගමන් කරමින් සිටිමු. ග්‍රීසිය මෙන් අයවැය හිඟය ද වෙළෙඳ ශේෂ හිඟය ද  අඩුකර ගැනීමට හැකිනම් අපට සහනයක් ලැබෙනු ඇත. ග්‍රීසියේ ජනතාව එසේ කලේ බොහෝ දේවල් කැප කරය. අප අනතුරට පත්වුවහොත් බේරාගැනීමට- ඇපදීමට- සිටියේ ජාත්‍යන්තර මුල්‍ය අරමුදල පමණි. ග්‍රීසියට තිබූ යුරෝපා සංගමය වැනි සංවිධානයක් අපට නොමැත. ජාත්‍යන්තර මුල්‍ය අරමුදලේ කොන්දේසි මූලික වශයෙන් ඉලක්ක වන්නේ අපගේ ණය ගෙවීමේ හැකියාව වර්ධනය කිරීමටය. අපට දැන් අලුත් මිතුරෙක් සිටී. එනම් චීනයයි. චීනය කිසිම කොන්දේසියක් නොපනවයි. මේ හේතුවෙන් අපි ජාත්‍යන්තර මුල්‍ය අරමුදල නොසලකා හැර ඇත්තෙමු. පසුගිය කාලයේ චීනයෙන් අප විසින් හම්බන්තොට වරාය වෙනුවෙන් ලබාගත් ණය ගෙවීමට වරායේ ආදායම ප්‍රමාණවත් නොවූ බැවින් හම්බන්තොට වරායේ අයිතිය දීර්ඝ කාලීන බද්දකට චීනයට පැවරීමට අපට සිදුවිය. රටක් වශයෙන් අපට සිටින මිතුරන් සීමිතය. ජාත්‍යන්තර මුල්‍ය අරමුදල සහ යුරෝපා සංගමය මගින් ග්‍රීසියට විශාල වශයෙන් කොන්දේසි පනවන ලදී. එබැවින් එරට විෂම චක්‍රය හැරවීමට ඔවුන්ට හැකි විය. චීනය අපට මෙම විෂම චක්‍රයේ දිගටම යාමට අනුබල දෙයි. රජය එයට කැමතිය.

දැඩි ණය බරින් මිදීමට කළයුත්තේ රටේ නිෂ්පාදනය හෙවත් දළ දේශීය නිෂ්පාදිතය වැඩි කිරීමයි.එවිට ණය ගෙවීමට ඇති හැකියාව වැඩිවේ. දළ දේශීය නිශ්පාදිතය වැඩි කළ හැකි ක්‍රම බොහෝ තිබේ. අපනයන නිෂ්පාදන සහ සේවා වැඩිකිරීම හරහා දළ දේශීය නිශ්පාදිතය වැඩි කර ගත හොත් වෙළෙඳ ශේෂයේ දැනට ඇති හිඟය ටද එය පිලියමක් වනු ඇත.

පහත දැක්වෙන ප්‍රස්ථාරයේ 2019 වර්ෂය සඳහා ශ්‍රී ලංකාව ජපානය සහ ග්‍රීසිය එම රටවල ණය ප්‍රමාණය සහ වෙළෙඳ ශේෂ හිඟය යන කරණා දෙක මත ස්ථානගත කර ඇත. ඕනෑම රටකට වඩාත් සුදුසු වන්නේ මෙම ප්‍රස්ථාරයේ පහල දකුණු දෙසට ස්ථානගත වීමයි. එනම් ණය ද  වෙළෙඳ හිඟය   ද අඩු තත්ත්වයයි. මෙය පරිපුර්ණ තත්ත්වයකි.  අඩුම වශයෙන් මෙම තත්ත්වයෙන් ප්‍රතිවිරුද්ධ අතට ගමන් නොකළ යුතුය.ශ්‍රී ලංකාව දැන් කළ යුත්තේ ප්‍රස්ථාරයේ දකුණු දෙසට ගමන් කිරීමයි. ග්‍රීසිය එසේ ගමන් කර ඇත.

 

මුලාශ්‍රය  :        https://tradingeconomics.com

 

රාජ්‍ය ණය -ශ්‍රී ලංකාව ද.දේ.නි.යේ ප්‍රතිශතයක් ලෙස-1950-2020

government debt in sri lanka harsha gunasena

අයවැය හිඟය ශ්‍රී ලංකාව  – ද දේ නි යේ ප්‍රතිශතයක් වශයෙන්

government debt in sri lanka harsha gunasena

මුලාශ්‍රය: ශ්‍රී ලංකා මහා බැංකු වාර්තාව 2020

වෙළෙඳ ශේෂය ශ්‍රී ලංකාව  – ද දේ නි යේ ප්‍රතිශතයක් වශයෙන්

government debt in sri lanka harsha gunasena

මූලාශ්‍රය https://data.worldbank.org/

 

ජපානය, ග්‍රීසිය සහ ශ්‍රී ලංකාව – වෙළඳ ශේෂය X අක්ෂයේද රාජ්‍ය ණය Y අක්ෂයේද දක්වා ඇත.

වෙළෙඳ ශේෂය ශ්‍රී ලංකාව  - ද දේ නි යේ ප්‍රතිශතයක් වශයෙන්

– හර්ෂ ගුණසේන

Published in Aithiya on 6 June 2021

https://www.aithiya.lk/8920/government-debt-in-sri-lanka-harsha-gunasena/

Thursday, June 3, 2021

Dictatorial Open Economy – The Central Bank Of Sri Lanka & The Movement Of The Exchange Rate

 By Harsha Gunasena –

Harsha Gunasena

The Central Bank of Sri Lanka is committed to the stability of the financial system of Sri Lanka but some of the actions of the Bank lead to destabilize the financial system of the country.

It is basic knowledge that managing an economy is a balancing act. When some one is engaged in a business, he cannot fix the bottom line since the bottom line is an effect of several causes including sales and expenses. One cannot fix even sales since sales is an effect of several causes including customer management. One can fix the causes and not the effects. Similarly, only an insane person can think that the exchange rate of a country can be managed  by force exercised in the market. The exchange rate  is an effect of the level of exports and imports of a country. In addition to that there are other causes such as foreign remittances and foreign loans. Sri Lanka is having a long-term deficit in the trade balance and also the current account. Higher level of imports is being set off to a certain extent of exports and worker remittances. Successive governments in Sri Lanka have not taken remedial actions to this situation and the Central Bank is given the task to fix it in this manner.

There is a Sinhala proverb that, ‘athisarayata amuda gasanava vage’. The meaning is ‘like wearing a crupper to cure dysentery’. The Central Bank of Sri Lanka is engaged in this type of activity.

Sri Lanka is facing a severe financial crisis of which the origin was the deficit budgeting policy of the successive governments. Deficit is financed by debt either domestic or foreign. Since there were budget deficits in successive years as well the governments having to borrow to repay the debts. As a result, government debt has increased. Deficit budget is a result of either reduction of the income or increase of the expenditure. If a government reduces taxes mainly of the businesses which is the main source of revenue, the government expects a growth of the economy by the increased economic activities of such businesses. Likewise, when the capital expenses of the government are increased the economy should grow. Even by increasing the recurrent expenses there is a stimulation to the economy. If the economy has grown to the expected levels the debt would have been a smaller percentage of the grown economy which is measured as Gross Domestic Production.

There is another issue as well. In late 1990s Sri Lanka became a lower middle-income country. Thereafter it was much difficult to get concessionary foreign loans. Eventually Sri Lanka has moved to get foreign funds through commercial loans of which the interest rate is high and most of the time the repayment period is shorter. Therefore, annual repayment of the foreign debt is being increasing. The government is facing difficulties to repay the debt installments due to the long-term deficit of the current account. Over a long period, the export revenue of the country is lower than the import expenses. The difference is the trade deficit. This is covered to a great extent by the inward remittances of the migrant workers. However, the successive governments did not treat these migrant workers well. Present government gave lesser priority when bringing down these workers during the Covid time.


This is the issue faced by the government and the country. The present government does not like to go to the IMF requesting relief since IMF imposes conditions. Successive governments and especially this government say that the IMF conditions are not good for the country. What are those conditions? The main condition is to reduce the budget deficit which is the root cause of all these problems. The government does not want to do that since there will be political issues, which means when the government expenses are reduced or the government taxes are increased people will get affected and they will not vote for the government next time.

Neither the government nor the opposition dare to tell the truth to the people since all of them are concerned of their votes and not of the sustainability of the country. Voters in Sri Lanka are sensitive to the economic issues since around 40% of the population is below the poverty line if Sri Lanka is considered an upper middle income country. In upper middle income countries the poverty limit is income of USD 5.5 in 2011 PPP. Per Capita income of Sri Lanka is at the level of USD 4000 which is close to the upper middle income level. This shows the extent of unequal income distribution of the country.

Hence the government goes to China and ask for loans, who gives loans without any hesitation and will not ask the government to reduce the budget deficit. Therefore, the government is also happy and the people are also happy but the basic problem will continue aggravating the situation further. They are postponing the problem to the future generations. However, people who are like the crabs in the pot will have to suffer. Since government have no money to meet the debt, they restrict imports not on systematic manner but on inconsistent manner. Just like King Dutugemunu fought the wars with his brother at the initial stages, according to a famous folk story. Therefore, people will have to suffer.

The Central Bank of Sri Lanka has also joined this process. Their job is to manage the exchange rate. The Central Bank has reduced the interest rates in Sri Lanka which is a good thing. They will sustain it by force even though the interest rate will go up since the government started to shift from foreign borrowing to domestic borrowings. The Central Bank can print the money left and right to fund the government requirements. The problem would be to contain the inflation. Since it is a current issue, the figure cannot be adjusted as some expenditure was transferred to previous year in the Annual Report of Central Bank 2020 to reduce the budget deficit in 2020.

The Central Bank imposed restrictions  on importation of certain categories of motor vehicles and some items categorized as non-essential items for a period of three months on 19 March 2020 by Direction No.1 of 2020. However outside of the Direction minimum supplier credit of 90 days and 180 days was imposed on the importers. Irrespective of that Rupee depreciated against the USD from 181 to 199 from March to mid-April 2020. Since there was reduced crude oil consumption during the period of covid restrictions the Rupee was stable during May – November 2020.

The import bills with 90-180 days of supplier credit, started becoming due for payments from November 2020 which contributed to a depreciation of Rupees beyond Rs 187 against Dollars during November-December 2020 provoking Importers entering in to forward exchange contracts desperately to mitigate the exchange risk. Rupee depreciated above 193 in December 2020 while the Central Bank successfully intervened with their Forex reserves to cross the year at Rs 187 per Dollar. However, In January 2021 Rupee further depreciated to the level of 196.

The Central Bank on 25 January 2021 by Direction No.2 of 2021 directed licensed commercial banks not to enter in to forward exchange contracts with importers for a period of three months which was the only instrument available for importers  in Sri Lanka to mitigate forex risk. This restriction was further extended until further notice and this act prevented the forex market of portraying the real exchange rate.

The Ceylon Petroleum Corporation was forced by the authorities to borrow dollars from the state banks to pay their commitments rather than purchasing dollars from the market. That was one of the reasons of increasing the dollar deposit rates.

The Central Bank issued the gazette 2215/39 on 18 February 2021 imposing a mandatory conversion of 25% of exports immediately upon the receipt of such proceeds and the proceeds should be received within 180 days from the date of exports. The Central Bank was not aware that some of the exporters used to get USD packing credit loans to finance their exports so that when the proceeds come, they had to first settle the loan and thereafter they have hardly anything leftover. Later the direction was amended several times and finally on 9 April 2021 by gazette 2222/60 the minimum mandatory conversion requirement was brought down to 10% of export proceeds and such conversion should take place not immediately but within 30 days of the receipt of the proceeds.

The USD/LKR  rate crossed Rs 200 mark in March 2021 due to continued shortage of dollars in the Domestic Market. This led to exchange rate losses for importers who were deprived of booking their import bills via forward contracts from January onwards due to restrictions. It was announced on 23 March 2021 that the Central Bank entered into a currency swap with the central bank of China for USD 1.5 Bn. and a term Loan of USD 500 Mn was obtained from Chinese Development Bank on 12 April 2021.

On 17 April 2021 the state banks intervened in the market with the blessings of the Central Bank, to artificially bring down the USD/LKR rate to 193 within a day, through sale of Dollars over $ 60 Mn. However, it could not be retained at that level.

Towards the end of April 2021, the Central Bank allowed the licensed commercial banks to get-to-gather and determine on peg for USD/LKR rate which initially started with 199-200 (Bank Buying and Bank Selling Rates respectively). Later it was adjusted to 200-202 with a bid-offer spread of 2 Rupees. Generally, the bid-offer spread is around 0.50 in the interbank market.

At the beginning of May 2021, the Central Bank prevented commercial banks from participating in the interbank forex market to square their forex open positions, so that the banks had to do it internally within the banks. This worsened the situation and created a severe scarcity of dollars in the market.

The Central Bank had meetings on daily basis with the commercial banks to address the issues prevailing in the forex market, but it was evident on subsequent events that these meetings were mere compensatory ones without addressing the real issues.

The widened spread between bank buying and selling rate of USD/LKR made banks happy as they could earn an arbitrage profit by exploiting the foreign exchange earners in the country in spite of severe shortage of dollars in the market. The peg was further widened to 199.50-202.00 on 10 May 2021 where exporters were further penalized by banks due to a lowering the bank buying rate with a wider bid-offer spread of Rs 2.50.

The Central Bank adjusted the bank buying rate downwards expecting the exporters to get frightened of falling exchange rate and induce them to sell their dollars. It was not successful, and the commercial banks collectively adjusted the two-way price to 200-203 on 13 May 2021 with the blessing of the Central Bank.

Identifying that the exporters were not eager to convert their foreign currencies since they get higher deposit rate in dollars, commercial banks collectively acting as a cartel decided a ceiling on dollar deposit rate of 5.50% per annum. It should be noted that commercial banks deposit dollars in Sri Lanka development bonds at 7.5% which is now 2% more than the rate they pay to exporters.

The commercial banks were benefited. They could make money on one hand by having a high spread with the direction of the Central Bank in squaring off their Dollar positions internally and on the other hand by keeping a higher margin of the dollar deposit rates and rates of Sri Lanka development bonds where the banks invest. Both cases were at the expense of the foreign exchange earners of the country.  This type of manipulation of Exchange Rate and Dollar Deposit rates by banking system of the country including the regulator can be identified as a market collusion.

The commercial banks initially gave priority to the import bills open under letters of credit (LC) and they have delayed the payments of non-LC bills. Now they are rejecting the request of the clients to open LCs with the full blessings of the Central Bank due to the severe shortage of dollars in the market. I understand that there are certain foreign obligations of the local companies which were not met in a timely manner causing embarrassment to those local companies.

On 25 May 2021 by direction No. 8 of 2021 the Central Bank revoked the existing limits of foreign currency borrowings of the licensed banks for a period of one year subject to the licensed banks ensuring that such foreign currency borrowings do not give rise to any foreign currency risks.

The Central Bank wants to have both, ravulayi kendayi, the beard and the porridge. They want the licensed banks to borrow foreign exchange which is in short supply now and also not to expose themselves to foreign exchange risks.

Bankers know that it is not appropriate or sometimes suicidal to finance long term projects with short term loans. What they are doing is exactly the same, finding out short term solution to a long term problem.

It appears to be that the intention of the Central Bank is to keep the USD/LKR rate around the level of Rs 185. It is a question who decided this level? Was it by the Central Bank and the Monetary Board or someone outside of the Central Bank has imposed it on them? The Central Bank or whoever that party should realize that exchange rate of a country cannot be managed in this manner causing severe difficulties to the players in the market. At present the Rupee is over valued causing much difficulties to the exporters and foreign exchange earners who brings valuable foreign exchange to the country. The local currencies of some other countries such as Indonesia, India and Vietnam are undervalued and hence the exporters of those countries are at an advantage.

The Central Bank and the person if any who decides the level where the exchange rate should be, are not sensitive to the fact that it is solely exports which will help the country to come out of this situation.

The best bet for Sri Lanka is to increase the manufacture-based exports. This cannot be done overnight, and it is a long term process. Import substitution is good but export promotion is better. When there is import substitution, it can substitute to the level of consumption of our population which is 21 million. There is no such restriction in the exports. If capable we can cater to the entire world.

Successive governments have neglected this, and they were engaged in petty things like the Central Bank is doing in respect of the exchange rate today. There are many entrepreneurs who can do exports who are spread throughout the country and waiting without funds. Although they need capital, they cannot get a short-term loan even, since all the banks in Sri Lanka ask them a collateral which they are unable to give. I have firsthand experience in this respect.

If the government, the Central Bank and the commercial banks if they are interested  to do a real change, they should engage in helping rural entrepreneurs enabling them to access finances without any hinderance and promote exports which will give a lasting long-term solution to the exchange rate problem rather than engaging in hide and seek games.

Published in Colombo Telegraph on 3 May 2021

 https://www.colombotelegraph.com/index.php/dictatorial-open-economy-the-central-bank-of-sri-lanka-the-movement-of-the-exchange-rate/

Sri Lanka’s dictatorial open economy: Management of exchange rate by force

If the Government, the Central Bank and if interested the commercial banks want to bring about a real change, they should engage in helping rural entrepreneurs enabling them to access finances without any hindrance and promote exports which will give a lasting long-term solution to the exchange rate problem rather than engaging in hide and seek games 

 


Sri Lanka is facing a severe financial crisis of which the origin was the deficit budgeting policy of the successive governments. Deficit is financed by debt either domestic or foreign. Since there were budget deficits in successive years as well the governments having to borrow to repay the debts. As a result, Government debt has increased. 

Deficit budget is a result of either reduction of the income or increase of the expenditure. If a government reduces taxes mainly of the businesses which is the main source of revenue, the government expects a growth of the economy by the increased economic activities of such businesses. 

Likewise, when the capital expenses of the government are increased the economy should grow. Even by increasing the recurrent expenses there is a stimulation to the economy. If the economy has grown to the expected levels the debt would have been a smaller percentage of the grown economy which is measured as Gross Domestic Production. 

There is another issue as well. In the late 1990s Sri Lanka became a lower middle-income country. Thereafter it was much difficult to get concessionary foreign loans. Eventually Sri Lanka has moved to get foreign funds through commercial loans of which the interest rate is high and most of the time the repayment period is shorter. Therefore, annual repayment of the foreign debt is being increasing. The Government is facing difficulties to repay the debt instalments due to the long-term deficit of the current account. 

Over a long period, the export revenue of the country is lower than the import expenses. The difference is the trade deficit. This is covered to a great extent by the inward remittances of the migrant workers. However, successive governments did not treat these migrant workers well. The present Government gave lesser priority when bringing down these workers during the COVID time.

 

IMF

This is the issue faced by the Government and the country. The present Government does not like to go to the IMF requesting relief since IMF imposes conditions. Successive governments and especially this government say that the IMF conditions are not good for the country. 

What are those conditions? The main condition is to reduce the budget deficit which is the root cause of all these problems. The Government does not want to do that since there will be political issues, which means when the Government expenses are reduced or the Government taxes are increased people will get affected and they will not vote for the Government next time. Neither the Government nor the Opposition dare to tell the truth to the people since all of them are concerned of their votes and not of the sustainability of the country.

 

China

Hence the Government goes to China and asks for loans, who gives loans without any hesitation and will not ask the Government to reduce the budget deficit. Therefore, the Government is also happy and the people are also happy but the basic problem will continue aggravating the situation further. They are postponing the problem to the future generations. However, people who are like the crabs in the pot will have to suffer. 

Since the Government has no money to meet the debt, it restricts imports not in a systematic manner but in an inconsistent manner. Just like King Dutugemunu fought the wars with his brother at the initial stages, according to a famous folk story. Therefore, people will have to suffer.

 

Central Bank

The Central Bank of Sri Lanka has also joined this process. Their job is to manage the exchange rate. They are creating history in Sri Lanka. The Central Bank has reduced the interest rates in Sri Lanka which is a good thing. They will sustain it by force even though the interest rate will go up since the Government started to shift from foreign borrowing to domestic borrowings. 

The Central Bank can print the money left and right to fund Government requirements. The problem would be to contain inflation. Since it is a current issue, the figure cannot be adjusted as some expenditure was transferred to previous year in the Annual Report of Central Bank 2020 to reduce the budget deficit in 2020.

 

Rupee depreciation and forex reserves

The Central Bank imposed restrictions on importation of certain categories of motor vehicles and some items categorised as non-essential items for a period of three months on 19 March 2020 by Direction No. 1 of 2020. However outside of the Direction minimum supplier credit of 90 days and 180 days was imposed on the importers. Irrespective of that the rupee depreciated against the USD from 181 to 199 from March to mid-April 2020. Since there was reduced crude oil consumption during the period of COVID restrictions the rupee was stable during May-November 2020.

The import bills with 90-180 days of supplier credit, started becoming due for payments from November 2020 which contributed to a depreciation of rupees beyond Rs. 187 against dollars during November-December 2020 provoking importers entering into forward exchange contracts desperately to mitigate the exchange risk. The rupee depreciated above 193 in December 2020 while the Central Bank successfully intervened with their forex reserves to cross the year at Rs. 187 per Dollar. However, In January 2021 the rupee further depreciated to the level of 196.

The Central Bank on 25 January 2021 by Direction No. 2 of 2021 directed licensed commercial banks not to enter into forward exchange contracts with importers for a period of three months which was the only instrument available for importers in Sri Lanka to mitigate forex risk. This restriction was further extended until further notice and this act prevented the forex market from portraying the real exchange rate.

The Ceylon Petroleum Corporation was forced by the authorities to borrow dollars from the State banks to pay their commitments rather than purchasing dollars from the market. That was one of the reasons of increasing the dollar deposit rates.

The Central Bank issued the gazette 2215/39 on 18 February 2021 imposing a mandatory conversion of 25% of exports immediately upon the receipt of such proceeds and the proceeds should be received within 180 days from the date of exports. The Central Bank was not aware that some of the exporters used to get USD packing credit loans to finance their exports so that when the proceeds come, they had to first settle the loan and thereafter they have hardly anything leftover. 

Later the direction was amended several times and finally on 9 April 2021 by gazette 2222/60 the minimum mandatory conversion requirement was brought down to 10% of export proceeds and such conversion should take place not immediately but within 30 days of the receipt of the proceeds. 

 

Dollar shortage and exchange rate losses

The USD/LKR rate crossed the Rs. 200 mark in March 2021 due to continued shortage of dollars in the domestic market. This led to exchange rate losses for importers who were deprived of booking their import bills via forward contracts from January onwards due to restrictions. 

It was announced on 23 March 2021 that the Central Bank entered into a currency swap with the Central Bank of China for $ 1.5 billion and a term loan of $ 500 m was obtained from Chinese Development Bank on 12 April 2021.

On 17 April 2021 the State banks intervened in the market with the blessings of the Central Bank, to artificially bring down the USD/LKR rate to 193 within a day, through sale of dollars over $ 60 million. However, it could not be retained at that level.

Towards the end of April 2021, the Central Bank allowed the licensed commercial banks to get together and determine on peg for USD/LKR rate which initially started with 199-200 (Bank Buying and Bank Selling Rates respectively). Later it was adjusted to 200-202 with a bid-offer spread of 2 Rupees. Generally, the bid-offer spread is around 0.50 in the interbank market. 

 

Severe scarcity of dollars

At the beginning of May 2021, the Central Bank prevented commercial banks from participating in the interbank forex market to square their forex open positions, so that the banks had to do it internally within the banks. This worsened the situation and created a severe scarcity of dollars in the market.

The Central Bank had meetings on daily basis with the commercial banks to address the issues prevailing in the forex market, but it was evident on subsequent events that these meetings were mere compensatory ones without addressing the real issues. 

The widened spread between bank buying and selling rate of USD/LKR made banks happy as they could earn an arbitrage profit by exploiting the foreign exchange earners in the country in spite of severe shortage of dollars in the market. The peg was further widened to 199.50-202.00 on 10 May 2021 where exporters were further penalised by banks due to a lowering the bank buying rate with a wider bid-offer spread of Rs. 2.50. 

The Central Bank adjusted the bank buying rate downwards expecting the exporters to get frightened of falling exchange rate and induce them to sell their dollars. It was not successful, and the commercial banks collectively adjusted the two-way price to 200-203 on 13 May 2021 with the blessings of the Central Bank.

 

Market collusion by commercial banks

Identifying that the exporters were not eager to convert their foreign currencies since they get higher deposit rate in dollars, commercial banks collectively acting as a cartel decided a ceiling on dollar deposit rate of 5.50% per annum. It should be noted that commercial banks deposit dollars in Sri Lanka development bonds at 7.5% which is now 2% more than the rate they pay to exporters.

The commercial banks were benefited.  They could make money on one hand by having a high spread with the direction of the Central Bank in squaring off their dollar positions internally and on the other hand by keeping a higher margin of the dollar deposit rates and rates of Sri Lanka development bonds where the banks invest. Both cases were at the expense of the foreign exchange earners of the country.  This type of manipulation of exchange rate and dollar deposit rates by banking system of the country including the regulator can be identified as a market collusion. 

The commercial banks initially gave priority to the import bills open under letters of credit (LC) and they have delayed the payments of non-LC bills. Now they are rejecting the request of the clients to open LCs with the full blessings of the Central Bank due to the severe shortage of dollars in the market.  I understand that there are certain foreign obligations of the local companies which were not met in a timely manner, causing embarrassment to those local companies.

Bankers know that it is not appropriate or sometimes suicidal to finance long-term projects with short-term loans. What they are doing is exactly the same, finding out a short-term solution to a long-term problem.

 

Who decided USD/LKR rate of Rs. 185?

It appears to be that the intention of the Central Bank is to keep the USD/LKR rate around the level of Rs. 185. Who decided this level? Was it by the Central Bank and the Monetary Board or someone outside of the Central Bank has imposed it on them? 

The Central Bank or whoever that party is should realise that exchange rate of a country cannot be managed in this manner causing severe difficulties to the players in the market. At present the rupee is overvalued, causing much difficulties to the exporters and foreign exchange earners who brings valuable foreign exchange to the country. The local currencies of some other countries such as Indonesia, India and Vietnam are undervalued and hence the exporters of those countries are at an advantage. 

The Central Bank and the person, if any, who decides the level where the exchange rate should be, are not sensitive to the fact that it is solely exports which will help the country to come out of this situation. 

It is basic knowledge that managing an economy is a balancing act. When someone is engaged in a business, he cannot fix the bottom line since the bottom line is an effect of several causes including sales and expenses. One cannot fix even sales since sales is an effect of several causes including customer management. Similarly, only an insane person can think that the exchange rate of a country can be managed in this manner. The exchange rate is an effect of the level of exports and imports of a country. In addition to that there are other causes such as foreign remittances and foreign loans. Sri Lanka is having a long-term deficit in the trade balance and also the current account. Higher level of imports is being set off to a certain extent of exports and worker remittances.

 

Best bet for Sri Lanka

The best bet for Sri Lanka is to increase the manufacture-based exports. Import substitution is good but export promotion is better. When there is import substitution, it can substitute to the level of consumption of our population which is 21 million. There are no such restriction in the exports. If capable we can cater to the entire world.

Successive governments have neglected this and they were engaged in petty things like what the Central Bank is doing in respect of the exchange rate today. There are many entrepreneurs who can do exports who are spread throughout the country and waiting without funds. Although they need capital, they cannot get a short-term loan even, since all the banks in Sri Lanka ask them a collateral which they are unable to give. I have first-hand experience in this respect.

If the Government, the Central Bank and if interested the commercial banks want to bring about a real change, they should engage in helping rural entrepreneurs enabling them to access finances without any hindrance and promote exports which will give a lasting long-term solution to the exchange rate problem rather than engaging in hide-and-seek games.

Published in Dailyft on 3 may 2021

https://www.ft.lk/harsha-gunasena/Sri-Lanka-s-dictatorial-open-economy-Management-of-exchange-rate-by-force/10490-718732