Business

Adani’s Calling Off Public Offer: A Big Setback for India’s Green Hydrogen Projects

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All those who are keen that India should successfully set up massive green hydrogen projects to overcome the impending energy crisis are greatly disappointed that Adani group has decided not to go ahead with the fully subscribed  Rs.20,000 crore   Follow On Public Offer.

Using this public offer of Rs.20,000 crore,  Adani group earlier announced that it would spend a substantial amount to set up green hydrogen projects,  which are unlikely to happen now.

Need for green hydrogen energy project

India presently imports around  80% of it’s crude oil requirement amounting to around 250 million tonne per annum,. India is also importing around 50% of India’s requirement of natural gas, which amounts to around 35 billion cubic metres per annum.

Import requirement of crude oil and natural gas is likely to increase at 6 to 7% per annum in the coming years, as domestic production of crude oil and natural gas is likely to remain stagnant in the coming years.

Amongst many plans being implemented by the government of India to reduce the use of fossil fuel and avoid global warming, the promotion of green energy projects in a big way is one of the very important strategies.

The government of India has allotted Rs.35,000 crore for green energy projects in the 2023-24 annual budget.

The government of India is targeting to generate five million tonnes of green hydrogen annually from the year 2030, which is the industry’s total amount of (non-green) hydrogen consumed today.

This shift to green hydrogen would avoid  30  to 40 million tonnes of carbon dioxide emissions per annum and avert import of more than ₹60,000 crore worth of natural gas and crude oil.

Adani group’s proposed plans:

Adani group’s business spans coal trading, mining, FMCG (Adani Wilmar), seaport, solar power manufacturing, airports, roads, data centres, green hydrogen and so on. 

If the proposed public offer would have been accepted by Adani group, about ₹10,800 crores would have been used to fund the capital needs of green hydrogen projects, airports and expressways. 

Green hydrogen project proposal of Adani group covers the green hydrogen ecosystem from scratch.

While a few other green hydrogen projects are in the preliminary stage in India, the green hydrogen project proposal of Adani group is one of the largest.

A big setback for India’s project investment plans:

Private sector investments in projects like what Adani group has announced have to happen in a big way if India is to attain the target of 5 trillion dollar economy in the coming years.

Obviously, to attain this target, many massive projects require huge investment, for which large public issues of several thousand crores of rupees are required. 

If such public issues were to be throttled and sabotaged by vicious and motivated campaigns by some so-called research groups, then,  it would result in big setbacks for India’s future development programmes.

When an industrial group achieves spectacular growth, it is seen that those who cannot match the performance of the fast-growing group view such performance with surprise and disbelief. 

There have been cases and instances, where competitors from India or abroad would try to indirectly launch campaigns against the fast-growing group and support negative campaigns.

There have also been cases where motivated environmental groups have scuttled projects by carrying out hate campaigns and stating unproven environmental violations against particular companies. The immediate example is the closure of Sterlite Copper unit in Tamil Nadu

There have been many instances to show such motivated campaigns across the world for whatever reasons.

These conditions cause setback to India’s plans to achieve big leap forward.

Adani group   – A victim of motivated campaign  in this case:

A vicious campaign   against Adani group   was carried out by a US-based investment research firm known as  Hindenburg Research, stating several  vague  allegations, some unproven violations 

Due to the massive publicity given to such campaigns in Indian media before proper investigation, the gullible investors became panicky.  In such circumstance, the share of Adani group have seen massive losses.

In such extraordinary circumstances, Adani group felt that going ahead with the fully subscribed issue will not be correct,  since the interest of the investors have to be protected.

The net result of the situation is that  India has lost massive investment opportunities in green hydrogen projects.

Further, the motivated American research team and the detractors against India, wherever they may be,   seem to be highly pleased and satisfied.

The entire Adani episode is a case of negative forces winning ,  which is a very unfortunate situation for a growing and developing country like India.

Flight MH 17 and The Little Dutch Girl – A Personal Reflection

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You are an open wound

And we are standing

In a pool of your blood

Rupi Kaur

25th of January 2023 was significant from a judicial standpoint, but it was a grim reminder of how many lives were stolen in the most violent and egregious way.

The Destruction

One of the worst atrocities in the annals of civil aviation was perpetrated when Flight MH 17 was destroyed over Eastern Ukraine by a ground-based missile. Was Russia to blame? Or was it Ukraine? Or even the airline for flying over dangerous territory?  The aircraft operating the flight was shot down in eastern Ukraine about 60km from the Russian border on 17 July 2014, allegedly by pro-Russia separatists.  All the 298 passengers – 193 of whom were Dutch – are believed to have died, and some of the remains of those who perished were never recovered. It is now revealed that death was not instantaneous.

Everyone seemingly responsible for the heinous act started deflecting blame, and a little girl (and all others on board) on the flight was forgotten, except for her  devastated father who grieved the unbearable loss of his only child. 

From then on, everything became clinical and adjudicatory.

Seven and a half years later, The European Court of Human Rights ruled on 25th January 2023 – on a purely procedural and technical issue –  that complaints against Russia from Ukraine and the Netherlands should go to trial, but it was not about what the little Dutch girl lost. Who would care anymore, anyway?

The European Court of Human rights, in a press release said: “Among other things, the Court found that areas in eastern Ukraine in separatist hands were, from May 11, 2014 and up to at least January 26, 2022, under the jurisdiction of the Russian Federation” , referring to “the presence in eastern Ukraine of Russian military personnel from April 2014 and the large-scale deployment of Russian troops from August 2014 at the latest.”

The Little Dutch Girl

One day in mid July 2014 a young girl –  full of hope for her future and bubbling with the energy of youth – boarded a Malaysian Airlines Boeing 777, in Amsterdam.  She had everything in life to be thankful for  – a university education,  romance and courting, a good life  with a warm home and a family – all  in front of her.  The best was yet to come.  It was time for new life to start with the freshness of hope and all the happiness that her young  heart could take.  Her  penalty for being born was not even in the distant horizon.

Her destination was Kuala Lumpur, and she was looking forward to a lighthearted romp on a fun flight and a glorious holiday with her family who were travelling with her.  

Yet she did not make it.

Every day, people die of accidents caused by their own negligence, or diseases beyond their control. People also die of intentional killing by others. Somewhat rarely, people suffer death through random acts of violence – like the little Dutch girl. For her there was no second chance.  There was no going back to the perfumed meadow of Summer. It was as though an alien sky swallowed her that clear day and the future became an illusion.

There are no answers no good, no evil only a million promises not kept that day when it raised its ugly head.  We can only fill the craters with ashes; level the furrows plant grass, trees, flowers lay white gravel path some rustic benches – a public park and hush the cries of orphaned parents.

But there was no one when darkness fell that night and all the lights went out.  She should have had someone that she could find.  She should not have been alone to weep.

My Reflections

Today, that little girl would have been in her early twenties. What would she be doing? Perhaps reminiscing over her first and only love at university? The first time she saw him and looked down and walked away? How memories of him protecting both under a tiny umbrella when they walked alone in the rain flood her mind? How she forgot to tell him what was on her mind? How she hurt for having forgotten to tell him what was on her mind? How excited she felt when she scored high grades and ran up to tell him? The look on dad’s face when she told him of her grades.

Maybe she would be holding her first born lovingly and tenderly, while her baby peered at her radiant like a pearl in an oyster that had a little door. She would have been overwhelmed with joy as though her whole world had been invigorated by the touch of a butterfly and the splash of a drop of dew. She could have had many days walking through tender meadows of sunshine and warmth amidst the laughter and joy of simple pleasures.

We Failed Her

We did not keep our promises to a little girl who depended on us for her safety We did not have stringent regulations, and Standards to stop that flight.  We knew the area was dangerous,  infested with unscrupulous elements holding  ground-based missiles. Yet we did nothing to prevent the ominous and grave risk that was posed to the flight. We did not have a system of sharing and disseminating threat information in a timely manner. We did not know to whom this information should have been relayed.  We don’t seem to have known what risk avoidance was – that it involved a risk assessment technique that entails eliminating hazards, activities and exposures that place valuable assets at risk.  In the case of civil aviation within the context of conflict zones this would mean eliminating hazards by avoiding the airspace over that zone entirely.  Unlike risk management, which is calculated to control dangers and risks, risk avoidance totally bypasses a risk.  The information to States on threats posed to their civil aviation over conflict zones would therefore had  to be disseminated through policy and procedure, training and education and technology implementations.

We did not do that.

Sorry little girl. May the doors of heaven open at the sound of your footsteps May a bright angel watch over and follow you  through your  inevitable journey. May we meet again on the horizon of eternity when our ship finally sails beyond every limit of our sight.

Above all, may we never walk away from you.

India: Adani Unveils ‘Everything’ to Rebut Hindenburg allegations

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Richest Indian Gautam Adani’s group on Sunday likened the damning allegations made by short seller Hindenburg Research to a “calculated attack” on India, its institutions and growth story, saying the allegations are “nothing but a lie”.

In a 413-page response, Adani Group said the report was driven by “an ulterior motive” to “create a false market” to allow the US firm to make financial gains.

“This is not merely an unwarranted attack on any specific company but a calculated attack on India, the independence, integrity and quality of Indian institutions, and the growth story and ambition of India,” it said.

Stating that the allegations in Hindenburg Research’s January 24 report are “nothing but a lie”, it said the document is “a malicious combination of selective misinformation and concealed facts relating to baseless and discredited allegations to drive an ulterior motive”.

“This is rife with conflict of interest and intended only to create a false market in securities to enable Hindenburg, an admitted short seller, to book massive financial gain through wrongful means at the cost of countless investors,” it said.

It went on to question the credibility and ethics of Hindenburg, and said the mala fide intention underlying the report were apparent given its timing when Adani Enterprises Limited is undertaking one of the largest ever further public offering of equity shares in India.

“Hindenburg has not published this report for any altruistic reasons but purely out of selfish motives and in flagrant breach of applicable securities and foreign exchange laws,” it said. “The report is neither ‘independent’ nor ‘objective’ nor ‘well researched’.”

Activist short seller Hindenburg Research, the firm which caught global attention with takedowns of electric-vehicle makers Nikola and Lordstown Motors, alleged in a report on Wednesday that its two-year investigation found the Adani Group “engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades”.

The report by the tiny New York firm that specialises in short selling has led to Adani group losing more than USD 50 billion in market value in just two trading sessions and Adani himself losing in excess of USD 20 billion, or about one-fifth of his total fortune.

Hindenburg called out the conglomerate’s “substantial debt”, which includes pledging shares for loans; that Adani’s brother Vinod “manages a vast labyrinth of offshore shell entities” that move billions into group companies without required disclosure; and that its auditor “hardly seems capable of complex audit work”.

Of the 88 questions raised by Hindenburg, 65 of them relate to matters that have been duly disclosed by Adani portfolio companies, Adani Group said. “Of the balance 23 questions, 18 relate to public shareholders and third parties (and not the Adani portfolio companies), while the balance 5 are baseless allegations based on imaginary fact patterns.”

It listed questions from the report and dismissed them as “false suggestions based on malicious misrepresentation of governance practices” or “manipulated narrative around unrelated third party entities” or “biased and unsubstantiated rhetoric”.

“We reaffirm that we are in compliance with all applicable laws and regulations. We are committed to the highest levels of governance to protect the interests of all our stakeholders,” it said. “The Adani Portfolio also has very strong internal controls and audit controls. All the listed companies of Adani Portfolio have a robust governance framework.”

The focus of the Adani portfolio and the Adani verticals is to contribute to nation building and take India to the world, it said.

“We will exercise our rights to pursue remedies to safeguard our stakeholders before all appropriate authorities and we reserve our rights to respond further to any of the allegations or contents of the Hindenburg report or to supplement this statement,” it added. 

Sources: PTI/ Agencies

Sri Lanka and IMF: Delusional Partners

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Here we go again. The International Monetary Fund (IMF) is in command of Sri Lanka’s economy, barking orders and making demands in an effort to restore macroeconomic stability. The pattern is a familiar one. Back in April 2022, Sri Lanka’s currency collapsed, having depreciated by 44 percent against the U.S. dollar since President Gotabaya Rajapaksa took office in 2019, and, according to our measure, inflation reached a stunning 74.5 percent per year. Sri Lanka even suspended payments on its external debt. Then the IMF fire brigade arrived.

On September 1, 2022, the IMF reached a staff-level agreement to support Sri Lanka’s economy with a 48-month lending arrangement of roughly $2.9 billion. Now, the IMF is withholding the cash until Sri Lanka raises corporate-income and value-added taxes, cuts government spending, and reaches a debt-restructuring agreement with two of its largest creditors, China and India. The IMF is confident that these measures, among others, will stabilize Sri Lanka’s economy.

There’s just one little problem. This is Sri Lanka’s 17th IMF program. In fact, Sri Lanka has been on IMF life support nearly continuously since 1965. None of the previous IMF programs have permanently stabilized Sri Lanka’s economy. Why should the 17th? As the famous, often-misattributed, quote goes: “Insanity is doing the same thing over and over again and expecting different results.” By this standard, both Sri Lanka and the IMF crossed the threshold of insanity long, long ago.

There’s little empirical evidence to suggest that Sri Lanka’s shiny new IMF program will be any more successful than the past ones. A recent working paper by researchers at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise analyzed the effect of IMF loan programs, in the three years following the adoption of a program, on macroeconomic indicators from 2000 to 2010. The authors found that IMF lending arrangements resulted, on average, in a 5.8 percent increase in the unemployment rate, while control-group countries — countries that faced similar economic circumstances but did not implement IMF programs — experienced an average 7 percent decline in unemployment.

Other indicators tell a similar story. Countries with IMF programs fared worse than control-group countries in terms of real GDP growth, real export-value growth, and in the reduction of government debt. This research suggests that many countries would have been better off without any IMF assistance at all.

Sri Lanka’s economy is still in bad shape. Since Gotabaya Rajapaksa was elected in November 2019, the Sri Lankan rupee has shed 52 percent of its value against the U.S. dollar. Using purchasing power parity, one of us (Hanke) accurately measures inflation in Sri Lanka at a roaring 106 percent per year as of January 12. Since May 2022, foreign reserves have officially hovered around $1.8 billion, but a reported $1.4 billion of those reserves are locked away in a swap with the People’s Bank of China. So, if Sri Lanka’s economy needs stabilizing and a positive confidence shock, and another IMF program is not the answer, what is?

It’s time for Sri Lanka to mothball its central bank and replace it with a currency board. A currency board issues notes and coins convertible on demand into a foreign anchor currency at a fixed rate of exchange. It is required to hold anchor-currency reserves equal to 100 percent of its monetary liabilities.

A currency board, unlike the Central Bank of Sri Lanka, has no discretionary monetary powers and cannot issue credit. It therefore imposes a hard budget constraint on the fiscal authorities. Its sole function is to exchange the domestic currency it issues for an anchor currency at a fixed rate.

Currency boards require no preconditions and can be installed rapidly. They have existed in some 70 countries. None have failed, including the one that one of us (Hanke), designed and installed in Bulgaria in 1997. It immediately smashed a hyperinflation, caused interest rates to plunge, forced the fiscal authorities to balance the budget, and, with its positive confidence shock, spurred economic growth.

Today, thanks to its currency board, Bulgaria has the second-lowest debt-to-GDP ratio of any country in the European Union. Even the IMF heaped praise on currency boards a year after the installation of Bulgaria’s. A 1998 IMF publication noted that “currency boards in many countries have achieved impressive economic results, both in achieving lower inflation than other exchange rate regimes and in stabilizing expectations after prolonged hyperinflation.”

As it turns out, Sri Lanka (formerly Ceylon) had a currency board from 1884 to 1950. In 1884, the largest financial institution in Ceylon, the Oriental Bank Corporation, experienced an acute liquidity shortage due to bad loans to coffee plantations and subsequently failed. This sparked a run on two other banks, the Chartered Mercantile Bank and the Bank of Madras. With the crisis escalating, the colonial government quickly established a currency board, issuing fully backed, convertible-on-demand government notes — paper money. With that, the crisis was history.

It’s time for Sri Lanka to do the one and only thing that will permanently remove it from the IMF’s intensive-care ward. It should revert to a currency-board system, like the one it had for 66 years.

Courtesy: National Review. Click here to read the original version of this article

A Vicious and Motivated Campaign to Malign Adani Group

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When an industrial group achieves spectacular growth, it is seen that those who cannot match the performance of the fast-growing group view such performance with surprise and disbelief.  In such circumstances, the armchair critics and the research and investigative organisations would try to   “invent and discover” some reasons for the rapid growth of the industrial group and in the process, the research organization would get media attention and come to the limelight.  There have also been cases and instances, where the competitors would try to indirectly launch campaigns against the fast-growing group and support negative campaigns so that the interest of the competitors would be protected.  There have also been cases where motivated environmental groups have scuttled projects by carrying out hate campaigns and stating unproven environmental violations against particular companies.

There have been many instances to show such motivated campaigns across the world for whatever reasons.

Two instances can be readily pointed out:

One is the Koodankulam nuclear project in Tamil Nadu in India, where a very vicious campaign was made against the project by so-called environmentalists and vested interests, which delayed the project by more than ten years. Now, the Koodankulam nuclear power project is operating quite well after commissioning, which clearly highlights the fact that all the allegations made against the Koodankulam nuclear power project were false and motivated.

Another immediate example is the Sterlite Copper project in Tuticorin region in Tamil Nadu, which is a large copper complex, which has been forced to be closed down by violent agitators, alleging   environmental violation. Sterlite Copper management denied all the allegations but the state government decided to close the unit permanently, fearing agitators.   The so-called environmentalists said that the Sterlite Copper was causing cancer in the local region and emitting noxious fumes, which was not true. Now, that the Sterlite Copper plant remain closed for around three years, it is clearly seen that there is no change for better in the atmospheric, soil or health conditions in Tuticorin region. This obviously proves that Sterlite Copper was sinned against rather than sinning.

Allegations against Adani group:

The present case of Adani group being accused of financial malpractices etc. by a US based research organization clearly falls on the same pattern as described above.

Many vague allegations have been made against Adani group such as family members occupying crucial posts, some unproven violations and preliminary notices issued against the group by government agencies which were suitably answered, artificially boosting share value in the market and so on.

Multiple activities in vital sector:

Adani group is involved in several field of activities including renewable energy, coal mines, seaport (Adani port), power transmission, telecommunication, airport management etc.  All these are well-planned profitable ventures if one can manage the business competently.

Adani group is a significant contributor to the industrial, infrastructure and economic growth of India and it is promoting technology and industrial growth, employment generation and conferring so many other benefits on the country as a whole.

The fact is that all these projects are managed with a reasonable level of competence by the Adani Group. The proof of the pudding is in the eating.

Not a loan defaulter:

While Adani group has taken large loan to finance the projects from financial institutions, there is nothing wrong in this, as these are legitimate methods to start and run any business activity. As the debt is serviced properly as per the terms of the agreement with financial institutions by Adani Group, this clearly show that the business is managed well.

Some sworn critics say that Adani group is debt-ridden. This is not true.  As a matter of fact, the total debt of Adani group is much less than several other groups as indicated below

A few companies with high debt ( In Rs. ‘000 crores )

While financial institutions and other agencies have extended loans or the public who have bought equity, there are no complaints from them. This obviously means that they are satisfied with the overall performance of Adani Group and all is well.

There are many ways of raising finances for operating business and so long as they are done as per the law, there should be no complaints.

 The allegation that Adani group has artificially boosted the share value in the market is totally baseless, as the market evaluates and reacts to the ground realities relating to the company and participates in the financial scheme of things promoted by the company, as per their judgement.

Is it motivated allegation?

One thing that cannot but be noted is that such allegations have been made by the US based research company against Adani group at a time when the group is launching FPO (follow on public offering).  Obviously, one may suspect that the US organization has the intention of sabotaging the efforts of Adani group.

The financing institutions around the world will certainly scrutinize the FPO launched by Adani group carefully and properly and would not be influenced by the findings of some armchair critics, who call themselves as researchers.

Gullible public being misled:

The fact is that when such vague allegations are made and somehow get adequate publicity in the media, gullible people get confused and become suspicious even without understanding the actual facts.

For example, it is ridiculous to see media reports that Adani group’s public offer price is around Rs.3112/- while the face value of the share is Re.1 /-  The absurdity of the view can be explained as follows.

“Suppose an organization was founded by the promoters with the face value of the share Re.1/- and when the company would develop and progress very well, then the market share value of this Re.1 /- face value could be much higher.  In some cases, it could be even as high as INR 2000 /- and more per share.  In such circumstances, when the public offering is done with a share price of around INR 3112/- , it  should not be interpreted as that Re.1 face value is being priced as INR 3112 /-

Let not Adani group waste time:

Adani group has said that it was considering legal action against the U S based research company and the research company has replied that it would face legal action.

The fact is that the armchair critical team in USA has really nothing much to lose by legal action and they would get huge publicity due to the protracted legal proceedings that may promote their business contacts. 

 Whereas Adani group, which has many projects which are under operation oi implementation and have many more future projects in view,  would find it difficult to divert its attention and time to fight a legal case in court.

 Adani group should ignore such detractors and save its valuable time and energy to move on with the process of contributing to the industrial and economic growth of the country.

Views expressed are the author’s own

India’s Adani: Beginning of the End?

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Shares of India’s Adani Enterprises (ADEL.NS) sank 20% on Friday as a scathing report by a U.S. short seller triggered a rout in the conglomerate’s listed firms, casting doubts on how investors will respond to the company’s record $2.45 billion secondary offer.

Seven listed companies of the Adani conglomerate – controlled by one of the world’s richest men Gautam Adani – have lost a combined $48 billion in market capitalisation since Wednesday, with U.S. bonds of Adani firms also falling after Hindenburg Research flagged concerns in a Jan. 24 report about debt levels and the use of tax havens.

The rout took shares of Adani Enterprises, the group’s flagship company, well below the offer price of its secondary sale, which had initially been offered at a discount.

The Adani Group is concerned about the fall in share prices but continues to be in wait and see mode as the share sale continues until Jan. 31, said two people with direct knowledge of the discussions.

India’s capital markets regulator is studying the Hindenburg report and may use it to aid its own ongoing probe into offshore fund holdings of Adani Group, two other sources said. Spokepersons for the regulator and Adani had no immediate comment.

Adani Group has dismissed the Hindenburg report as baseless and said it is considering whether to take legal action against the New York-based firm. It did not immediately respond to a request for comment on the regulator’s move.

With a net worth of $97.6 billion, billionaire Gautam Adani is now the world’s seventh richest man, according to Forbes, slipping from the third position he held before the Hindenburg report.

Adani met the county’s power minister R.K. Singh on Friday in New Delhi, according to a source familiar with the matter. The agenda of the meeting was not immediately known.

The billionaire hails from the western state of Gujarat, the home state of Prime Minister Narendra Modi. India’s main opposition Congress party has often accused Adani and other billionaires of getting favourable policy treatment from Modi’s federal administration, allegations the billionaire denies.

The stunning market selloff has cast a shadow over Adani Enterprises’ secondary share sale that started on Friday. The anchor portion of the sale saw participation from investors including the Abu Dhabi Investment Authority on Wednesday.

“The sell-off is seriously extreme … it has clearly dented the overall investor sentiment in the market,” said Saurabh Jain, assistant vice-president of research at SMC Global Securities.

Market worries extended to Indian banks with exposure to Adani Group’s debt. The Nifty Bank index (.NSEBANK) fell over 3%, while the broader 50-share Nifty index (.NSEI) was down 1.5%.

CLSA estimates that Indian banks were exposed to about 40% of the 2 trillion rupees ($24.53 billion) of Adani Group debt in the fiscal year to March 2022.

Source: The Reuters. Click here to read the complete report

Sri Lanka: Central Bank to Maintain Same Policy Interest Rates

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The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 24 January 2023, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 14.50 per cent and 15.50 per cent, respectively. The Board, having noted the recent and expected developments and projections on the domestic and global macroeconomic fronts, was of the view that the maintenance of the prevailing tight monetary policy stance is imperative to ensure that monetary conditions remain sufficiently tight to rein in inflationary pressures. Such tight monetary conditions, together with the tight fiscal policy, are expected to adjust inflation expectations downward, enabling the Central Bank to bring inflation rates towards the desired levels by end 2023, thereby restoring economic and price stability over the medium term.

Inflation continued to decline as envisaged in recent months and is projected to follow a faster disinflation path 

Year-on-year headline and core inflation, based on both the Colombo Consumer Price Index (CCPI) and the National Consumer Price Index (NCPI), continued to decelerate in December 2022 for the third consecutive month, as expected. The downward adjustment in inflation rates is expected to continue through 2023, supported by subdued aggregate demand resulting from tight monetary and fiscal policies, expected improvements in domestic supply conditions, and the passthrough of easing global commodity prices to domestic prices, along with the favourable statistical base effect.

Domestic economic activity is expected to recover towards the latter part of 2023, compared to the large contraction in 2022 

As per the GDP estimates published by the Department of Census and Statistics (DCS), the real economy is estimated to have contracted by 7.1 per cent in the nine months ending September 2022, on a year-on-year basis. With tighter monetary and fiscal policies in place, along with disruptions to domestic supply conditions, real activity in the final quarter of 2022 is also expected to have remained subdued. The economy is expected to make a gradual recovery during the year supported by the expected improvements in domestic supply conditions, underpinned by the timely implementation of corrective policy measures. Meanwhile, the anticipated improvements in foreign exchange flows and the resultant enhancement in business and investor sentiment are expected to reinforce the expected recovery in the period ahead.

Excessive market interest rates have begun to adjust downward and are expected to ease further in the period ahead 

Early signs of a gradual easing of excessive market interest rates have been observed recently in response to the administrative measures adopted by the Central Bank, along with the improvements in domestic money market liquidity and overall sentiments in the domestic markets. Recent measures adopted by the Central Bank to reduce the overreliance of licensed commercial banks on the standing facilities of the Central Bank and the concurrent conduct of open market operations helped improve liquidity in the domestic money market. This prompted activity in the interbank money market. Improved liquidity conditions, along with improved investor sentiment on the anticipation of “financing assurances” from official creditors, led to a notable moderation in the yields on government securities recently, reflecting the easing of the high risk premia attached to government securities. Meanwhile, the market deposit rates have also shown a notable moderation, benefiting from improved liquidity conditions. These developments are expected to pave the way for an easing of excessive market interest rates in the period ahead. Nevertheless, outstanding credit extended to the private sector by commercial banks continued to contract in response to the tight monetary conditions and the moderation in economic activity. Monetary expansion also moderated from peak levels, albeit at a slower pace.

The external sector remains resilient despite heightened challenges, and the outlook remains positive with the expected improvements in relation to “financing assurances” from creditors 

The merchandise trade deficit is estimated to have contracted significantly in 2022, compared to recent years, owing to an improvement in export earnings and a substantial compression of  import expenditure on account of policy measures taken to curtail non urgent imports and foreign exchange liquidity constraints. The gradual improvement in workers’ remittances, together with the revitalisation of tourism, helped improve the external current account balance in recent months while easing excessive pressures in the domestic foreign exchange market. As a result, the exchange rate has remained relatively stable, and recorded a marginal appreciation against the US dollar, thus far in 2023. Gross official reserves were estimated at US dollars 1.9 billion as of end 2022, including the swap facility from the People’s Bank of China, equivalent to around US dollars 1.4 billion. The envisaged finalisation of the IMF-EFF arrangement in the period ahead and the resultant developments that follow, along with the improvements in the external current account, are expected to enhance the external sector outlook.

Policy interest rates are maintained at current levels 

In consideration of the current and expected developments, both domestic and global, as indicated above, the Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 24 January 2023, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 14.50 per cent and 15.50 per cent, respectively. The Board was of the view that the current monetary policy stance is appropriate to ensure that underlying monetary conditions in the economy remain sufficiently contained to drive inflation along the envisaged disinflation path. While some downward adjustment in market interest rates has been observed lately, the Monetary Board is of the view that there is sufficient space for excessive market interest rates, including lending interest rates to Small and Medium Sized Enterprises (SMEs), to adjust downwards considering the recent improvements in domestic money market conditions and sentiments along with the moderation in the yields on government securities. However, the Board was also of the view that the anticipated further decline in the yields on government securities due to the narrowing of risk premia is unlikely to result in a significant improvement in underlying monetary conditions. The Central Bank will continue to closely monitor monetary conditions in the period ahead and will remain prepared to take swift and proactive measures, as appropriate.

Air Taxis and Vertiports – A Growing Trend In 2023

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If transportation technology was moving along as fast as microprocessor technology, then the day after tomorrow I would be able to get in a taxi cab and be in Tokyo in 30 seconds ~ W. Daniel Hillis

Known as flying cars by some, air taxis (or flying taxis)   are technically known as EVTOL (electric, vertical take off and landing) aircraft.  In other words, they are drones propelled by multirotor  equipment and are usually designed to carry less than a dozen passengers (there are two seater air taxis in the design phase in China and Germany)..  Air taxis are calculated to ease traffic congestion on the roads making it easy for commuters to get from one place to another without being bogged down in traffic. A good example where air taxis could be beneficial is in the context of a rush to the airport to catch a flight or a dash to the railway station to make it to a train which is few and far between during the day.   Air taxis take off and land vertically, obviating the need for runways needed by conventional aircraft, and land in vertiports – described as “half airports, half subway stations”.

EVTOLs other uses are in search and rescue operations, transporting organs for transplant, as well as delivery and tourism. It is estimated that in the coming decades there could be  hundreds or even thousands of EVTOLs in countries such as the United Kingdom and the United States .

The Economist’s annual journal The World Ahead 2023 says: “air travel turns profitable as international arrivals  soar by 30%. But they stay below pre-pandemic levels”. At present only up to one third of air travel pre 2019 can be seen, but the demand for travel is growing. The International Air Transport Association’s (IATA)  – the trade association of airlines – has forecast that there will be a return to pre pandemic levels for global airlines by around end-2023, calling it “about the right timeframe”. The use of air taxis would largely be domestic, particularly in large countries such as the United States, Canada, China and India which have large domestic markets.  The exponential increase in international air travel would in turn mean that air taxis would be a popular and efficient mode of transport in the context of domestic connections.

The Economist goes on to say: “This will be a crucial year for the aviation pioneers developing electric vertical take off and landing (EVTOL) aircraft …several firms are hoping to obtain the necessary certification in 2023 to commence commercial production, paving the way for the fast passenger services”.

Prior to starting to manufacture these aircraft, manufacturers and regulators would have to agree on safety standards and the latter would have to issue a license for the aircraft before passengers can be carried.  BBC Science Focus reports: “Many developers believe their vehicles will be safety certified and cleared for take off by 2025, if not sooner. Boeing, Airbus and Hyundai are some of the familiar names building air taxis. Another is Joby, which bought Uber Elevate, the ride-sharing giant’s foray into eVTOLs, in December 2020. Meanwhile, British firm Vertical claims to have the highest number of conditional pre-orders with the likes of Virgin Atlantic and American Airlines among the investors lining up for its VA-X4 vehicle”. The Report goes on to say that sprawling and congested cities such as  Los Angeles i São Paulo, Osaka and Singapore are some of the cities preparing for the advent of advanced air mobility offered by air taxis. In Europe the continent’s first vertiport  is being built in France in time for the 2024 Paris Olympics,  with the United Kingdom following close. 

Regulations on air taxis in most countries are yet to attain fruition. However, air taxis could arguably be considered analogous to any aircraft big or small, and therefore regulators could well be influenced by current international regulations applying to the manufacture of commercial aircraft. Annex 8 to The Chicago Convention which addresses issues of airworthiness of aircraft provides that the State of manufacture is required to ensure that each aircraft, including parts manufactured by sub-contractors, conforms to the approved design, and that the State taking responsibility for the production of parts manufactured under the design approval has to ensure that the parts conform to the approved design.

The Annex begins with an obligatory provision on the State of design of an aircraft by saying that it is required to transmit to every Contracting State which has advised the State of Design that it has entered the aircraft on its register, and to any other Contracting State upon request, any generally applicable information which it has found necessary for the continuing airworthiness of the aircraft, including its engines and propellers when applicable, and for the safe operation of the aircraft, and notification of the suspension or revocation of a Type Certificate. For its part, the State of Registry has to ensure that, when it first enters on its register an aircraft of a particular type for which it is not the State of Design and issues or validates a Certificate of Airworthiness it is required to advise the State of Design that it has entered such an aircraft on its register.

The State of Design has to ensure that, where the State of Manufacture of an aircraft is other than the State of Design, there is an agreement acceptable to both States to ensure that the manufacturing organization cooperates with the organization responsible for the type design in assessing information received on experience with operating the aircraft. The State of Manufacture of an aircraft is obligated to ensure that, where it is not the State of Design, there is an agreement acceptable to both States to ensure that the manufacturing organization cooperates with the organization responsible for the type design in assessing information received on experience with operating the aircraft.

There is also a requirement (not specifically aimed at manufacturers) that compliance with the Standards prescribed as above is required to be established by flight. Chapter 4 of the Annex stipulates that the functioning of all moving parts essential to the safe operation of the aeroplane is required to be demonstrated by suitable tests in order to ensure that they will function correctly under all operating conditions for such parts.  Initially air taxis will have crew piloting the aircraft. Annex 8  contains a requirement that the aircraft be provided with approved instruments and equipment necessary for the safe operation of the aeroplane in the anticipated operating conditions. These include the instruments and equipment necessary to enable the crew to operate the aeroplane within its operating limitations.  The underlying principle is that the aircraft is required to have such stability in relation to its flight characteristics, performance, structural strength, and most probable operating conditions (e.g. aeroplane configurations and speed ranges) so as to ensure that demands made on the pilot’s powers of concentration are not excessive when the stage of the flight at which these demands occur and their duration are taken into account.

Certification of airworthiness of an air taxi is a serious business and internal regulations of a country must consider analogous standards already established by member States of the International Civil Aviation Organization.

Sri Lanka: Sovereign Insolvency

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The sovereign default announced by Sri Lanka on 12 April 2022, was the cumulative result of fiscal folly over many years. This writer has attempted to uncover the root causes of our ‘sovereign predicament’ in a series of interviews with international media between January and July 2022; a curated version of which could be accessed online1.

Two in-depth studies by this writer published in 20162 and 20173 prognosticated what was clearly a looming disaster. These were published in academic journals in 2016 and 2017, they were orally presented at the Inaugural Nagalingam Balakrishnan Memorial Lecture4 in Colombo on 21 June 2014, and at an international conference organised by the Centre for Poverty Analysis5 (CEPA) in Colombo from 1 to 3 September 2014, respectively.

The purpose of this essay is to highlight the specific blunders by successive Governors of the Central Bank of Sri Lanka and members of the Monetary Board since 2006 that has led to the current crisis, and hold them accountable for their actions and/or inactions over a period of 16 years (July 2006-April 2022). Authority and power come with accountability and responsibility. 

A couple of retired senior Central Bank staff (retired Deputy Governor of CBSL Dr. W.A. Wijewardena6, and retired Director of Statistics at CBSL Dr. S.S. Colombage7), independent Economists, and many other professionals (for example, Sanjeewa Jayaweera8) have repeatedly and publicly forewarned the Central Bank and the Treasury of Sri Lanka about their risky and wrongful policies since 2006 (if not before). Yet, successive Governors and Monetary Boards have not heeded saner counsel. 

This study offers citations/references that amply demonstrate where the fault lines were and who was directly or indirectly responsible for patently risky and wrong policy decisions. 

Global best practices in central banking in brief 

The independence of the Central Bank is a foundational imperative in an open market-led economic/monetary system. As a corollary, there must be a strict separation of powers between the Treasury/Ministry of Finance and the Central Bank of a country. This demarcation is as important as the insulation of the judiciary from the executive and the legislature. 

Countdown to sovereign bankruptcy in Sri Lanka

The very first breach of the independence of the Central Bank and its autonomy viz the Treasury occurred in the late-1990s when Sri Lanka graduated in to the lower middle-income country in 1997 and thereby gained access to borrowings in the private international capital markets. The Secretary to the Treasury was made an ex-officio member of the Monetary Board of the CBSL by the then President of Sri Lanka Chandrika Kumaratunga. A.S. Jayawardane was the then Governor of the Central Bank of Sri Lanka.

Although Sri Lanka was eligible to borrow from the private international capital markets in 1997, the very first such borrowing was in 2007 through the issuance of an International Sovereign Bond (ISB) to the value of $ 500 million. The then Opposition Leader and current President of Sri Lanka, Ranil Wickremesinghe9, wrote to the joint lead managers of the debut float (Barclays Capital, HSBC, & J.P. Morgan) in 2007 that a future government of his would dishonour repayment of the same.

After the election of Mahinda Rajapaksa as President in November 2005, Ajith Nivard Cabraal was appointed as the Governor of the Central Bank in July 2006. It has been the practice to appoint the senior-most Assistant/Deputy Governor to the post of Governor of the Central Bank since its inception in 1950 until President Premadasa appointed Dissanayaka as the Governor in 1992. Dissanayaka was a civil servant in the Ceylon Administrative Service (and its successor Sri Lanka Administrative Service) and was a Deputy Secretary to the Treasury prior to his appointment as the Governor of the Central Bank in 1992.

For the first time in the history of the CBSL a versatile book keeper assumed the role of Governor of the Central Bank in 2006. This appointment of a person who had scant regard for demonstrated and proven principles of central banking put the integrity of the Central Bank in peril. 

The decline of the technical competence and integrity of this premier institution was apparent to all but the ruling crony class. 

This writer learnt that there were deliberate actions taken by the newly appointed Governor to weaken the technical competence and integrity of the Central Bank by way of side-lining senior competent professional staff such as the then Head of Economic Research, Dr. H.N. Thenuwara, and the then Head of Statistics, Dr. Anila Dias Bandaranaike, among others. Such arbitrary, irrational acts of the new Governor resulted in the premature retirement/departure of Dr. H.N. Thenuwara, Dr. Anila Dias Bandaranaike, Rose Cooray, and the like from the Central Bank. Governor Cabraal wanted a compliant and subservient staff and a pliant Monetary Board as opposed to technically competent and upright senior staff with professional and personal integrity.

The year 2006 marked the beginning of severe politicisation of the CBSL never seen before in the history of the Central Bank since its establishment in 1950. It was not just the beginning of the politicisation of the Central Bank, it was also the beginning of the politicisation of the entire banking and financial sector including the private banks. The modus operandi of such politicisation was as follows. The CBSL under Cabraal utilised the EPF/ETF funds to purchase shares in the two largest private commercial banks. Commercial Bank of Ceylon (Com Bank) and the Hatton National Bank (HNB), and thereby secured memberships in the Board of Directors of such banks to park the retiring senior Central Bank officials such as Assistant/Deputy Governors. For example, Dr. Ranee Jayamaha (former Deputy Governor of CBSL) was appointed to the Board of Directors of the Hatton National Bank, and Dheerasinghe (former Deputy Governor of CBSL) was appointed to the Board of Directors of the Commercial Bank of Ceylon after their respective retirement from the CBSL. The foregoing appointments could have caused conflicts of interest (if not illegal). The justices of courts of law are barred from practicing law after retirement in order to prevent conflict of interest during their tenure as judges. In a similar vein, senior executive staff of a Central Bank should also be barred from working in the financial sector post retirement. 

The aforementioned appointments in the largest private commercial banks were made to influence/encourage those banks to borrow foreign exchange from private international capital markets to lend to the Government for its ambitious prestige infrastructure projects, inter alia, for what former Central Bank Governor W.D. Lakshman called the “developmental state”. (See the justification for such politicisation of the entire banking and financial sector by Dr. Weligamage Don Lakshman, one of the successors to Governor Ajith Cabraal (July 2006-January 2015) and the predecessor to Governor Ajith Cabraal (October 2021-April 2022), in 2020. Lakshman, 202010

Similarly, the CBSL under Ajith Cabraal directed state-owned commercial banks such as the People’s Bank and the Bank of Ceylon (BoC), and the state-owned specialised bank, National Savings Bank (NSB), to borrow foreign exchange from private international capital markets to lend to the Government for its ambitious prestige infrastructure projects as well as to fund capital expenditures of the state-owned public utilities such as the Ceylon Electricity Board (CEB) and the National Water Supply and Drainage Board (NWSDB), a state-owned enterprise such as the SriLankan Airlines, and crude oil purchases of the state-owned Ceylon Petroleum Corporation (CPC). (See, Sarvananthan, 201411, for example) 

Such Central Bank-directed external borrowings by state-owned banks, private commercial banks, and state-owned utilities/enterprises between 2006 and 2014, inter alia, have undermined the overall financial sector stability, increased the precarity/vulnerability of such semi-government and private financial enterprises, and contributed to the overall volatility of the external public debt portfolio of the country by way of underestimating the real total external liabilities of the Government. 

Policy milieu of the CBSL during 2006-2022

The Government’s direct borrowings through the issuance of International Sovereign Bonds (ISBs) and indirect borrowings through state-owned banks (such as syndicated loans) and utilities/enterprises (with and without government guarantee) currently account for over 50% of the total external debt of Sri Lanka. The borrowings by the state-owned banks and utilities/enterprises on explicit government guarantee are called “contingent liabilities”12 of the government in fiscal parlance. 

The ISBs bear the highest interest rates (between 5% and 9% in the international borrowings of Sri Lanka (see, for example, CBSL, 201213) among all the available external borrowing mechanisms (bilateral, multilateral, and private international capital market borrowings) to any country. Moreover, the repayments of ISBs are relatively short-term (5-10 years) without any grace period for the commencement of repayments. However, one advantage of ISBs is that borrower has to pay only the interest payment annually, and the entire capital is repayable only at maturity, which gives some breathing space for the borrower.

Between 2007 and 2019, borrowings in the private international capital markets were the primary mode of external borrowings for successive governments of Sri Lanka, in which borrowings do not require justification or do not come with strings attached (conditional upon economic policy reforms or political governance reforms). 

Ironically, certain press releases of the CBSL during 2007-2008 explicitly acknowledged that the proceeds of the ISBs were not only utilised to pay for certain infrastructure projects (such as the Hambantota port and southern highway) but also to retire some of the then-existing domestic debt that bore very high-interest rates (between 15% and 20% or higher) (see a series of articles by this author in Montage14 (current affairs magazine) edited by Frederica Janz at that time for criticisms of such external borrowings of the government/CBSL (unfortunately, we could not access the press releases of the CBSL before 2012 on their website now). 

In order to lessen the burden of short-term repayments of the ISBs, inter alia, successive Governors of the Central Bank have artificially kept the exchange rates quite stable thereby artificially overvaluing the domestic currency, the Sri Lankan rupee (LKR). This was the key policy blunder that led to the eventual sovereign default of the country in April-May 2022. The Central Bank’s frequent interventions in the foreign exchange market to prop up the rupee also contributed to heightened imports of consumption goods (including luxury motor vehicles, for example), especially during the period 2010-2019.

By keeping the value of the rupee artificially high by fixing the exchange rate/s for prolonged periods of time (years, not weeks or months) through frequent interventions in the foreign exchange market by the Central Bank, Sri Lanka’s exports were artificially overvalued (thereby undermining global competitiveness) in dollar terms, and earnings from tourism were suppressed. These were on top of the loss of the GSP+ facility for exports of goods and services to the European Union (EU) in the early 2010s. However, the GSP facility for Sri Lanka was restored in 2017 but is currently once again under intense review by the EU for the past couple of years. 

The severe negative impact of the managed floating exchange rate system practiced by the CBSL (as opposed to free float) is reflected in the fact that the exports of goods and services as a percentage of the GDP in Sri Lanka, in US dollar terms, that was 39% in 2000 and 32% in 2005 fell to mere 17% in 2021 (second lowest since 1960 after just 15% in 2020 due to the pandemic)15. 

Were the forgoing of exports and tourism earnings for white-elephant infrastructure projects and retiring of domestic debt rational and prudent management of the external finances of a country? To the best of the knowledge of this author, no sane government in any country would dare to borrow externally in the private international capital markets to retire its domestic debt in spite of the fact that domestic debt directly contributes to inflation. 

In addition to the folly of wanton borrowings through ISBs, the then Central Bank Governor Cabraal, and the then members of the Monetary Board (all political appointees) were singularly responsible for the losses incurred on hedging for crude oil imports16 and investments in ill-fated Greek Bonds17. The then Governor and the members of the Monetary Board have never been made accountable, to date, for such losses to the country. These past impunities have contributed to continued irrational and imprudent policy decisions of the Monetary Board (all political appointees), the chairperson of which is the Governor, that eventually resulted in the sovereign default in April-May 2022. 

By the time the Rajapaksa regime lost power in January 2015, Sri Lanka’s external debt position had already become precarious. The person who replaced Cabraal as the Governor of the CBSL in early 2015, Arjuna Mahendran, was once again from the international private sector though much more educated than Cabraal. However, Arjuna Mahendran also lacked professional and personal integrity like Cabraal, which resulted in the Central Bank of Sri Lanka bond scandal18. Arjuna Mahendran was removed from office in 2016 by the then President, Maithripala Sirisena, and replaced by Dr. Indrajit Coomaraswamy on 2 July 2016. Dr. Coomaraswamy possessed both educational qualifications and professional cum personal integrity to be the Governor of the Central Bank.

Whatever external borrowings made by the Government between 2015 and 2019 were almost entirely to make repayments of the external borrowings, especially ISBs, made during the period 2007 and 2014. The new President elected in November 2019 appointed “Emeritus Professor” W.D. Lakshman as the 15th Governor of the Central Bank effective from 24 December 2019. In spite of being a former “Professor of Economics” at the University of Colombo, Dr. Lakshman lacked the necessary exposure to the complex world of global commerce and the finer intricacies of international finance. 

Dr. Lakshman was an ideologue of a forgotten era. He was a lifelong critic of international financial institutions such as the IMF. Unsuitable to head the Central Bank of an emerging lower-middle-income open economy. Dr. Lakshman was the third worst Governor, after Ajith Nivard Cabraal and Arjuna Mahendran, the Central Bank of Ceylon/Sri Lanka has had in its entire history, though the former is professionally an honest person as opposed to the latter two. Dr. Lakshman’s lifelong pathological aversion to the International Monetary Fund (IMF) played a critical role in Sri Lanka’s procrastination to seek an IMF bailout.

By the time Dr. Lakshman was appointed the Governor in the closing days of 2019, Sri Lanka was shut out of the private international capital markets because of the repeated negative reports about the precarity of Sri Lanka’s sovereign bonds by global credit rating agencies such as the Fitch Group, Moody’s, and Standard & Poor (S&P) Global Ratings. Therefore, since the beginning of 2020, the CBSL was forced to borrow only locally in addition to several ad-hoc short-term currency swaps with Bangladesh, China, and India, a few bilateral credit lines from China and India, and one-off loans from Japan and South Korea. 

Money printing and Modern Monetary Theory (MMT)

Ironically, whereas a Central Bank’s role is to be a lender of ‘last resort’ to the government, under the governorship of Dr. Lakshman the CBSL became the lender of ‘first resort’ to the government by buying unprecedented levels of government securities, which literally meant printing money. 

While the dogmatic/theoretical inspiration for printing unlimited money is drawn from the fallacious Modern Monetary Theory (MMT), the practical lessons Dr. Lakshman19 cites are from Japan and the Newly Industrialised Countries (NICs) such as South Korea and Taiwan in the aftermath of the World War II, which he dub as “developmental states”. 

Dr. Lakshman, during his academic days, has publicly accepted corruption as a necessary evil during any country’s early stages of “take-off”, citing rampant corruption in Korea and Taiwan during their take-off period. I remember him juxtaposing corruption and successful developmental states as a classic chicken and egg conundrum at a public seminar held at the Dr. N.M. Perera Centre in Colombo several years ago, in which this author was a co-panellist. 

It is true that Japan, Korea, and Taiwan were developmental states (as opposed to market-driven states) during the early stages of their “take-off”. However, the global political and economic context during the immediate and medium-term post-World War II (i.e. 1950s, 1960s, & 1970s) period wherein victorious western powers regarded the aforesaid countries as bulwarks against communism raging throughout East and South East Asia did play a pivotal role for the resurgence of Japan as an economic powerhouse and the emergence of the so-called tiger economies (ala Korea and Taiwan). 

Hence, just because Korea and Taiwan were “developmental states”, Sri Lanka, for example, cannot emulate those “economic miracles”, through a developmental state. This author would argue that third world countries like Sri Lanka need what Prof. Rainer Kattel, et al, calls “entrepreneurial state”20. 

Two underlying cardinal principles of MMT are that as long as the public debt is denominated in domestic currency, a government need not worry about unlimited domestic borrowings because domestic currency could always be printed thereby avoiding a public debt default (i.e. states have “monetary sovereignty”), and that unlimited money printing ‘does not’ cause inflation! Both are fallacious according to mainstream economic science in general, and monetary theory in particular. (See, for example, Coats, 201921; Drumetz and Pfister, 202122; Hartley, 202223; Palley, 202024; Prinz and Beck, 202125)

In his oration to mark the 70th anniversary of the establishment of the Central Bank of Ceylon/Sri Lanka on 28 August 2020, Governor W.D. Lakshman promotes the idea of developmental central banking, deviating from the core functions/objectives laid out in the Monetary Law Act of 1949 and amendments thereof made in 2002. Implicit in his 70th anniversary oration was the justification for unlimited printing of money. Dr. Lakshman has been strenuously denying publicly that the printing of money causes inflation. One of Dr. Lakshman’s former students at the University of Peradeniya and later a lecturer in political economy in the same university (long retired), Sumanasiri Liyanage26, has publicly supported the printing of money by the Central Bank in January 2021.

Ajith Cabraal27, who once again functioned as the Governor of the CBSL between October 2021 and April 2022, propagated the myth in April 2021 that money printing does not cause inflation parroting the then Governor Lakshman. During the previous stint of Governor Cabral (at the CBSL) between 2006 and 2014, Dr. Lakshman was an “Adviser” at the Ministry of Finance. Cabraal had a history of shouting/shooting down negative reports by international credit rating agencies28 on Sri Lanka’s creditworthiness since 2006 to date. 

The over-stock of money in the market (as a result of money printing by the central banks worldwide), in the absence of a commensurate rise in production (primarily due to lack of demand), depreciates the domestic currencies resulting in hyper-inflation29 (including food inflation). In Sri Lanka, in the 21-month period between 1 January 2020, and 30 September 2021 (during Governor Lakshman’s tenure), due to excessive money printing30 by the Central Bank, the stock of money rose by 38% (i.e. by Rs. 2.9 trillion) whilst the GDP grew only by just 1%. This has caused inflation to rise to over 11%, and food inflation rose to over 18% in November 2021. 

These have seen steady rises ever since; resulting in the overall inflation, in terms of Sri Lanka Consumer Price Index (SLCPI), at its peak 74% in September 2022, and the food inflation at its peak 86% in September 2022. During the last quarter of 2022, however, both the overall inflation as well as the food inflation have begun to decelerate. 

Both Cabraal and Lakshman have unrepentantly deviated from the holy grail of central banking31, i.e. policy-making in the interest of the “public” as opposed to policy-making in the interest of the government in power or the politicians. 

The poor performance of Dr. Lakshman as Governor of the Central Bank is emblematic of poor standard of economic professors in Sri Lanka in particular, and poor pedigree and pedagogical practices of Sri Lankan academics in general. The tertiary level economic curriculum in Sri Lanka requires urgent and substantial revision and upgrading from outdated and irrelevant contents.

Theories of physical sciences are not subject to political or social circumstances, contexts, situations, or territories; that is, the outcomes of physical sciences theories are universal. In contrast, the outcomes of macroeconomic policies/theories vary according to the political and social circumstances, contexts, situations, and territories. Thus, right macroeconomic policies should be adopted taking into consideration of the individual political and social circumstances, contexts, situations, and territories. Just because advanced industrial countries were printing unlimited money for prolonged periods during the pandemic, any developing country cannot afford to print unlimited money for an indefinite period of time to revive its pandemic-affected economy. 

Lessons to be learned from sovereign bankruptcy in Sri Lanka

It is high-time the proposed new Monetary Law Act (MLA) in Sri Lanka explicitly and clearly define the qualifications and experiences required for the post of Governor of the Central Bank, members of the Monetary Board, and the members of the Stakeholder Engagement Committee (SEC). The SEC was established in July 2022 amalgamating the former Monetary Policy Consultative Committee (MPCC) and the Financial System Stability Consultative Committee (FSSCC). Moreover, the post of Governor and memberships in the Monetary Board and the Stakeholder Engagement Committee should be openly advertised and recruited and ‘not’ arbitrarily appointed by the President and/or the Governor (in the case of appointments to the Monetary Board & SEC).

While the independence of the Central Bank is sine qua non, there should be necessary checks and balances to prevent abuse of power, corruption, nepotism, and the like in the Central Bank of Sri Lanka in recruitment of staff, consultants, etc., and transparency in the policy-making and decision-making processes. Moreover, Central Bank’s frequent paternalistic diktats to the commercial and specialised banks (including to the private ones, let alone the state-owned banks) and unnecessary interferences in the financial sector in general (under the euphemism of “moral suasion”32) should be tamed (if not done away with) in the proposed new Monetary Law Act (MLA). Every single public authority (e.g., Central Bank Governor, Treasury Secretary, Monetary Board) in Sri Lanka should be made accountable and responsible not only to the parliament, government, and the executive in power, but more so to the general public as well. 

Sri Lanka cannot emerge out the current economic quagmire without broader financial sector reforms such as divestiture of the state-owned commercial banks (People’s Bank and Bank of Ceylon) and specialised banks (National Savings Bank) which function as captive sources for funding public debt (both domestic and external) as well as funding perennially loss-making state-owned utilities (Ceylon Electricity Board (CEB), Ceylon Petroleum Corporation (CPC), National Water Supply and Drainage Board (NWSDB)) and enterprises (SriLankan Airlines, Sri Lanka Railways, Sri Lanka Transport Board, Road Development Authority, etc.). 

According to a report of the Committee on Public Enterprises (COPE) of the parliament of Sri Lanka, state-owned banks (i.e. Bank of Ceylon and People’s Bank) have complained that they have been repeatedly ordered by the Central Bank to fund the CPC and CEB during 2020-2022. Moreover, in the investigations into the Central Bank of Sri Lanka bond scam of 2015, it was revealed how the CBSL coerced the People’s Bank to back off from bidding. The forensic audit report of the CBSL in the aftermath of the bond scam of 2015 is yet to be made public. This kind of non-transparency cannot assuage the domestic markets or potential foreign investors. 

The state-owned banks have also become primary lenders to unscrupulous politicians from all political parties, especially members of parliament and deputy/ministers, who are involved in variety of businesses such as owning liquor shops and fuel stations throughout the country, and involved in construction projects (public works) for public and quasi-public authorities.

We understand that one of the conditions the IMF has put forward for its proposed bailout of Sri Lanka is enaction of a strong anticorruption legislation in parliament. This is just a cosmetic exercise. There are enough laws in Sri Lanka already to arrest corruption; what is lacking is the political and/or administrative WILL to enforce such laws or the law/s are applied only selectively to penalise the political opposition. 

In addition to any new legislation, the IMF should insist that an international forensic audit of the personal finances (bank accounts, movable and immovable property, income tax filings, etc.) of each and every member of parliament (including both government and opposition) and their extended family members, and each and every public servant (especially executive grade) (including armed forces personnel) and their extended family members should be carried out and appropriate legal actions taken if their wealth and income cannot be accounted for or justified.

Even today, under a new Governor and management, some of the actions of the Central Bank of Sri Lanka smack of duplicity and double standards in law enforcement as reflected in the recent permanent “revocation” of the license of the Prasanna_Money_Exchange_Pvt_Ltd33 and merely a temporary “extension of the suspension” of the trading of Perpetual Treasuries Limited34, which was the executor of the Central Bank bond scam of 2015. It is important to note here that the Perpetual Treasuries is owned by the son-in-law of the then (2015) Governor of the Central Bank, Arjuna Mahendran.  

If Angola35, where the Supreme Court in December 2022 ordered the seizure of $ 1 billion worth of assets of the daughter of the former President and freedom fighter Jose Eduardo dos Santos, and Mozambique36, where the Maputo City Court in November 2022 found a son of the former President and 18 other “high profile defendents” guilty of $ 2 billion illicit foreign loan with government guarantee that bankrupted the country could do it, why not Sri Lanka?

Although, in principle, we welcome the public appeal by 182 Economists worldwide37 on 8 January 2023, urging the hedge fund holders of International Sovereign Bonds (ISBs) of Sri Lanka in particular, and of all the third world countries in default in general, to cancel such debt, in practice any such debt cancellation initiative should be conditional upon barring all those politicians, bureaucrats, and professionals who were responsible for the sovereign default (by their actions or inactions) and who were directly or indirectly involved in the Central Bank bond scam and other mega corruption from holding any public office hereafter. If not, any unconditional and unilateral debt cancellations would become a moral hazard for countries such as Sri Lanka. 

Footnotes:

1https://docs.google.com/document/d/1LFQz1Wpqj68_MFVp6tGSRtx7liFBr8H-DFze-1WfLzo/edit.)

2https://link.springer.com/article/10.1007/s10708-015-9637-3

3https://journals.sagepub.com/doi/10.1177/0169796X17735241

4https://docs.google.com/document/d/1Bd9VMNMfAZZEYfiyfP4v6jf8XelKSA0z/edit

5https://www.cepa.lk/events/annual-poverty-symposium/13th-cepa-symposium-post-war-development-in-asia-and-africa/

6https://www.ft.lk/w-a-wijewardena-columns/A-Child-s-Guide-to-Modern-Monetary-Theory-Keynesianism-in-an-old-bottle/885-710459

7https://www.ft.lk/columns/Money-printing-to-repay-Govt-debt-worshipping-MMT-is-likely-to-magnify-economic-instability/4-710612

8https://island.lk/sri-lankas-economic-quagmire-and-how-margret-thatcher-smashed-the-keynesian-consensus/

9https://www.colombotelegraph.com/index.php/wikileaks-bond-issue-2007-unp-will-not-be-able-to-honour-repayment-ranil-wrote-to-jp-morgan-barclays-hsbc/

10https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/speech_20200828_70th_anniversary_oration.pdf

11https://docs.google.com/document/d/1jSY81CmYvMwQSJ-_z9J5OXyFXuTax9ZWPU5nPZyUMY8/edit

12https://www.imf.org/external/pubs/ft/fandd/1999/03/polackov.htm#:~:text=Contingent%20explicit%20liabilities%20are%20legal%20obligations%20for%20governments,on%20future%20government%20finances%2C%20and%20complicate%20fiscal%20analysis.

13https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/press_20120717_democratic_socialist_republic_of_sri_lanka_us%24_1_billion_international_sovereign_bond_issue_e.pdf

14https://docs.google.com/document/d/1vCuAxDR7JGBB6pMD7EuDQ-8ppoChlPeBAvjftytSxsQ/edit

15https://data.worldbank.org/indicator/NE.EXP.GNFS.ZS?locations=LK

16https://www.reuters.com/article/srilanka-oil-hedging-idUSL3E8M25SI20121102

17https://www.sundaytimes.lk/120708/news/cabraals-gamble-lanka-loses-billions-in-bankrupt-greece-5565.html

18https://en.wikipedia.org/wiki/Central_Bank_of_Sri_Lanka_bond_scandal

19https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/speech_20200828_70th_anniversary_oration.pdf

20https://iris.ucl.ac.uk/iris/publication/1981807/7

21https://www.cato.org/sites/cato.org/files/2019-09/cj-v39n3-4.pdf

22https://www.intereconomics.eu/pdf-download/year/2021/number/6/article/modern-monetary-theory-a-wrong-compass-for-decision-making.html

23https://www.nationalaffairs.com/publications/detail/the-weakness-of-modern-monetary-theory

24https://www.elgaronline.com/view/journals/roke/8-4/roke.2020.04.02.xml

25https://link.springer.com/article/10.1007/s11293-021-09713-6

26https://www.ft.lk/Columnists/MMT-What-s-wrong-with-printing-money/42-711087

27https://island.lk/cabraal-no-relationship-between-money-printing-and-rupee-depreciation/

28https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/press_20210112_unwarranted_rating_action_by_S%26P_e.pdf

29https://www.economist.com/finance-and-economics/is-the-world-economy-going-back-to-the-1970s/21805260

30https://www.ft.lk/columns/Budget-2022-What-s-the-missing-link/4-726282

31https://www.bis.org/publ/othp04.pdf

32https://www.jstor.org/stable/134345

33https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/Press_20221212_Revocation_of_the_money_changing_permit_issued_to_Prasanna_Money_Exchange_Pvt_Ltd_e.pdf

34https://www.cbsl.gov.lk/en/node/13817

35https://www.aljazeera.com/news/2022/12/28/angolan-court-orders-seizure-of-dos-santoss-assets-lusa-news-agency

36https://www.aljazeera.com/news/2022/11/30/mozambique-court-hands-out-verdicts-in-2bn-corruption-case

37https://www.theguardian.com/business/2023/jan/08/hedge-funds-holding-up-vital-debt-relief-for-crisis-hit-sri-lanka-warn-economists

Sri Lanka: Misleading Responses on Illegal Foreign Exchange Transfers

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  • Suppression of wages in the export sector as a whole is the fundamental factor enabling exporters to illegally retain incomes abroad
  • Exporters illegally retaining incomes abroad worsens foreign exchange availability in the domestic financial system and causes hyper-inflation.
  • Over US$ 40 billion has been mis-invoiced out of the export and import sector between 2009 to 2018
  • Unions and civil organisations demand the CBSL and government to take immediate action to repatriate illegally transferred funds and bring perpetrators to justice
  • Parliamentary Select Committee consisting of competent persons without conflicts of interest must be set up to investigate illegal outflows carried out by export and import sector
  • Government must declare Sri Lanka’s foreign debt as odious debt through an international arbiter

Apparel, tea and rubber exporters’ associations recently announced that they wished to ‘set the record straight’ on serious corporate fraud allegations made by the Central Bank (CBSL) on non-repatriation of export income and allegations of trade mis-invoicing and transfer pricing. In view of the exporters’ statements, the CBSL appears to be withdrawing its accusations, signalling a possible complicity in economically destructive corporate fraud.

It is also made abundantly clear by the misinterpretation of Sri Lankan monetary law by the CBSL Governor in an interview on 8th December 2022 stating that merchandise exporters can repatriate foreign exchange without having to convert such proceeds. The law of the land states that if funds are repatriated the conversion will happen through the local commercial banks by the first week of the following month after the date of repatriation (see Point 8 of CBSL FAQ on Gazette Extraordinary No. 2251/42, dated 28. 10. 2021). Only services sector exporters are authorised by law to repatriate proceeds without converting.

In the following account we will show that the arguments of the business elite to absolve themselves from their fraudulent conduct are only prevarications. Accordingly, we call upon the CBSL to undertake a detailed audit of its own procedures and the export sector dynamics and make arrangements to recover the lost foreign revenue.

Childish fables of Joint Apparel Association Forum (JAAF)

In a seemingly bold disclosure out of desperation under the weight of a collapsing economy, the CBSL Governor recently declared that apparel exporters repatriated only 14% of their export income while their value addition or residual income is around 55% of the gross revenue after meeting various foreign exchange obligations. To justify the gap of 41% non-repatriated export income, the JAAF claims that they paid the balance to local suppliers in foreign exchange, especially for petroleum purchases. Any sensible person would understand it is impossible for the garment factories to consume petroleum to the extent of 41% of their gross revenue. If their assertions were true, then out of Sri Lanka’s total petroleum expenditure of US$ 4.16 billion during the first 11 months of 2022 the garment exporters alone would have consumed 54% or US$ 2.24 billion worth of fuel, which is impossible.

Secondly, it is general knowledge that apparel exporters procure only a few inputs from local suppliers and the rest is all imported. Local suppliers’ inputs usually include knitted fabric, printing and packaging. They form part and parcel of the input cost of 45% from gross revenue. Therefore, even if all local inputs are procured using foreign currency, they need to be paid from 45% attributed to the input cost from gross revenue. Hence, export income after deducting the foreign exchange input costs and other foreign exchange obligations (which is called residual income) should be fully repatriated to prevent 55% value addition in the sector claimed by exporters becoming a ridiculous fallacy.

Garments constitute a technologically backward process resulting in low wages and physically destructive workday lengths and intensities for workers, in contrast to technologically progressive processes of producing inputs. Since the inception of garment manufacturing in Sri Lanka, businesses have failed to reinvest surpluses in producing inputs like yarn and machinery. On the contrary, they have largely siphoned away capital through trade mis-invoicing and destroyed what remains in the economy in conspicuous luxury.

Tea Exporters Association (TEA) fabricating facts on repatriation

Following JAAF’s misleading statement on non-repatriation, TEA also asserted a similarly disingenuous view. The CBSL Governor had underlined that the value addition ratio of the sector is 90% of the total output while the repatriation rate was only 23% from gross revenue. In response, the TEA claimed that they do not enjoy the luxury of keeping income outside the country as its costs constitute 75% of the gross revenue. This is a shameless distortion of facts by TEA.

In 2021 the unit production cost was Rs. 533.13 a kilo of tea whereas the average weighted export price was Rs. 920.76 (CBSL), as much as 72.7% above the cost of production. More importantly, the average weighted export price of tea shot up over 116% to around Rs. 1,990 a kilo in October 2022 from December 2021 (Sri Lanka Tea Board) due to the rupee depreciating over 80% and the increase in the world market price for tea. However, the unit production cost could increase no more than 20-30% given that the estates and exporters brutally suppressed wages that account for over 70-80% of the unit cost. Therefore, the collapse of the rupee, the increase in world market tea prices hand in hand with the suppression of wages multiplied the profits of estates and the franchised tea exporters in 2022, leading to the unprecedented boom in plantation stocks recently.

At current prices, it can be estimated that the unit production cost is only 32% of the average weighted export price of the sector, less than half of the 75% rate claimed by TEA. The export price is a staggering 210% above the unit production cost of the sector. In other words, the weighted average export price of tea is over three times its unit production cost in 2022! This enables them to retain a greater share of the export proceeds outside the country, contrary to what TEA wants us to believe and justifying the initial calculation of 23% repatriation rate in the sector by CBSL.

This means to say that suppression of wages in the export sector as a whole is the fundamental cause enabling the exporters to illegally retain incomes abroad. This in turn worsens the foreign exchange availability in the domestic financial system and hyper-inflation. We therefore demand the increase in export sector wages by the rate of currency depreciation.

Response of Masakorala and CBSL Governor on Illegal Capital Outflows

Instead of reinvesting in expanding and transforming the production structure, the economy’s surplus is stashed away through non-repatriation and trade mis-invoicing to the tune of over US$ 40 billion between 2009 to 2018 according to Global Financial Integrity, the widely cited Washington based think tank. Its report further notes that this figure is a gross underestimation of trade mis-invoicing in Sri Lanka given that it limited its analysis to trade based on Open Accounts and did not consider services and trade based on Letters of Credit. It is to be noted that the latter accounts for a large share of Sri Lanka’s total international trade.

Illicit capital outflows also led to collapsing tax revenue over the past few decades, which corresponds with proliferating BOI firms in mid-1990s (see graph below), the primary agents of capital flight through transfer pricing and trade mis-invoicing. Sri Lanka’s tax revenue as a share of the GDP averaged between 22% to 24% until the mid-1990s. It collapsed to 8.7% by 2022 primarily as a result of under-invoicing exports and imports, and over-invoicing imports made possible by zero percent import tax on inputs for BOI firms and the other sweeping tax holidays they enjoy. Even after imposing draconian taxes on people through 2023 budget, the government can only expect a 2.6% increase in the tax income to GDP ratio in 2023 to 11.3%. This modest increase in 2023 compared to the enormous collapse of the ratio over the years is also projected to be highly unrealistic. The government nor the CBSL, however, seem to have any intention of addressing corporate corruption leading to this colossal and catastrophic loss of tax revenue.

Source: CBSL

In this regard Rohan Masakorala, Director General of Sri Lanka Association for Manufacturers and Exporters of Rubber Products, states that no one can blame businesses for shifting capital out according to the law of the land. We thank Mr. Masakorala for admitting that businesses have shifted capital abroad and now it is up to Mr. Masakorala to specify the laws of the land that gave the right to transfer capital through trade mis-invoicing and transfer pricing.

The CBSL Governor Dr. Nandalal Weerasinghe stated that between 1994 and 2016 the law allowed businesses to stash their foreign exchange incomes out of the country (see his interview on 8 December 2022). What is the law that allowed businesses to illicitly transfer foreign exchange belonging to Sri Lanka and not generated by them, by means of fraudulent invoicing and transfer pricing?

In fact, it was the CBSL who warned us in 2006 in its own publication titled ‘Preventing Money Laundering and Combating the Financing of Terrorism’ that the country is suffering an outflow of funds through trade mis-invoicing. It states that “money launderers tend to use international trade to effect their laundering activities by the means of inaccurate pricing (mis-invoicing) of imports and exports to hide the transfer of funds. For example, over-invoicing of an import will permit the transfer of funds outside the country.” Even the Justice Minister Wijeyadasa Rajapakshe told the Parliament recently that US$ 53 billion was transferred out by exporters in the last 12 years.

In this light, we demand both the CBSL and the government to take immediate action to repatriate the illegally transferred funds and bring the perpetrators to justice. We demand the government to setup a Parliamentary Select committee with competent persons without conflict of interest to investigate the matter and recommend strong punitive and remedial action.

Demand for debt cancellation

When national savings and external borrowings are illicitly siphoned out of the economy, the capacity of a country and its people to survive and let alone prosper would soon end. However, both international law and U.S. domestic law hold that the burden of proof lies with the creditors when there is widespread evidence of chronic misuse of external borrowings. Creditors should reclaim the funds from those who are accused of misusing or embezzling it, and not from the people who suffered under their control. The legal doctrine of odious debt makes an analogous argument that sovereign debt incurred which does not benefit the people is odious and should not be transferable to a successor government. Applying this principle, Sri Lanka could declare that debts will be treated as illegitimate through an arbiter like the United Nations. Numerous African nations are already demanding the same in collaboration with the United Nations Conference on Trade and Development (UNCTAD) asserting that illicit capital flight through trade mis-invoicing and transfer pricing drained more capital from its region than it received through foreign debt and aid over the past decade.

The recently published statement signed by 182 eminent economists and academics around the world support this position on debt cancellation in Sri Lanka citing the impact of illicit capital flows through trade mis-invoicing and transfer pricing. They underline that illicit capital flight is estimated to be greater than Sri Lanka’s foreign debt during past 15 years. Instead, the government is pushing the cost of economic collapse solely onto the people by imposing unbearable indirect taxes, privatisation and slashing essential expenditures. This unjust and unsustainable status quo must end.

Swasthika Arulingam, President, Commercial and Industrial Workers’ Union, United Federation of Labour

Signed on behalf of:

Ceylon Bank Employees’ Union, Ceylon Estate Employees’ Union, Ceylon Federation of Labour, Ceylon Teachers’ Union, Dabindu Union, Engineers’ Services Professional Association, Families of the Disappeared (Human Rights Organisation), Federation of Media Workers’ Trade Union,Mass Movement for Social Justice, Movement for Land and Agricultural Reform, National Fisheries Solidarity Movement, National Trade Protection Council, North South Solidarity Group, Professionals’ Centre for People, Protect Union, Satahan Media, Sri Lanka All Telecommunication Employees’ Union, Stand Up Workers’ Union, Textiles Garments and Clothing Workers’ Union, United Fishermen’s and Fish Workers’ Congress, Young Lawyers’ Association

Sugath Kulathunga – Former Chairman of Sri Lanka Export Development Board, Prof. (Dr.) M. P.S. Magamage – Former Chairman of National Livestock Development Board, Gratien A. Peiris – Former Chairman of Sri Lanka State Engineering Corporation and Value Chain Expert, Kalpa Rajapaksha – Senior Lecturer in Economics and PhD Student, Amali Wedagedara – Political Economist and PhD Student, Dhanusha Pathirana – Economist

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