Moving Out of Money

6 min read

We aren’t getting an inflation targeting mechanism in the near future. To paraphrase the words of the outgoing Central Bank Governor, it is unlikely that given the political situation such a ground-breaking piece of legislation will be passed in parliament.

An inflation targeting regime was to be combined with an independent central bank. The Central Bank would have operated independently of the Treasury. It would have been further prevented from accommodating the fiscal excesses of the government. This would have meant that it would be gainful to hold on to an instrument that paid out a fixed nominal return like a fixed deposit. Now it is likely that over the tenure of the deposit the real return would be eroded by inflation.

This is odd as if we had truly been practicing inflation targeting the economic situation would have favored an incumbency win. In such a scenario it would be likely to have been passed. It is now beneficial to move out of money.

Context

The major parties are the greens and whatever color, symbol, and family dynasty the Sinhala Nationalists decide to go behind. Both are now right-wing from a taxation perspective. Where they differ is really just in terms of property rights and debt sustainability.

It has been true for multiple decades now that Sri Lankans are able to sell used vehicles for more than they purchased them for. These vehicles are not collectors’ items. This is to say that the rate of inflation is far higher than the rate of depreciation on a vehicle.

The state has now begun interfering in bank debt collection[i]. This is happening at an unprecedented level and sets a dangerous precedent with regards to borrower behavior.

To quote from Ishara’s recent interview[ii] on the previous government’s intervention on loans;

With the announcement of the debt relief program in July 2018, a lot of misinterpretation occurred for political advantage. Some politicians misused the concept for election promises, where they encourage people who pay on time too, to default so that they will be eligible for the debt relief program.

Levels of Debt

By cutting Value Added Tax and revamping the PAYE system the government has shown a rather cavalier attitude towards debt. This debt is what drives the increasing denominations of our physical currency.

After all, if you can’t pay why not print. It is quite likely that we are soon to see a Rs 10,000 note. This all comes in a context wherein to quote Nimal Perera’s on twitter[iii];

Most of the Property Developments companies are struggling to sell their apartments. Even Shangri-La has over 100 units more to sell. Altair is the same. Most of the companies are having cash flow issues. Banks who have given loans are having recovery issues. No resale market.

He later corrected his tweet to say that 85 units remain on the market on January 22nd.

The Beira Lake Conspiracy

You and I do not have land around the Beira Lake. Some of you, if you are lucky, might have ownership of some apartment in the area. The land in that area is inherited and is artificially inflated in value due to the hoarding nature of the holders and the enabling tax structure.

John Keells and Browns Holdings, for instance, had so much land that it was weighing down on their financial performance. To rectify this corporate Colombo conspired with the authorities to spark a highly speculative property development boom with incredible concessions on tax.

Tax from actual work can be taxed as high as 24 percent but when one of Mangala’s dimwit friends’ makes it through sitting on their ass with the property they inherited they pay capital gains at 10 percent. Municipal tax is negligible and municipal works in the Beira area are anyway funded either centrally or through apparent aid[iv].

The development of the area is being heavily pushed through the channeling of credit and tax concessions into the area. Given all of this how politically sustainable will the impending bailout be? Especially when the SMEs realize that they were left out of the recent SME bailout scheme.

Crisis

You may be asking whether there really is a crisis. Ignore the political question of whether slashing taxes and thereby revenue was warranted. Ask yourself whether there is a real crisis. Quoting the President’s Media Division[v];

The unsettled expenditure for Presidential Election held on November 16, 2019, is Rs. 1,188 million. Rs. 25,696 million has to be paid by the Ministry of Health for the supply of medicine and services in hospitals. The expenditure incurred by the Ministry of Finance which is to be paid to the banks for the senior citizens’ interest rate subsidy is Rs. 45,856 million. The amount to be paid to fertilizer suppliers for the fertilizer subsidy is Rs. 23,949 million. The unpaid amount of money for the highway constructors is Rs. 18,449 million. The amount in arrears that is to be paid for Gamperaliya, Northern Provincial Development and resettlement programs is Rs. 3,126 million. Rs. 6,558 million is overdue for irrigation and rural development projects. These are only a few instances.

The UNP would and should not yield to the supplementary estimates presented in parliament. They would feel that their unpopularity stemmed from taxation that was warranted considering the level of debt built up by those in the current government. The UNP ran a primary surplus meaning that they covered the expenditure that they made with tax revenue.

Either which way taxes will have to increase whatever ethnic hue (as they are both right-wing parties) of the next government. Cash or near-cash like fixed deposits are easier to tax than for instance land in Nuwara Eliya.

Derived Demand

The demand for apartments in Colombo is not for the local population. Most occupants are ex-pats. Locals buy apartments to rent to them. The demand for apartments is therefore derived by the number of ex-pats in the country. It would be interesting to see a breakdown of rental spend by nationality in Sri Lanka.

Softlogic is planning to be the king of retail in Sri Lanka. It has an impressive offering and is well placed to cater to tourists. It, however, may have mistimed its expansion as tourists can bypass Colombo with the highway. Though it is difficult to predict the future it would be worrisome to the landlords of the considerable rented space to Softlogic to the actual decline in revenue for this period compared to last year.

Monopolization of retail space at BIA departure would actually be profitable to both the retailer and airport. Katunayaka lags severely behind other countries in departure duty-free.

More Philosophically

If you owe the bank 1 million, the bank owns you. If you owe the bank 100 million you own the bank. If monetary policy is conducted in a manner to suit your own debt levels you own the country.

Sri Lanka wouldn’t have even considered lowering interest rates after the tsunami. Why has that become in vogue now? I would like to comment on the unprecedented outflow from the securities market but the media seems unwilling to publish anything on that front.

Companies like Hayleys and Softlogic have gone on debt fueled expansion drive. They are likely to influence monetary policy away from the current high real returns to creditors. Move out of money as soon as possible. Anyway the rates on your renewing fixed deposits are atrocious and you would be better served in a money market account or in corporate debt directly.


[i] http://www.ft.lk/front-page/Govt-pledges-debt-relief-from-microfinance-SME-loans/44-690831

[ii] http://www.ft.lk/business/Industry-specialist-LOLC-sets-record-straight-on-microfinance/34-693260

[iii] https://twitter.com/nimalhperera/status/1219822262037159937

[iv] https://www.clc.gov.sg/research-publications/publications/digital-library/view/cleaning-up-beira-lake-rejuvenating-colombo-city

[v] http://www.pmdnews.lk/entire-economy-is-crippled-due-to-financial-mismanagement-of-the-previous-administration-govt/

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