Vehicles for the Rich

This piece serves as a gambit to a relatively unpopular budgetary reform that should be pushed through. In Sri Lanka as in the rest of the world the vehicle is a status symbol. It’s role as a status symbol is however more pronounced in Sri Lanka. High duty, petrol costs, and realizable value in the secondary market make the vehicle a reliable indicator of wealth. The significant costs in owning a vehicle combined with the considerable ease with which it can be offered as collateral make it popular as an asset class amongst businessmen. Businessmen also use the transferability of the asset class to cover taxable income or unexplained wealth. Vehicles are the preferred form of collateral outstation (any region outside the Western Province) indicating problems with financial deepening and distribution.

True on so many levels

One must consider vehicle drivers, owners, service providers, financiers, and then agents from a social lens. Revisiting the list, one sees that they are ordered in ascending order in terms of wealth. Ishara Chinthaka Nanayakkara, Indra Silva, the Yaseen family, David Pieris, and Arthur Senanayake come to mind. It is my sense that vehicle dealing has overtaken tea as a creator of disproportionate wealth. This is odd as it doesn’t take much in the way of intelligence to import and then sell a vehicle. People notice vehicles. The school run of the British School of Colombo is a significant eye sore to those averse to gaudy displays of wealth by the newly rich. One would imagine that there is a daily gala occurring at the WTC by observing the way in which people roll up to work. There is considerable social angst against this.

False on the most significant one

Vehicles are a signifier of individual wealth. They are not however a signifier of societal wealth. A vehicle is only as important as it is in Sri Lanka when your infrastructure is poor. Wealthy nations have efficient public transport used by a considerable portion of their population. Rich Sri Lankans will still have to feel poor amongst their foreign counterparts who have more equitable taxation and better mobility. We must start to think of vehicle taxation as part of wealth distribution and more importantly as part of a wider transport policy.

We are in the process of moving to http://www.WrongLK.com

Please share your ideas by commenting to help formulate this idea into a budget suggestion.

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What is Inflation Targeting?

“Given that Sri Lanka is a twin deficit country, in terms of budget deficit and current account deficit, the chances that Sri Lanka attracting new money at this juncture is very minimal indeed. By increasing interest rates, we will not be able to attract new money or keep the money already invested.”

Indrajit Coomaraswamy 02.10.2018

Inflation targeting as defined by Bernanke in one of his papers1

“The hallmark of inflation targeting is the announcement by the government, the central bank, or some combination of the two that in the future the central bank will strive to hold inflation at or near some numerically specified level.”

In the same paper he goes on to say

“We believe that it is most fruitful to think of inflation targeting not as a rule, but as a framework for monetary policy within which “constrained discretion” can be exercised. This framework has the potential to serve two important functions: improving communication between policymakers and the public and providing increased discipline and accountability for monetary policy.”

To put it in a local context, the movement to a flexible inflation targeting framework does not mean that we wholly ignore foreign reserves. It just means that we will consider other things as well. The governor signaled that he was looking to increase the growth rate in the second half of 2018 to close to 4% and to a lesser extent that he was hoping to close the output gap that exists.

Why rates will come down in the long term?

To put it simply the government is just better at borrowing now. It borrows less frequently and for less ambitious purposes. This is in a context of a complete legal overhaul of the way in which government financing occurs. We have a new bond issuance system, a new active liability management act, and most importantly significantly lower budgetary deficits proportional to GDP. The budget deficit for 2019 is close to 4.1% of GDP.

The relevant section of the active liability management act2 is as follows;

“The Parliament may, during a particular financial year from time to time, by resolution, approve to raise sums of money, the total of which shall not exceed ten per centum of the total outstanding debt as at the end of the preceding financial year, as a loan whether in or outside Sri Lanka.”

This gives the government the capacity to refinance and pre-finance any government obligations. This allows government financing to take place more smoothly. This and the capacity to tap international markets pre-emptively will help reduce the financing costs of the government. My sense is that the CBSL is now in a much better position to reject bids than it has been before. With inflation at current levels it is also forgivable for the CBSL to print money and end up at the upper band of the inflation target.

What About Foreign Reserves?

Here this article agrees with the consensus that reserves will slightly deteriorate. This however does not pose a significant risk to the economy as the magnitude of such deterioration will be small. We must remember that this is not a government that wastes foreign reserves on protecting the exchange rate and as such the level of reserves will not fall to a point wherein a crisis occurs. One must also account for the Samurai and Panda Bonds which are to be issued.

Further the halting of duty-free vehicle imports and the upcoming budget which many economists suspect will increase the cost of the yearly vehicle revenue license in a unit rate like fashion will ease pressures on the demand for foreign exchange. The revenue license hike would look to tackle the problem that high duties are realizable in the secondary market for cars and as they are FX denominated reward people who buy cars as a bet against the rupee.

Revisiting the exchange rate in this regard

Many analysts are concerned about the reserve position with the flow of funds back to the US and further the rising costs of oil. Our low rates of FDI should bring confidence about the magnitude of the fund flow back to the US. There is also much scope to increase FDI and foreign investment will invariably flow to build up the Port City project. With regards to the costs of oil there is little that interest rate policy can do.

Going long on government securities

Let us remind ourselves that the average AWPR in 2015 was 7.40%. The Central Expressway, the only heavy financing requirement so far, has been financed through an external party. Inflation is below 5%. An 11.32% yield on the secondary trading of a 9.91-year treasury bond as at 03.10.2018 seems a good deal.

We are a country with a primary surplus on our budget. A fiscally conservative government in the long run will bring down rates.

Footnotes

  • Inflation Targeting: A New Framework for Monetary Policy? Author(s): Ben S. Bernanke and Frederic S. Mishkin Source: The Journal of Economic Perspectives, Vol. 11, No. 2 (Spring, 1997), pp. 97-116 Published by: American Economic Association
  • ACTIVE LIABILITY MANAGEMENT, ACT, No. 8 OF  2018, Parliament of Sri Lanka

 

The Rate of Exchange, Capital Flight, and the Central Bank

 

The Central Bank (CBSL) exists for the sole purpose of price stability. It’s controls on the financial system and monetary policy exist to maintain price stability. As put forth many times by the Governor, the failing of the CBSL to control inflation is a fireable offence. In this light the following text aims to put forth a view on the exchange rate that does not play to the current media narrative and focuses on the objective of the CBSL.

The notion that the exchange rate, more narrowly the USD/LKR rate, having a linear (increasing prices in the same proportion) and systemic (affecting all goods) is misguided. Given below are where Sri Lanka imported its goods from represented in percentage values;

a

Source-http://atlas.cid.harvard.edu/explore/?country=128&partner=undefined&product=undefined&productClass=HS&startYear=undefined&target=Partner&tradeDirection=import&year=2016

Though our import contracts may be priced in dollars, as it is a reserve currency, the US only makes up 2.71% of this value. A more multivariate approach to analyzing our exchange rate would suggest that the rupees has appreciated in a basket of imports sense. This would be difficult to compute as global supply chains and financial products are more complex outside insular nation states. To put this in a more practical sense the cost of an Indian hatchback would be coming down to a locally salaried person. Inflation via appreciation of the dollar is also hedged by the increasing ability of local producers to compete at higher prices.

 

The Central Bank looking to contain inflation, which it has done admirably over the last six months, should look at how the exchange rate will affect the basket of goods that have a bearing on inflation. Though exporters may face uncertainty with regards to the value of their contracts they can hedge, borrow at foreign rates, operate completely in USD, and look to the Central Bank to give a broad indication of where rates will be in the future.

In the recent past there has been a false notion that foreigners on a significant basis are withdrawing from Sri Lanka. This is not reflected in the secondary trading of USD national debt listed outside the country. Those rates have been moved in line with projections of rises in US rates. Further there is no recent significant activity in those instruments. Reasons for the foreign withdrawal are more hinged on the growth experienced in the US markets which has caused a global movement of capital back to the US.

The Central Bank however fails on an exchange rate front with regards to the massive informal market in foreign exchange. This market is less efficient and causes volatility. Sri Lanka’s stringent capital controls combined with its low tax collection drives demand for a black market in FX. The low rates (read high margins by BOC) on FX conversion to our workers in the middle east leaves them bringing back physical notes to the country. The information available on the BOC website would suggest that they don’t even allow electronic transfers into their account from major employers in the middle east. These notes are then traded against the many 5000 lkr notes (only used by politicians and tax evaders) in circulation. To paraphrase what an IRD man once told me, this money is then taken to Malaysia by rich businessmen using the same channels that the LTTE used in its financing operations.

b

Source- BOC Website

Though I am in favor of foreign ownership of assets and would vociferously support the ability of any foreign passport holder to incorporate companies locally and retain property rights indefinitely I am suspicious on the Sri Lanka-Singapore FTA. On balance I am broadly still in support of the agreement. My suspicions are because Singapore has broadly liberalized lines of customs duty and there is little trading benefit on a crude trade balance analysis of the agreement. This is combined with the recent Central Bank sale of assets belonging to the ETI group to a Singapore based firm. As seen by the stock exchange filings and noted in the media, the Edirisinghe brothers remain operationally at the head of these companies now under apparent foreign ownership. It is unclear if the suspected rerouting of Edirisinghe brother’s ownership of Swarnamahal Finance through Singapore sanctioned by the Central Bank is a firable offence if proven? ETCA or ETCA inclusive of just financial services would in my opinion be more fruitful to push through.

c

Source- Swarnamahal Finance Interim Statements 30.06.2018

Also available at

http://www.ft.lk/columns/The-rate-of-exchange–capital-flight-and-the-Central-Bank/4-663257

Who We Pay for LankaPay

Full doc.x with images at bottom.

Arvind Subramaniam recently made statements in the Central Bank about rebuilding the social contract. He put forth a narrative of reform whereby he called for the building of trust in government institutions. The statements also coincided with the revelation to the general public that cheque payments had been made to the former president, members of COPE, and to political foundations. Here the general public should see an opportunity. We have a Central Bank eager to impress Mr Subramaniam and a political desire for some action. On your behalf this article looks to achieve two things;

  1. Reduced cheque usage via a reduction in the SLIP system cost to the consumer
  2. ITCA representation on the LankaPay Board

Cheques are notoriously bad instruments of payment. They are slow, subject to error, and expensive. According to LankaPay’s annual report “Out of the 51.45Mn cheques  presented for clearing, 2.15Mn cheques were  returned due to non-payment. This amounts to  4.18% of the cheques presented for clearing of  the total cheques returned, around 48% were  returned due to lack of funds.” Cheques also facilitate fraud and money laundering as they can be easily transferred and even encashed by 3rd parties notably members of a Minister’s Security Detail (MSD) with no questions asked. We have a perfectly good SLIP system which is underutilized due to extortionate pricing which was written about earlier (http://www.ft.lk/columns/Money-transfer-and-the-CBSL/4-658243). The previous article shows that to the consumer cheques are cheaper than electronic transfers even though the bank would find it cheaper to perform the latter via LankaPay.

 

 

Source- Central Bank Q3 Payments Bulletin

Looking at the charts from the payments bulletin we see that the majority of transactions in the SLIP system are also only for salary payments. These payments tend to happen only once a month. More widespread usage can be achieved with a lower price. The regulatory hatred towards digitization is also unfounded. Take the IRD, one of the few revenue institutions not to show a marked improvement since the taking over of the new government. One of their only long term achievements is the collection of PAYE tax. This is because the system does it for them. Mandating for instance that doctors and lawyers receive payment via the SLIP system or via card would be easy to implement given a more widely used digital payment system. This would then make it easy to collect revenue. To be fair to the IRD, it is the CBSL down the road in the much nicer office who are to blame. According to the Central Bank’s Payment Bulletin in excess of 90% of the total retail payments continue to be made via cash. The Central Bank is keener to see their friends at De La Rue succeed than for the IRD to meet revenue target.

All of this is facilitated by the undue power and lack of public accountability with the Central Bank and its many subsidiary operations. LankaPay, running contrary to the Capital Maharaja narrative, is a private company. It has some state and proxy state ownership but operates for profit and in the interests of its shareholders inclusive of the private banks. Also its monopoly status is not in the public interest. The board is also oddly comprised with the regulator taking board seats in the company. This ensures that the company is not particularly well regulated. The board also lacks any technical experts or any involvement of ICTA. This ensures that state institutions are unable to interface directly with the company bypassing the banking system. Sri Lanka customs was only recently given a solution through LankaPay. Institutions like the SEC who would greatly benefit from an operational digital payment platform have been noticeably silent. This may be due to the SEC commission comprising of one Ranel T Wijesinghe who is also on the board of the Bank of Ceylon, a major beneficiary of the poor payment system. The existence of these so called independent commissions might increase the number of interests represented but one must question if these interests are public or vested?

Name of Bank No. of Lanka Pay Shares Mn Value Rs. Mn % Held
Central Bank 2.95 29.5 19%
HNB 2.2 22 14%
Bank of Ceylon 2.1 21 14%
People’s Bank 2.1 21 14%
Sampath 2 20 13%
Others 1.85 24.75 12.17%
Commercial Bank 1 10 7%
Seylan 1 10 7%
Total 15.2 158.25 100%

Source- Lanka Pay Annual Report 17/18

LankaPay is best judged by the status of their planned expansion. The Central Bank has squashed both PayPal operations in Sri Lanka and also the planned operation of a competitor by ICTA. This is sad as PayPal would have helped Sri Lankan businesses better interact with companies overseas and ICTA’s competitor might have brought in innovation into an otherwise sluggish sector.

LankaPay acts as a rent seeking monopoly. The profits however are on respective banks profit and loss statements as they charge excessive mark ups on services provided by the company. It has failed to implement a national card system. It has failed to bring about wide usage of its certification technology. It reinvests in outdated technology. It prevents entry into the industry both through regulatory pressure and also through the excessive unutilized capacity of its own systems. The current switch has been tested and proven to process approximately 7 Mn commercial transactions a day. Sri Lanka is nowhere close to this figure. The marginal cost of processing an additional transaction must be negligible and as such the usage of cheques can be phased out in a few years.

The implementation of a national card system is something LankaPay will not do. It is in the national interests as it allows for lower costs, retention of payment information domestically, and wider financial inclusivity. The Banks however have very lucrative deals with VISA and Mastercard and will not allow for a domestic competitor to form. The technology is already available through a partnership with JCB and probably is already operational in a different form under the previous CPS system. Even though the CPS system is live there are no participant members. LankaPay’s 2018 investment in the common card and payment switch according to the cash flows is zero. The Central Bank is also pretending to work on a payment system for our transportation network. As a country we will continue to be declined widespread card usage by our Central Bank. What do we have to show for 436 million LKR in investment?

The maximum price for a SLIP transfer can be reduced and the cost of a cheque transaction can be increased. This is us, the general public, putting forth an offer for the beginning of a social contract.

Who We Pay for LankaPay

Kelsey Homes House for Rent in Nawala

Dear Reader,

You are an integral part of this post. I have been instructed by my father to list a Colombo based property on the internet for rent. This happens every two or three years as tenants move out. On doing it this time however I find that the prices have skyrocketed. Services like this a few years ago would have been free or charged a negligible amount.

Lanka Property Web and Ikman.lk both charge more than 2000 lkr for their services and have very complicated pricing cards. Lanka Property Web seems to have a membership charging system which I suspect auto renews. Also, the viewing figures are low and little interest has been generated. My father feels my argumentativeness is of no use to the family and that I should just “do the bloody thing” but he was not averse to advertising on Facebook.

Can Sri Lankans get better value for money by listing on Facebook and pushing their advertisements?

 

Bedrooms number: 4 Bills inclusive? No
Bathrooms/WCs: 2 Deposit: 1 year
Floor area: 2200 sqft Min. lease term: 1 year
Floors: 2 Nearest bus stop: 600 meters
Area of land: 8 perches Nearest train station: 3.1

 

Property-85/7A Senanayake Mawatha, Nawala

 

A house built in 2004 and newly refurbished, consisting of 4 large bed rooms, 2 bathrooms with hot & cold water, Family TV lounge upstairs with a balcony towards the garden. Sitting dining rooms extending to the garden. Pantry fitted with cooker hob and extractor and hot & cold water. Maids room and toilet has separate entrance. Two car parallel parking with remote controlled roller shutter. The house is equipped with a CCTV network and other safety devices. AC units to be fixed in consultation with the occupant. The house is located in a breezy residential neighbourhood with wide roads. Rent Rs. 175,000.00 ONO. Six months deposit. Can be seen by appointment.

For More Details and Contact Info Click Below

https://www.lankapropertyweb.com/rentals/property_details.php?prop=252811- (Does integrate Google Street View)

https://ikman.lk/en/ad/kelsey-homes-house-on-rent-nawala-for-rent-colombo

I hope to follow up with analyzing the results shortly.

In Support of Digital Banking

The Central Bank governor at his recent statement at the Digital Banking summit stated that he felt like a charlatan when asked to speak about technology. He is right. This is not because, as he attributes it, of his recent acquisition of a smartphone but rather due to his regulatory lack of support for digital innovation. The Central Bank through its regulation of our payment and banking systems continues to pander to powerful financial interests. The Central Bank through its regulatory diktat from upon its fortress in Colombo Fort has chosen to strangle economic activity. Let us just take one situation wherein this is true. One massive instance of the Central Bank shunning a digital innovation.

Money Transfer

Let’s focus on transferring money. The prices as I face it, through Commercial Bank, are given below. As the largest non-state bank, I feel the costs are reflective of a broader truth in the economy.

1.10 Cost of Cheque Books
Per Leaf, Including VAT Rs 15/-
4.8.2 CEFTS (Per Transaction)
Over the counter Rs 100/-
Internet Banking Rs 50/-
Mobile Banking Rs 50/-

Source- http://www.combank.lk/newweb/en/rates-tariffs/general-tariffs#filer-c

According to LankaClear’s website “The Common Electronic Fund Transfer Switch (CEFTS) is an integral part of Sri Lanka’s trusted national payment network.” Our interbank payment network is poor. This is by design. Our antiquated means of transferring money, the large costs incurred in transacting, and the difficulty in transferring money all seek to serve vested interests. Looking at the tariff above you would be inclined to use a cheque book over a digitized transaction. It’s as if the post office has somehow become cheaper than Whatsapp or Email. Now to be fair, we on average may not even be aware of these charges as the Banks we use tend to have amazing transfer mechanisms internal to the bank that are free, intuitive, and feature rich. Most major utility providers have accounts at all major banks and as such are accessible through these internal transfers. The impact of these charges and non-charges has a systemic impact on our economy. Think in terms of net neutrality.

Through the inefficiency of interbank transfers, the regulator is pushing customers and therefore deposits to the banks it chooses. The regulator is also allowing banks to artificially improve CASA ratios by delaying the crediting of payments. As most shareholders will know even if it is that you have instructed the CDS to deposit cheques directly to your account it does not credit as set out by the company. Banks collude with each other to maintain slow realisation of transfers. For instance, my recent dividend cheque from Property Development PLC (subsidiary of Bank of Ceylon) to be credited on the 8th of June was only realised in my account on the 28th of June. The wide usage of cheques in the economy also helps beneficiaries of Central Bank conspiracies to mask payments. To paraphrase Rajitha Senarathne fielding a question on a primary dealer, it is not unusual for a business to write many cheques and it takes a lot of time to trace where payment ended up. Small businesses wishing to automate the receipt of payments are also constrained into either only serving customers within a certain bank or having a costly online credit card payment portal. Sri Lanka’s merchant fees are well above the global average of .99% with smaller merchants having to pay as much as 3.5%. These fees can (and have been in Europe) be capped by the regulator.

Why doesn’t the Central Bank reduce the price of CEFTS and SLIPS and increase the price of CITS and Cheque transfers? Initially because of the high costs and therefore high profits to the banks of cheque returns. More strongly though because of the entrenched interests in a poor payment system highlighted earlier.

Source- Lanka Pay Website

Improved version for publication available at;-

http://www.ft.lk/columns/Money-transfer-and-the-CBSL/4-658243

FT 3.7.2018

 

Independence

Subject: Independence
From: perera_d94@yahoo.com
To: globalmedia@visa.com; lkhelpdesk@bookmyshow.com
Date: Sunday, June 3, 2018, 5:27:41 PM GMT+5:30
This message contains blocked images. Show images or Always show images

Dear Visa and BookMyShow,

I write to you following a failure to place a discounted transaction on your site. As you may know, this month Visa cardholders are entitled to up to 25% off for movie ticket bookings through your site. The error prompt I received instructed me to book more than one ticket to avail the offer. Despite this and my credit card (MasterCard) I decided to go through with a Visa Debit card payment. This was for two reasons; One I couldn’t find the more than one ticket in the terms and conditions, and two I believe it’s in everyone’s interest to support the individual endeavor. This email is about more than a discount. This email is not a mere complaint. This email is about independence.

By choosing to prevent anyone from doing anything alone you are forcing that person to an activity he or she may not choose. Your actions are not that regulatory but rather help bring about stigma around the independent venture. People doing things alone are already at a price disadvantage as restaurants and venues tend to price for two or more. Sometimes you aren’t even allowed in if you are alone. This is saddening as groups of people tend to be both insular and aggressive. Independent people are on average more interesting and trustworthy.

To quote Gustav Le Bon, the father of crowd psychology, “In crowds it is stupidity and not mother wit that is accumulated.”

I put forth these ideas from my visits to the Lionel Wendt. In my observations I find that people as part of larger groups are not the ideal customer. They on average pay less. They collectivise transactions preventing usage of both website and payment card. They are less interested in the play. They are quite insecure with many wearing more make up than those on stage. They are disruptive and communal in their behaviour. They have a symbiotic relationship to each other preventing natural movement to and from exits. They become less attractive proportional to their size. Due to the difficulty of convincing every member they are less likely to try something new or do something unplanned. Let us do away with them.

I have attached all documents to this email. I hope to hear from you soon.

Kind Regards

Dinesh Perera

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