Thursday, June 23, 2016

Evening breezes

After the heat of April and the rains in May the weather has turned quite nice. Particularly pleasing is the bracing evening breeze.

It seems to set in a little late, perhaps after eight in the evening, but when in it does it is such a nice experience; cool without being chilly, strong enough to be bracing without being uncomfortable; rustling the trees and leaves as it passes. Once it sets in it seems to continue through most of the night, until dawn.

I don't know what causes it but it's worth just sitting out or walking around, just to enjoy it.

Not wasting any more time typing this, I'm off outside; the breeze is calling and the fireflies in the garden are waiting.



Tuesday, May 31, 2016

Israel: a 'colonial' settler state

The problem of Palestine is a vexed one and I have grappled with it before, albeit in a lighter vein.

Something struck me today, the situation in Israel is similar in many ways to that of the former 'White Dominions' of Australia, New Zealand, Canada, South Africa and the United States. These countries saw a large scale influx of settlers from the 'home' country, who displaced the native inhabitants. The difference with Israel being that since those countries were much larger there was more space available, which probably made cohabitation easier.

While researching these thoughts I came across a couple of articles that articulate these ideas far better than I could, you can access the links below to read them in full.

One which argues the case for the colonial parallel:

Israel - the last of the settler colonies by Jonas Fossli Gjersø

And a slightly different view, from a liberal Jewish perspective. It admits the basic case but highlights some differences from the other colonies. Some good comments in the 'comments' section of this piece as well.






Related posts:

As the Arabs see the Jews

Israel's democratic credentials







Friday, April 29, 2016

The attraction that ISIS hold for Muslims in the West

Janith had written something on this subject that prompted me to put down a few thoughts. Its a very complex question that I have been puzzling over for some time.

What would lead people to turn violently against societies in which they live?

I have not had time to think through everything but I jotted a list of what I believe are the factors that lead to the phenomenon:


  1. A sense of alienation/isolation from the society where they live, brought about by (possibly)  discrimination or an inferiority complex.
  2. This leads to a search for a sense of identity or security, which in turn takes them to their religious roots in Islam.
  3. The austere, extreme form of Wahabi Islam is extensively promoted by the Saudi's and through sheer expenditure of funds appears to have taken over the mainstream. The Islam that people turn to is not the traditional, tolerant version but the ascetic and extreme one.
  4. The teaching of a distorted version of Islam, leads to further suspicion of all things unIslamic/Western. Does this promote further isolation ? People mixing mainly with other muslims and not other communities, worsens the cycle.  
  5. Religious teaching based on respect for authority, emphasizing obedience and conformity, discourage independent thought and make communities more vulnerable to manipulation.
  6. Frustration with their lives, due to limited of job opportunities or the need to rebel against a host of perceived injustices.
  7. Policy on Israel serves as a lightening rod - the injustices against the Palestinians are closely identified with and seen as proof of a general anti-muslim sentiment in the West. 
Some of those attracted to ISIS, might have, under more normal circumstances become vagrants, vandals or petty criminals. 

I think there have been parallels before, in the US. The attraction of blacks to Islam from the 1930's was driven by similar forces; as was the attraction to communism, during the same period.

The difference in that instance was that the people so attracted were not subject to manipulation that turned them violently against wider society.

The solution then, is to ensure that these people are gainfully employed. Unfortunately the recession in Europe has left many unemployed. The wave black turning to Islam and communism waned as opportunities opened up.

People busy with holding down a job, paying a mortgage and bringing up families have little time to spend on violent rebellion against society.

Just a few thoughts, still trying to get my head around this, comments welcome.

Updated 1st May 2016


Saturday, April 23, 2016

Costs of dining out and hotel/resort prices in Sri Lanka


Icaruswept had written an interesting post on restaurant prices. This is something I have been thinking about myself, along with the related subject of hotel/resort prices.

Dining out is expensive and the reason is not just food cost. We are getting ripped off in the coffee bars in Colombo and the resorts outside Colombo, something I have complained of before.

Let me share a few recent experiences on trips outstation.

Just returned from Unawatuna from a great little guesthouse in Unawatuna called the Summer Valley Boutique Villa. that charged us Rs.3600/- per double B&B. Thats 1800/- a head, including a breakfast. My friends were shocked at the price we got and were expecting the worst, some sort of flea infested dive.

Contrary to the worst fears of the party, the place was very clean and comfortable. In the evening my friends were debating where to go for breakfast the next day. I remided them that breakfast was included. They were shocked again. How could they afford to give us breakfast as well? They expected it to be crap and suggested that we may not want to take the risk.

Come the next day our party decided to check what was on offer. A pot of tea, and a tasty omelette, along with some delicious 'kade' paan, butter and jam turned up. The 'kade' paan in Colombo is positively insipid compared to what we got and it was polished off with relish.

More surprises were in store when a bowls of fruit salad turned up and an excellent peni pol pancake to finish off.

In Colombo that breakfast alone would have cost us anything between 800-1200.

When I stayed at a similar, spotlessly clean guesthouse in Galle called Leisure Holiday Resort, they charged me Rs.2,750 for the room. Breakfast was not included but could be ordered for Rs.350/- and they offered a similar menu as in Unawtuna although portions of fruit and bread were much smaller. Still, very good value and quite adequate, especially compared to prices at coffee shops in Colombo where no single item costs less than about Rs.300/-.

I visited Kandy a couple of months ago and stopped on the way for breakfast at a place recommended by another friend. Just beyond the Ambepussa Resthouse they offered a full buffet for Rs.350/-. This included paratas, string hoppers, dhal curry, fish curry, kiribath and a few other dishes. It was, in short, a steal compared to prices in Colombo.

We got a good indication of food costs when we stayed in Batticaloa just before Avurudu. We rented a bungalow and we bought the provisions and had them cooked by the staff. The food cost divided amongst the five of the party (and excluding the two bungalow staff) worked out to around Rs.1400/ per person per day (for three meals plus morning and afternoon tea). The meals included prawns, fish, crabs (on on occasion) and beef on another.

We have got used to paying Rs.8,000-10,000 full board to a hotels – and that too on a deal. Bungalows, which used to be pretty cheap to rent (5,000-10,000 for the whole bungalow about ten years ago) have followed suite and now routinely charge 20,000+.

In Colombo the only alternative to coffee shops are the members-only clubs but thankfully in the outstations there is now a whole set of budget properties that have come up. The problem in the past used to be 1) finding the properties, a subject of much vexation 2) checking on how good the place was.

Now, thanks to a booking site called booking.lk (or booking.com) its possible to get a list of all the properties and prices at a given location. Even better, the reviews are verified and controlled by the site.

Both the places I listed above I booked through booking.com. Since I was very happy with the places I wanted to give them a good review and searched on the site for a place to do a review. There was nothing. It is not possible to get on the site and just do a random review of a place.

What happens is that after someone has made a booking and completed a stay, an email is received from booking.com inviting the visitor to review the place. This way reviews are restricted to people who actually book.

If a place has a good number of reviews and the overall ratings are good then the chances are it will live up to expectations. Even better, as a part of the review, the visitor is shown the pictures of the property displayed on the booking site and asked to review if the actual place was better than/worse than the pictures.

Therefore, thanks to booking.com, a whole range of budget properties can now be accessed with some certainty of what is on offer, which is a great boon to travellers and I would recommend going through them the next time you want to travel.

Monday, April 18, 2016

Revert to a Currency Board to solve Sri Lanka's monetary and fiscal woes


The Sri Lankan rupee has been depreciating rapidly in the last few months and the satirical website NewsCurry suggested that the US dollar be adopted to prevent further depreciation. Although this sounds absurd, as my previous post explained this is actually a workable and serious proposition.
A Currency Board would also achieve the same ends and would be easier to implement than dollarisation. Lets look at the fundamental purpose of money and how a currency board will help stabilise the currency, and therefore the economy.
Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. He was right, money serves as the medium of exchange, and an absence of sound money undermines trade. Historically, the use of money arose due to the inconveniences of barter. Money serves three fundamental purposes:
1. It is the medium of exchange: Money can be used for buying and selling goods and services. If there were no money, goods would have to be exchanged through the process of barter.
2. It serves as the unit of account: Money is the common standard for measuring relative worth of goods and services.
3. Store of value: It is the means by which wealth is stored. Without money people would need to store their wealth as goods, which is cumbersome and expensive.
Money oils the wheels of trade; it is obvious that it performs its functions best when its value is stable. If the value of money fluctuates widely it undermines it's fundamental purpose. A simplistic example drives this point home.

Imagine being contacted by a broker about a 2,500-square-foot house, only to visit and find a house half the size. The prospective buyer would have very little trust in the broker. This is purely hypothetical given that a foot is a foot. Since its definition is unchanging, 2,500 square feet means the same today as it did 20 years ago.

Whatever the level of trust buyers have in their brokers, square footage will never be a factor; that is, unless the length of the foot is allowed to “float,” and its length declines. Suddenly, 2,500 square feet could very well mean 1,500 square feet in “real terms,” and trust in brokers will plummet.

This illustrates the effect of an unstable currency. Sound money has underpinned the growth of Singapore and Hong Kong. What lessons do these hold for Sri Lanka?

Hong Kong has a Currency Board arrangement, which means all currency issued in the territory must be at least 100 per cent backed by foreign reserves. Singapore's monetary policy, although no longer a fixed board (which it once was) retains the key characteristics of a currency board. A currency board is similar to a fully backed gold standard.

As the currency is fully “backed” by hard reserves it is freely convertible and immune from depreciation. The exchange rate can remain fixed but in practice many countries that run currency board arrangements allow a small fluctuation in the exchange rate to reflect trading conditions. The exchange rate may also be revised periodically, to ensure it remains consistent with the underlying fundamentals of the economy; which is what Singapore does.

The currency board guarantees the convertibility between the local currency and foreign currency at the foreign exchange rate in the currency board system. The local currency is linked with the foreign currency by the guarantee of convertibility and the fixed exchange rate. Therefore, the confidence in the local currency is linked with that in the foreign currency by the currency board arrangement, and the local currency acquires the properties of the foreign currency with respect to the basic functions of money.

The Currency Board cannot “create” money, except when actual reserves are available nor can it lend money to the Government, usually described as printing money (or, euphemistically, quantitative easing).

Since the Government cannot borrow from the Central Bank (a source of 'easy' money) it must rely on taxes or debt to finance spending, which imposes a degree of fiscal discipline. This in turn results in low inflation. As the money supply also changes only with movements in reserves, interest rates remain fairly stable and are generally low.

Currency board systems assure convertibility, instil macroeconomic discipline limiting budget deficits and inflation, provide a mechanism that guarantees adjustment of balance-of-payments deficits, and thus create confidence in the country’s monetary system,

In other words; the perfect way to impose discipline when grappling with difficult financial problems.

For this reason Currency Boards were adopted in several East European countries when transitioning from Communism. The transition from communism caused severe monetary shocks in Eastern Europe. To manage the transition several countries including Estonia, Lithuania and Bulgaria implemented currency boards with great success; inflation declined and economic growth picked up.

IMF studies show that historically, countries with currency board arrangements have experienced lower inflation and higher growth than those with other regimes. The lower level of inflation is explained partly by the greater monetary discipline imposed but also by the greater level of confidence engendered by adopting the Board.

Note that a Board is not a simple exchange rate peg (which is what Sri Lanka had pre-1977) the requirement for the currency to be fully “backed” by reserves, the restriction on lending to the state and a long-term commitment to the system usually enshrined in law are crucial differences that underwrite the stability of the currency.

To date no currency board has had to be abandoned as a result of a crisis. The Asian currency crises of 1997 provided a severe test: all currencies of SE Asia depreciated rapidly except those of Hong Kong and Singapore. The worst affected was the Indonesian rupiah which dropped from $1=Rp2,400 to $1=Rp14,500, the Thai Bhat fell more than 50% and the currencies of South Korea, the Philippines and Malaysia were all battered.

Alone amongst its neighbours, the Hong Kong Dollar was unaffected, despite repeated speculative attacks. Although Singapore allowed its currency to depreciate by around 20%, to adjust to the relative weakness of its trading partners during the crisis, it was a matter of choice by policy makers rather than an event forced on them by circumstances.

Currency boards were once the norm. Invented by the British they provided the stability that allowed foreign trade to flourish throughout the Empire. With the decline of the Empire the boards were gradually dismantled by the newly independent states, except in a few places such as Singapore and Hong Kong.

Currency Boards are now coming back in to use, Sri Lanka is grappling with huge fiscal and monetary problems, moving to a Currency Board would improve the stability of the system and provide the platform for long term growth.

Wednesday, April 13, 2016

Abandoning the Sri Lankan Rupee in favour of the US Dollar

The inimitable, NewsCurry carries an article claiming that the Finance Minister has proposed adopting the US dollar as Sri Lanka's currency to prevent further depreciation of the rupee. 

Although NewsCurry is only satire the suggestion is actually very sensible and has been adopted in certain extreme circumstances to stabilise an economy, the most recent being in Zimbabwe.

The process is termed dollarisation or currency substitution. What this does is remove monetary policy from the hands of the local Central Bank. Where the competence of the of the Government is in doubt this is a very sensible measure and something Sri Lankans should seriously consider.

The currency then becomes what it it supposed to be - a medium of exchange and a store of value. Most importantly the Government can no longer print money to bridge the budget deficit (which is what this regime has been doing) which is what drives inflation and causes the currency to depreciate.

The country would then not need a Central Bank, although a limited bank supervision function could be carried out by a slimmed down institution. There would be no need to for all the antiquated exchange control regulations which hamper trade and investment.

Inflation would be at the rate in the US, which is in low single digit.

Overall it would bring some sanity to the proceedings, something badly in need.

Further reading on Zimbabwe's experience here.

  

Tuesday, April 12, 2016

Bond market scandals in Sri Lanka

Just over a year ago a great controversy erupted over the an issue of bonds by the Government of Sri Lanka. The bonds were bought by a company controlled by the son-in-law of the Central Bank Governor which obtained a large chunk of the bonds on offer at premium interest rates.

At the time there were some doubts as to whether there was some innocent explanation:  a case of poor judgement, inadverdent communication of sensitive information or coincidence.

Hearing of what appears to be a massive spurt in corruption over the last few months one is unlikely to give the Yahapalanaya government the benefit of the doubt. When the same scandal reappears not once but twice (in January and March 2016) one can only conclude that this Government is irredeemably corrupt.

An analysis of the first bond scandal from March 2015 appears below. Sadly, the identical thing appears to have happened again in January and March this year. The news reports linked to above present only the bald facts in a neutral style and fail to convey properly the nature of the fraud. (This may be partly due to the lack of detailed information on the auctions, which the Central Bank is refusing to release).

In a nutshell, the scam is that the government appears to be paying interest rates of up to 2% higher on bonds. It does not sound like a lot but on billions of rupees over the period of the bond it is massive.  

The piece below was written in March 2015 and explains the nature of the problem. The same problem reappeared in January and March 2016.


Sri Lanka Bond Market Scandal
In an obscure and little understood corner of Sri Lanka’s tiny financial markets a scandal is unfolding that has shaken the credibility of the Central Bank and undermining perception of the Government. The financial jargon of ‘yields’, ‘basis points’, ‘cut offs’, ‘short selling’ has left journalists and the general public struggling to understand the issues.
Therefore, a quick introduction to bond auctions is in order.
When a bond is issued through an auction the rate of interest is not determined beforehand. Instead, the Central Bank only gives an indicative rate at which they expect offers. Dealers have to offer bids at whatever rate they deem fit. As the Government needs to raise funds at the lowest possible rates, bids are awarded in ascending order, starting from the lowest rate. An example is illustrated in the table below















Amount to be raised (Rs.) 1,000,000







List of Bids Received








Bidder
Rate
Amount bid








A
9.50%
300,000





B
9.75%
500,000




C
10%
200,000



D
10.25%
300,000



E
10.50%
500,000




F
10.75%
500,000

















Say the Government wishes to raise a million rupees and invites bids. Six bidders respond, at various rates. The Government awards the bids starting from the lowest until the required amount of funds is reached. In the example the bids sent by A, B and C are accepted and the others rejected. The last rate at which a bid is accepted is referred to as the ‘cut off rate’.
What happened in the actual auction for the 30 year bond ?
The Government announced an issue of bond for Rs.1 billion at an indicative rate of 9.5%. They received a total of 36 offers to a value of Rs. 20 billion. The Government accepted bids up to the value of Rs.10bn, 900% more than what was originally offered, with the final cut off being set at 12.5%, significantly higher than the 9.5% originally indicated.
The questions this raises are:


  1. Why did they accept Rs.10bn when the issue was only for Rs.1bn? If there was a need for funds why not simply have a larger issue? To an extent bidders will determine the rates to be offered based on the quantum of funds being raised, suddenly expanding the size of an issue catches them off-guard.
  2. If a rate of 9.5% was indicated prior to the auction, why accept bids at significantly higher rates? A difference of half a percentage would not have caused much comment but a 3 percentage points is very significant.
According to leaked data now in the public domain about 5 billion rupees appeared to have been allocated to Perpetual Treasuries, with 2bn being bid directly and 3bn through the Bank of Ceylon. Dealers are mystified as to why Perpetual needed to submit some of their bids through the Bank of Ceylon when they could have submitted them directly. Was this an attempt at disguise?
All of Perpetual’s bids accepted were at 12.5%, the cut off rate. There were obviously bids at even higher rates, but this is not the issue, the problem is why they chose to accept higher rates. The amount originally offered would have been fully subscribed at lower rates. Most bids accepted from other dealers were between 9.50% and 10.50%. Having lent at lower rates, these dealers are now effectively at a loss.
In their defence, the Government had signaled previously that the interest rates were expected to rise and there was wide market expectation of an increase. What caused the shock was the unusually sharp increase.
Also in the Government’s favour is the average rate at which the bond was issued: at 11.73% ,roughly in line with previous issue in May 2014 which was done at 11.25%. Although interest rates on shorter term debt had fallen significantly in the intervening period, there had been no other issues of 30 year bonds. (interest rates rise in proportion to the tenor-the period for which it is issued, so it is not possible to directly compare rates on a one year treasury bill with a 30 year bond).
Nevertheless other deviations from common practice have also raised questions.
Although there is no written rule, dealers are generally expected to place bids of around 10% of the value of an issue. For an issue of Rs.1bn, bids in the range of Rs.100m would be expected from each dealer. The question is what prompted Perpetual to offer a single bid of Rs.3bn for an issue that was originally supposed to be only Rs.1bn?
Information has also emerged that the same party was aggressively selling the 7 year bond in the market in the weeks prior to the 30 year bond auction. If interest rates are expected to rise then it makes sense to dispose of bonds carrying lower interest rates and to hold the money until the rates rise. This is normal market behaviour and with rates widely anticipated to rise many traders would have sold some of their bonds. What has raised eyebrows is the aggressiveness with Perpetual had disposed of large volumes of the 7 year bond.
From their activities in the market it is clear that they had formed a strong view on interest rates and were acting accordingly, the question being raised by others is whether there was anything more to this than a sharp traders instinct.
The critical attribute of a strong market is credibility: participants need to trust the system, that they will all be treated fairly and that no one will be cheated, something neatly captured in the motto of the London Stock Exchange “Dictum Meum Pactum” (My Word is My Bond).
The Government needs to get to the bottom of this urgently to restore confidence in the financial markets.