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.

Sunday, March 06, 2016

The quiet of the afternoon

For me, the early part of an afternoon, just after lunch on a holiday, has a serenity that no other time of day can match. 

The light is bright, almost brilliant but it never seems harsh. Despite the heat- it is far too hot to be walking around outside, contemplating the surroundings from the shade of a drawing room or a verandah is a strangely therapeutic experience.

Partly, it is the quiet - there is very little movement around, people are all indoors, resting. Even the animals and birds are silent, except for an occasional caw from a crow. The only sounds are of the trees and the wind, rustling the leaves.

There are no chores or errands to be run. This is the time for a quiet glance through the papers or to read a book. It is the space between lunch time and nap time, both equally appealing on a holiday. 

The weekends are a precious thing, but the morning and the evenings tend to be busy with errands or friends. The afternoon is a time of solitude and rest. Perhaps this is its appeal?

It must seem a bit strange, finding something appealing in the hottest time of day. Is this just me? Does anyone else feel the same?


Thursday, February 04, 2016

What do people in Kandy DO? and other random thoughts

Some random thoughts on a couple of topics, the result of a chat with a few people last evening.

What do people in Kandy do? 

I was having a chat with someone who mentioned that she was from Kandy. Apart from the usual gripes about the terrible drive to actually get to Kandy, we got on to the subject of economic activity in the town.

My friend, like many others from Kandy works in Colombo. She travels to Kandy on weekends to see her family. I remarked that there did not seem to be a lot of opportunity in Kandy, which she agreed with. She said that apart from Banks and Finance companies there was not a lot else to choose from. She went on to state that observing the number of people queuing at the Pettah bus stand on Fridays waiting to return to their villages one wonders if there is any significant economic activity outside Colombo and its suburbs.  

Why is it that most economic activity seems to be centred around the capital? I don't have a proper answer but I wonder if this is a historical accident caused by the agriculture centred economy we had until the 1980's.

For eons Ceylon had three principal exports: tea, rubber and coconut. Much of the population was rural and lived on the land, tending smallholdings. The main plantation crops were run on a more industrial scale and the towns in the countryside catered to the needs of the plantations. The hill country towns would have branches of Walkers or Brown & Co; firms that supplied equipment to the tea and rubber industry. Baurs and similar firms that supplied fertiliser would have outlets as well as a few motor repair shops, some banks, a general store or two and a few other shops supplying the people with their daily needs.

Beyond this there was not much else. As the majority of the people lived on the land there was not much need for anything else.

After independence in 1948 the country experimented with a closed economic system for a few decades, effectively putting the country in a time capsule. In 1977 things had little changed from the 1950's. When the economy was liberalised in 1977 growth seems to have taken off around the capital. Why? I don't know but perhaps the infrastructure was better?

Whatever it was, the Western Province spurted ahead of other areas of the country in terms of growth.  The towns in the rural areas were left largely untouched, which is why they offer little new opportunity.

Does anyone have any views or comments?

Why does everyone want to come to schools in Colombo?

In 1981 Sri Lanka had a population of around 14m, today we have something close to 21m an increase of about 50%. Casual observation suggests that the number of students attending schools in Colombo in the same period has increased many fold, maybe by as much as a factor of ten. Where did these children come from? Its not the population growth, it is something more that this.

Was it that children who were not going to school entered schools? No, Sri Lanka had high school enrollment for decades.What seems to have happened is that rural schools were abandoned in favour of schools in Colombo, presumably because this improved job and marriage prospects.

I have heard that there were Central colleges in all districts that used to be good, did they decline or were they abolished?

Assuming that there is a demand, why do the Colombo schools not open branch schools to cater to students from rural areas? The private "international" schools like Ceylinco Sussex, Gateway and Lyceum have established branch schools in outstation towns. Why can't the other state and private schools follow this example instead of burdening pupils, parents and residents of the city with extra traffic? One of the people at the table, from Musaeus College remarked that they used to have students commuting daily from Ratnapura and Embilipitiya! I have no idea what went through the minds of the parents and teachers when subjecting children to a daily commute of 3-4 hours, one way. 

Migrants in Europe and Islamic extremism

We also had a conversation with a Frenchman who now lives in Asia. On the subject of migrants in Europe and fundamentalist Islam he felt that the problem is one of poverty. When France was growing in the1960's they needed labour and attracted workers from places like Morocco. The children of those workers are now in the labour market but due to the recession many do not have a proper job. This breeds frustration and resentment which extremists are able to channel into their own nefarious purposes. If these people had jobs, a mortgage, a house my acquaintance mused they would be focused on paying their loans, maintaining their property and advancing their job and lives; not thinking of blowing themselves up.

Personally, I wonder if the attraction of religious extremism is similar to the attraction that Communism held for blacks and minorities in the 1950's and 1960s? The Soviets were attempting to spread their ideology and perhaps disadvantaged and discriminated communities who had little hope in their lives thought a change in the system would improve their lot?

In general I think religion can offer the distressed and the desperate some sanctuary, perhaps a sense of identity, purpose or security. Having found it they can become very passionate and this can be manipulated and misused by others.
       
Large Muslim families

There is a perception that Muslims have large families.  I don't know if this is true but there is a perception as such. The perception may be due to a cultural phenomenon, the extended family.

In the past all communities lived as extended families, in large houses with several generations, in-laws, siblings and cousins living together. The other communities have, by and large, moved to more a more Westernised (?) practice of individual family units living separately while only a part of the Muslim community seems to have done so.

There seem to be more extended families within the Muslim community than amongst other communities, which may give the appearance of larger families.

Of course when one lives within an extended family it eases the burden of childcare, as there are many who can lend a hand to look after children. This makes having more than one or two children a workable proposition, it is very difficult for two parents to look after one or even two children, especially if both have to work. With an extended family at hand even three or more are not a problem.

Perhaps its a combination of both? Again these are just random observations not based on any systematic study so could be quite untrue. Any thoughts, anyone?