Sri Lankan developers halt new condos after currency crashes and costs soar

ECONOMYNEXT – Sri Lankan condominium developers said they had halted new projects and building materials soared with the collapse of the rupee and import protection given to producers of building materials triggering a crisis in partially built apartments.

“At present, no developer is embarking on new projects because budgeting even in the short term is impossible,” the Sri Lankan Condominium Association said in a statement.

“The harsh reality is that developers with partially built properties and current buyers [and] those who have made installments on the “old pricing” will jointly face difficulties.

“On the one hand, the exponential increase in costs prevents the respect of the prices previously quoted and, on the other hand, buyers are faced with unforeseen cost increases and rising interest rates.”

The Sri Lankan rupee has plummeted and the country is trapped in the worst currency crisis in the history of the island’s Latin American-style central bank.

The rupiah crashed from 182 to 360 per US dollar in the current round of money printing to suppress rates.

Currency instability worsened and the central government, the state-owned enterprise and the central bank itself borrowed heavily from abroad during seven years of “flexible inflation targeting” with inflation targeting. output gap (printing money to stimulate growth) despite having a reserve peg and defaulting in 2022.

Inflation officially soared 67% in the year to June as food prices doubled in two years.

The price of steel has jumped 350%, from 100,000 rupees per ton in 2021 to 450,000 rupees today.

The price of tiles soared 300 percent from 150 square feet to 600 rupees.

The price of cement increased from Rs 800 to Rs 3,100 per 50 kg bag, or about 287%.

Prices for some fittings are over 500%, the condominium developers association said.

About 600,000 people are employed in the construction industry, the association said.

The industry was also hit by protectionist taxes that created monopoly power among some producers of building materials.

The suppression of central bank interest rates and resulting bad credit and investments for targeting the output gap (printing money to stimulate growth and employment) generally hits the sector hard. building the hardest.

The construction sector was also hit by the cycles of interest rate suppression and currency crashes of 2016 and 2018, with most of the industry backing the opposition at the time.

However, the 2019 administration printed even more money and extended 7% construction loans, which boosted imports, which were financed by central bank reserves, which made imports spike and interventions were sterilized, leaving banks with borrowing from the central bank and deteriorating loan-to-deposit ratios.

Printing money to stimulate growth has become popular in the West (apart from Germany and several German-speaking countries, including Switzerland), but these full-employment policies are followed by abrupt collapses.

“The truth is that, by a mistaken theoretical view, we have been led into a precarious position in which we cannot prevent substantial unemployment from reappearing,” classical economist Friedrich Hayek said in his 1974 Nobel Prize speech. when the world was plagued by high inflation. and the soft ankles of crumbling Bretton Woods.

“Not because my view is sometimes distorted, this job is deliberately created as a way to fight inflation, but because it is now bound to appear as a deeply regrettable but inevitable consequence of the wrong policies of the past. as soon as inflation stops accelerating.

“The fabrication of unemployment by what are called “full employment policies” is a complex process. It essentially operates through temporary changes in the distribution of demand, attracting both unemployed and already employed workers into jobs that disappear with the end of inflation.

In Sri Lanka, in the up credit cycle, foreign exchange reserves are used for imports and the resulting correction in the credit system is reversed (sterilized) with fresh money injected through securities repurchased from the bank, leading to a deterioration in the charge/deposit ratios.

However, economists then blame budget deficits as Treasuries end up on CB balance sheets.

Sri Lanka has gone from one currency crisis to another since a Latin American-style central bank was established in 1950 by an American money doctor. Latin American central banks are going bankrupt with budget surpluses.

Sri Lanka’s middle regime central bank has taken the country to the International Monetary Fund 16 times so far. The country is currently negotiating the 17th agreement with the IMF as well as debt restructuring. (Colombo/August 25, 2022)

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