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Tuesday May 30th, 2023

After fertilizer policy failure, Sri Lanka leader offers record 95 rupees for paddy

President Gotabaya Rajapaksa

ECONOMYNEXT – Sri Lanka President Gotabaya Rajapaksa has ordered his agriculture minister to buy paddy for 95 rupees per kilogramme, amid a chorus of complaints about the government’s ban on inorganic fertilizer that led to a drop in production in the ‘Maha’ cultivation season.

The Maha season usually sees the largest paddy harvest in Sri Lanka’s farmlands found in the island’s rural areas that are home to 70 percent of its 22 million population.

Some farmers did not cultivate in the season because the government could not provide organic fertilizer on time as promised. Others cultivated with whatever they had, but now complain the yield is lower because no weedicide and pesticides were made available by the government.

President Rajapaksa banned agro-chemicals in April last year although the original plan was to phase them out gradually over a period of 10 as per his election manifesto.

Finance Minister Basil Rajapaksa on January 03 offered 75 rupees per kilogramme of paddy as compensation for paddy farmers due to the government’s fertilizer policy which has widely been called a failure.

However, President Rajapaksa has now ordered to raise it to 95 rupees, which is a record high for paddy in Sri Lanka.

“This morning when I met state minister Siripala Gamlath, I asked him ‘are you buying paddy?’ He said, ‘yes, harvest season in Vavuniya is around the corner’,” Rajapaksa said, referring to a legislator who owns one of the top private rice businesses in the country.

“I asked how much he was offering. He said wet paddy is purchased at 80 rupees a kilo while dried paddy is purchased at 90 rupees a kilo,” he added, speaking at a ceremony that marked the opening part of the central express highway from Mirigama to Kurunagala.

“All of you know farmers could not sell their paddy at 25 rupees in the past. Today they sell at 90 rupees. I told the agriculture minister if outsiders are buying at 90 rupees, the government should buy at 95 rupees. That money will go to the farmer. That’s okay,” the president told the gathering.

President Rajapaksa did not comment on the government’s new fertilzer policy, but said it was his government that gave fertilizer free of charge.

“Unfortunately, the opposition instigated several farmers to protest. But who gave fertilizer free of charge? Who increased the minimum price to 50 rupees? It is this government,” he said.

“I call on the farmers to trust us. Although there were some delays and hiccups in the beginning, we are now going forward, doing this the right way.

“I request farmers not to get carried away. I am a president who came forward on behalf of you. That’s why I gave fertilizer free of charge. We are committed protecting farmers.

“Our parents also cultivated. My father is famous among the public those days for coming to parliament straight from a paddy field after washing the mud on him. We will never ever forget farmers,” said Rajapaksa. (Colombo/Jan16/2022)

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Sri Lanka rupee at 296.75/297.25 to dollar at open, bond yields steady

ECONOMYNEXT – Sri Lanka’s rupee opened at 297 /297.50 against the US dollar in the spot market on Monday, while bond yields were steady, dealers said.

The rupee closed at 296.75 /297.25 to the US dollar on Monday after opening around 296.50 /297.50 rupees.

A bond maturing on 01.09.2027 was quoted at 26.50/75 percent steady from Friday’s close at 26.50/65 percent.

Sri Lanka’s rupee is appreciating amid negative private credit which has reduced outflows after the central bank hiked rates and stopped printing money. (Colombo/ May 29/2023)

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Sri Lanka rupee appreciation squeezes exporters

ECONOMYNEXT – Sri Lanka’s recent appreciation is starting to squeeze apparel exporters as their domestic costs including wages and energy, were hiked over recent months, when the rupee fell steeply, an industry official said.

Companies had raised salaries and emoluments at rates averaging 25 percent for workers while transport costs have also gone up but not has come down, Yohan Lawrence Director General of the Join Apparel Association Forum said.

Apparel factories in particular also provide transport and some meals for workers.

Electricity prices have also been hiked, based on the rupee which was weaker. A tariff cut is expected from June after the rupee appreciated and imported fuel prices fell.

Sri Lanka’s rupee collapsed in 2022 from 200 to 360 to the US dollar as interest rates were suppressed with liquidity injections and a failed attempt was made to float the rupee with surrender requirement in place.

From the second half of 2022, with higher interest rates and negative private credit, the central bank has avoided printing money under conditions which are generally accepted to be difficult, and is broadly running deflationary open market operations, triggering a balance of payments surplus and putting the rupee under upward pressure.

Central bank net credit to government which was 3,302 billion rupees in September in 2022, was down to 3,209 billion rupees by March 2023, part of which was due to rollovers, analysts say.

Market pricing of fuel and electricity by the Ministry of Energy and also spending controls and tax hikes buy have also helped contain domestic credit.

Sri Lanka also has mandatory conversion rules, imposed on exporters, which is a concern for exporters.

“We believe rupee should be at its natural level, but with forced conversions you won’t get the correct picture,” Lawrence said.

Sri Lanka has to release a plan to remove import controls, exchange controls and other restrictions imposed in the period where policy rates were suppressed with liquidity injections (so-called multiple currency practices and capital flow measures) by June under the IMF program.

Apparel exporters have also seen orders fall amid tighter conditions in Western markets.

The central bank has to peg (intervene actively in forex markets and create money) to meet reserve targets under an IMF program and cannot free float (avoid creating money through international operations) the rupee.

The newly created money has generally been absorbed in an overnight liquidity shortage.

There have also been foreign purchases of rupee Treasuries. Amid a contraction in credit, the inflows also do not turn into imports fast as the money if the money is spent.

By making purchases a little below what is allowed by the contraction in domestic credit, the rupee can be allowed to appreciate, analysts say.

The central bank has so far allowed the rupee to appreciate to around 300 to the US dollar from 360 levels under a transparent guidance peg up to February.

Except after the 2008/2009 currency crisis, Sri Lanka’s central bank has not previously allowed to the rupee to appreciate under IMF programs where the first year in particular sees balance of payments surpluses, before private credit and domestic investments picks up again.

One of the considerations used by third world central banks are Real Effective Exchange Rate indices.

The REER of the Sri Lanka rupee based on a basket of currencies calculated by the central bank was 61.12 points in February before the rupee was allowed to appreciate by lifting a surrender rule.

In March the index went up to 69.55 points, but remained steeply below 100. Real effective exchange rates are calculated also taking into account inflation in counterpart trading nations.

Sri Lanka’s inflation index had hardly risen since September amid rupee gains. Falling food prices can help contain pressure for further wage hikes, analysts say. (Colombo/May30/2023)

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Sri Lanka forum to discuss central bank independence vs sound money

ECONOMYNEXT – Central bank independence and sound money will be under discussion at a public event organized by the Sri Lanka chapter of the Bastiat Society today, May 30, as island is recovering from the worst episode of monetary instability since independence.

The forum will feature Lawrence H White, Professor of Economics at George Mason University in the US, and W A Wijewardene, former Deputy Central Bank Governor, of the Central Bank of Sri Lanka.

“The discussion will compare the current system against alternative systems and explore the relationship between such banking systems and sound money,” the organizers said.

White specializes in the theory and history of banking and money. He is the author of “The Clash of Economic Ideas” (2012), “The Theory of Monetary Institutions” (1999), “Free Banking in Britain” (2nd ed., 1995), and “Competition and Currency” (1989).

Wijewardene has been speaking on central bank independence in Sri Lanka long before it became a topic of wider discussion, but also on accountability.

In April, a Central Bank Independence and Other Matters, which includes a collection of his orations on the subject over the years as well a recent development was published.

The discussion comes as independent central banks in the West have created the worst inflation since the 1970s and early 1980s and are apparently unaccountable to parliaments and the public.

The early 1980s also saw the first wave of external debt crises in so-called soft-pegged countries in Latin America and Eastern Europe in particular as the US and UK tightened policy to end the Great Inflation.

The discussion will be held at 7.00 pm at the Lakmahal Community Library and those interested can register online, the organizers said. (Colombo/May30/2023)

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