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Monday April 15th, 2024

After gloomy 2022, Sri Lanka CB eyes stability in growth, interest rate

ECONOMYNEXT – Sri Lanka Central Bank is eyeing for stability this year in the island nation’s economy after an unprecedented financial crisis forced the country for hard reforms amid worst contraction in the country’s post-independence history.

The central bank, which printed billions of rupees to finance government and resulted in a unprecedentedly high inflation, said the country is witnessing the impact of “consecutive economic shocks” in the last four years.

“Livelihoods were lost, while real incomes suffered the most,” the central bank said in a statement on “Monetary and Financial Sector Policies for 2023 and Beyond”.

“Structural economic impediments that existed across various spheres of the economy over decades were compounded by these economic shocks, along with ill-timed policy choices, thereby loosening the macroeconomic balance and resulting in a sudden and multi-pronged setback for the nation.”

The central bank last year raised the key monetary policy rates by a record high level to curb inflation after the money printing. The move, however, has hit the overall economy which was already on a downturn due to debt crisis and currency collapse.

The economy is projected to register a real contraction of around 8.0 percent in 2022 and expected to record a gradual recovery from the second half of 2023 and sustain the growth momentum beyond, the central bank said.

“The monetary policy will remain focused on ensuring price stability over the medium term,” the central bank, which is in a deal to finalize a $2.9 billion International Monetary Fund loan, said.

“The excessively high levels of interest rates observed at present are expected to moderate in
the period ahead as money market liquidity conditions improve and the risk premia attached
to debt restructuring concerns assuage.”

The market interest rates are now hovering around 30 percent, while inflation has eased to 57 percent last month from its record high of 73 percent in September.

“The market interest rate structure (of both deposit and lending interest rates) is expected to moderate in the period ahead with improving market liquidity conditions. If such adjustment would take longer time than anticipated, the Central Bank will consider taking administrative measures, as appropriate.”

“…measures are underway to secure financing assurances from official creditors for the debt restructuring process aimed at ensuring medium term public debt sustainability. With significant
progress being made at present in relation to the interaction with the Sri Lankan creditors,
the envisaged IMF facility is expected to materialise in early 2023.”

It also said the headline inflation is expected to move along a disinflationary path with a deceleration in the first half of 2023 and reaching the desired levels of inflation towards the end of 2023.

“If any upside risks to inflation emerge in the period ahead, that would be addressed through
appropriate policy measures.” (Colombo/Jan04/2023)

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Iran President to visit Sr Lanka on April 24 anid rising tension, inaugurate Omaoya power project

ECONOMYNEXT – Iranian President Ebrahim Raisi will arrive in Sri Lanka on April 24 on a one-day official visit to inaugurate Tehran-assisted $529 million worth Uma Oya multipurpose development project with 120MW hydro power generation capacity, official sources said.

The announcement on President Raisi’s visit comes two days after Iran launched explosive drones and fired missiles at Israel in its first direct attack on Israeli territory, a retaliatory strike that raised the threat of a wider regional conflict.

“The President is visiting to inaugurate the Omaoya project. He will be on a one-day visit,” an official at Iran embassy in Colombo told EconomyNext.

A Sri Lankan Foreign Ministry official confirmed the move.

This is the first time an Iranian President coming to Sri Lanka Iranian after then President Mahmoud Ahmadinejad’s visit in April 2008.

The Omaoya project was originally scheduled to be completed in 2015, but had been delayed several times due to unexpected issued faced during the project cycle and funding issue after the United States imposed economic sanctions on Iran and economic crisis in Sri Lanka.

The project was started in 2010 and the funding was to be received as loan grant from the Iranian government. However, Iran was able to provide $50 million before the sanctions. Sri Lanka has to bear the cost after the sanctions.

The project includes storing water in two reservoirs with dams before being brought through a 23 km tunnel to two turbines located underground and generating hydro power with a capacity of 120 megawatts and added to the national grid.

After power generation, the water is expected to be brought to three reservoirs while supplying water to 20,000 acres of old and new paddy fields in both the Yala and Maha cultivating seasons.

The Memorandum of Understanding (MOU) for the construction was signed between the two countries in 2007 while Sri Lanka’s Cabinet approved the execution of the contract agreement between the Executing Agency, Sri Lanka’s Ministry of Irrigation and Water Management (MOIWM) of the GOSL and Iran’s FARAB Energy and Water Projects (FC).

When commencing the project on March 15, 2010, the scheduled date of completion of the project was on March 15, 2015. But the schedule completion date was extended to December 31, 2020 due to the unexpected water ingress into the head race tunnel and followed by social impacts.

The trade between the both countries suffered after the US sanctions. However, Sri Lanka inked a deal in December 2021 with Iran to set off export of tea to Iran against a legacy oil credit owed by state-run Ceylon Petroleum Corporation to the National Iranian Oil Company.

Sri Lanka owes $251 million for crude imported before the US imposed sanctions on Iran. (Colombo/April 15/2024)

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Sri Lanka to discuss two contentious points with bondholders: report

ECONOMYNEXT – Sri Lanka and sovereign bondholders are to discuss two matters in the near future which the two sides failed to reach agreement at March talks in London, a media report quoting a top aide to President Wickremesinghe as saying.

Sri Lanka and bondholders had discussed four matters on restructuring international sovereign bonds in late March and agreement had been reached on two, President’s Chief of Staff Sagala Ratnayake was quoted as saying on state-run ITN television.

A restructuring proposal by bondholders was not in line with IMF requirements, and Sri Lanka had sent a counter proposal, he said.

The matters will be discussed at round of talks in the near future.

Sri Lanka was optimistic of reaching an agreement with the bondholders before June, officials have said.

According to matters already in the public domain, sovereign bond holders are keen to get a bond tied to dollar gross domestic product, as they feel IMF growth projections are too low.

In past re-structuring so-called value recovery instruments, a type of warrant, gave their owners extra payments if a country did better than expected and were tied to items like oil prices.

Bondholders had initially proposed bond which would have a lower hair cut initially, and it will have additional hair cuts if growth is low (about 3.1 percent) as projected in an IMF debt sustainability analysis. (Colombo/Apr15/2024)

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BIMSTEC Secretary General visits Sri Lanka, discusses regional cooperation

ECONOMYNEXT – The Secretary General of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), discussed measures to enhance regional cooperation, during his visit to the island last week.

Ambassador Indra Mani Pandey, Secretary General of BIMSTEC visited Sri Lanka from 07 – 12 April 2024, following his assumption of office as Secretary General of BIMSTEC in January this year.

The Secretary General “met with senior officials of relevant Ministries/Agencies to discuss measures to enhance regional cooperation under various BIMSTEC initiatives,” the Foreign Ministry said in a statement.

Several BIMSTEC countries have bilateral trade agreements, such as Sri Lanka and India, Thailand and Myanmar, Sri Lanka and Thailand, but no collective regional agreement to enable intra-regional leverage.

During the visit, Secretary General Pandey held discussions with Ministry of Foreign Affairs officials and paid courtesy calls on the President and the Minister of Foreign Affairs.

Secretary General Pandey participated at an event on “Regional Cooperation through BIMSTEC” organized by the Lakshman Kadirgamar Institute (LKI) on 9 April. (Colombo/April15/2024)

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