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Tuesday May 30th, 2023

China on track to bail out Sri Lanka with US$1.25bn in 2018

ECONOMYNEXT – China is on track to bail out Sri Lanka with up to 1.25 billion US dollars in 2018, with a below market rate syndicated loan and smaller Panda bond planned for later this year, after coming under fire for driving the Indian Ocean island in to a debt trap.

Sri Lanka is facing foreign debt repayment spikes in 2019 to 2021 period and the island changed its borrowing laws to allow extra money to be raised early to stretch repayment.

Earlier in 2018 China Development Bank easily beat offers from Western international banks for a syndicated loan to win the mandate to syndicated a billion US dollar loan for Sri Lanka both in rates and tenor (Sri Lanka may get China Development Bank loan within two months).

While private international bank offered three year money, CDB offered 8-year funds with a 3-year grace period at around 5.25-5.35 percent.

In April 2018, Sri Lanka sold a 5-year bond for 5.75 percent.

"This is actually extraodinarIly good terms that we have got," Central Bank Governor Indrajit Coomaraswamy said.

The first 500 million US dollar tranche of the syndicated loan will arrive in Sri Lanka at the end of August, Coomaraswamy said. The balance would come in October.

China is also helping Sri Lanka sell a 250 million dollar equivalent Panda bond (Yuan denominated bond) at the end of 2018, in yet another move to fund Sri Lanka.

The People’s Bank of China has just set up joint task force to help Sri Lanka with the Panda bond, Governor Coomaraswamy said.

Twin deals seem to indicate that China is going out of its way to bail out Sri Lanka, which until China’s entry to the scene had an impeccable debt repayment record.

Coomaraswamy says China has always had friendly relations with Sri Lanka.

"During consultations it was clear that they see us as a key strategic partner as far as the BR (Belt and Road) initiative is concerned, given our location," he said.

"So that is a factor. And of course Sino-Sri Lanka relations have been excellent right through the Rubber-Rice Pact of 1952, they have always been with us."

"You remember during the conflict they were pretty much the main partner Sri Lanka had in terms protecting the territorial integrity. So China has always been supportive of Sri Lanka."

China has come under fire for funding so-called vanity projects in ex-President Mahinda Rajapaksa’s hometown in Hambantota without proper feasibility studies. (Colombo/Aug03/2018)

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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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Sri Lanka teachers withdraw from A/L paper marking again over unresolved payments

ECONOMYNEXT – Paper marking of GCE Advanced Level exam has been delayed again as teachers withdrew from duties after Sri Lankan government failed to pay the promised allowances, All Ceylon Teachers Union said.

Teachers were promised an allowance of 15,000 rupees, however, the Union complained that only 10,000 rupee was given by the government for the teachers who have been involved in paper correction in over 30 centers across the country.

“As many teachers are stationed in examination centres away from their home towns, the government promised a 15,000-rupee allowance for these teachers,” Joseph Stalin, the Secretary of the All Ceylon Teacher’s Union, told EconomyNext.

“However, due to the constraints imposed by the dwindling treasury, the examinations department states they can only pay 10,000 rupees. This is insufficient to cover the teacher’s expenses and has led to protests.”

Meanwhile, upon inquiry denying the allegations, the Examination Commissioner Amith Jayasundara said, allowance was specified earlier.

“There was no such promise of a 15,000 rupee advance,” Jayasundara told EconomyNext.

“This was merely a consideration that was discarded after consulting the financial regulations. We have decided on a performance-based pay system with 10,000 rupees being paid after five days of paper marking.” (Colombo/May 29/2023)

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