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Thursday June 8th, 2023

China’s $240 bln lending for 22 countries opaque, expensive, only for BRI nations – study

ECONOMYNEXT – China has lent $240 billion worth of loans for 22 developing nations including Sri Lanka between 2008 to 2021 to rescue crisis hit nations as debts and balance of payment support, but the lending is expensive and less clear while it has targeted countries in Beijing’s Belt and Road Initiative (BRI), a report by four experts said.

Beijing has given over $170 billion for distressed nations and $70 billion as balance of payments support for the 22 countries mostly involved with Beijing’s ambitious Belt and Road Initiative (BRI) project, the report co-authored by Sebastian Horn from the World Bank, Bradley C. Parks from AidData of William & Mary, Carmen M. Reinhart from Harvard Kennedy School, and Christoph Trebesch from Kiel Institute for the World Economy.

The report comes amid increasing Western allegations that China is using its lending as a debt trap with an agenda to own assets in developing nations.

“However, China’s rescue loans differ from those of established international lenders of last resort in that they are opaque, carry relatively high interest rates, and are almost exclusively targeted to debtors of China’s Belt and Road Initiative,” the experts said.

“What is less well understood and of more recent vintage is the large and rising number of Chinese bailouts to countries in distress over the past 15 years. This paper shows that the Chinese government has created a new system of international rescue lending, which has not yet been documented or studied.”

The Belt and Road Initiative, known within China as the One Belt One Road or OBOR, was initiated in 2013 as a global infrastructure development strategy adopted by President Xi Jinping’s ambitious project to invest in more than 150 countries and international organizations.

“China’s role as an international crisis manager has grown exponentially in recent years following its long boom in overseas lending,” the experts said in the report.

“Our findings have major implications for the evolution of the international financial system, as cross-border rescue operations become less institutionalized, less transparent, and more piecemeal.”

“China has demonstrated that a major creditor country (notwithstanding its current status as an emerging market) can create a large system of cross-border rescue lending to nearly two dozen recipient countries, while at the same time keeping its bailout operations largely out of public sight.”

Findings from the study indicate that 80 percent of the bailout money was spent between the years 2016 to 2021, in middle-income countries like Pakistan, Argentina, and Mongolia.

The study also shows that China’s position is far from rivaling that of the United States or the IMF, which are at the center of today’s international financial and monetary system and the effectiveness of its rescue lending operations is not well understood.

While China has focused its sovereign debt restructuring efforts (with little or no new money) in low-income countries, its international bailout activities are concentrated in middle-income countries, the report said (Colombo/March30/2023)

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Sri Lanka’s shares slip on profit taking and selling pressure

ECONOMYNEXT – Sri Lanka’s shares closed lower on Wednesday after four consecutive gains in previous sessions spiraled into selling interest and profit taking, an analyst said.

The main All Share Price Index was down 0.28 percent or 24.39 points to 8,722.06, this is the lowest the index has been since May 02, while the most liquid index S&P SL20 was down 0.40 percent or 9.92 points to 2,468.44.

“The market was gaining in the previous sessions and there is selling and profit taking present today, due to continuously being on green,” an analyst said.

In the previous sessions the market was seeing gains, due to lowered policy rates and low inflation stimulating buying interest and driving the sentiment up, an analyst said.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

“There are gradual improvements in the market sentiment, with positive sentiments coming in from lowered policy rates and inflation,” an analyst said.

The market generated foreign inflows of 12 million rupees and received a net foreign inflow of 18 million rupees, due to low share prices and discounted shares followed by a dividend announcement.

The market generated a revenue of 554 million rupees, this is the lowest the turnover has been since May 10, while the daily turnover average was 1 billion rupees. From the total generated revenue, the banking sector contributed 120 million rupees, Diversified Banks contributed 115 million rupees and the Capital Goods Industry generated 78 million rupees.

Top losers during trade were Sampath Bank, Commercial Bank and Aitken Spence. (Colombo/June06/2023)

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Sri Lanka Treasuries yields plunge, 12-month down 318bp

ECONOMYNEXT – Sri Lanka’s Treasuries yields plunged across maturities at Wednesday’s auction with the 12-month yield falling 318 basis points, in one of the biggest one day falls, data from the state debt office showed.

The 3-month yield fell 244 basis points to 23.21 percent.

The 6-mont yield fell 339 basis points to 21.90 percent, along with the 12 months to 19.10 percent.

The short-term yield curve is inverted.

The central bank last week cut its policy rate 250 basis points in a signaling move but is not printing money to enforce the rate cut.

The debt office sold all 140 billion rupees of offered securities. (Colombo/June07/2023)

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Sri Lanka forex reserves rise US$722mn in May 2023

ECONOMYNEXT – Sri Lanka’s foreign reserves grew 722 million US dollars to 3,483 million US dollars in May 2023 from 2,761 million US dollars in April, official data showed as deflationary policy and weak credit reduced ‘above the line’ outflows.

Sri Lanka lost almost all its reserve in over two years as the central bank sold reserves and printed money to keep rates down (sterilized reserves sales) including borrowed dollars from India.

Gross official reserves fell to a low of 1,705 million US dollars in September 2022.

Sri Lanka’s central bank hiked rates in April 2022 to slow credit and also stopped printing money after it ran out of borrowed Asian Clearing Union dollars from India.

Sri Lanka’s gross official reserves are made up of both monetary reserves of the central bank and any balances of the Treasury account from loans or grants it gets.

The central bank’s net foreign reserves are still negative after busting up borrowed reserves to suppress rates. By April (before the collection of reserves in May) the central bank’s net reserves were negative by 3.7 billion US dollars.

In May alone 662 million US dollars were bought from the market, Central Bank Governor Nandalal Weerasinghe said.


No pre-determined level to stop Sri Lanka rupee appreciation: CB Governor

Borrowing dollars through swaps and busting them up, was invented by the US Federal Reserve as it was printing money and breaking the Bretton Woods system in the early 1970s.

Sri Lanka received a 350 million US dollar tranche from the Asian Development Bank and 331 million US dollars from the IMF to the Treasury for budget support.

The loans can be sold to the central bank by the government to generate rupees and spend. However, since credit is weak, not all the inflows go out of the country particularly as the central bank is conducting deflationary open market operations on a net basis.

By allowing the rupee to appreciate unlike in previous episodes of recovery in an IMF program, after a bout of money printing, the central bank is bringing down inflation – in some cases absolute prices – and restoring confidence and easing the ‘pain’ of ‘monetary policy’ or stimulus.


Why is Sri Lanka’s rupee appreciating?

Though exports are falling, tourism revenues are also picking up.

The budget support loans, tourism receipts less the reserve collected will widen the trade deficit. Building foreign reserves involves lending money to the US or other western nations and is similar to repaying foreign debt. (Colombo/June07/2023)

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