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Sunday June 23rd, 2024

Fingers crossed that Sri Lanka’s failed bill auctions which ravaged rupee will end

ECONOMYNEXT – Sri Lanka’s is holding the first Treasury bill auction without price controls Wednesday that crippled the bond markets and led to liquidity injections that ravaged the rupee and pushed the economy in to a monetary crisis triggering the worst balance of payments deficits in history.

The price controls on bill and bond auctions progressively discouraged investors from longer term bonds and 12-month bills and trading in the secondary market dried up.

Crippled Bond Auction

On Tuesday a solitary 2024 bond was quoted at 8.35/45 percent up from 8.25/40 levels Friday dealers said.

The central bank is offering 39.5 billion rupees of 3, 6 and 12 month bills.

There were no secondary market quotes for 12-month bills.

Sri Lanka’s 3, 6 and 12 yields flattened as price controls and liquidity injections continued over the past year and a half, a telltale sign that signals currency crises.

When bids are rejected and the central bank prints money to buy bills, rates remain rock steady week after week giving a ramrod straight curve over time until the currency collapse.

In times of monetary stability however the is a gap of around 100 basis points or more between 3 and 12 month bills.

The ramrod anomaly continues until delayed corrections are made to stabilize the rupee.

Then the gap between 3 and 12 month bills widen steepening the yield curves.

As stability comes back, credit slows after rate hikes the rates fall. If the currency is allowed to bounce back rates fall faster. At the moment however Sri Lanka’s forex markets are also dysfunctional.

Newly appointed Central Bank Governor Nivard Cabraal ended the price controls last week.

There is a high degree of uncertainty among market participants.

“Bids may be on the high side,” a dealer said. “We are not sure whether they will be accepted.”

The interbank money market is now 200 billion rupees short following a hike in the statutory reserve ratio as well as some foreign exchange interventions in September. The short is filled with printed window money at 6.0 percent.

It is not clear why the statutory reserve ratio was raised before the crippled bond auctions were allowed to work.

In order to fill the liquidity with foreign asset purchases after the liquidity injections stop, the interbank forex markets where the net internally unmatched dollar balances are traded among banks must also work work.

Hobbled Forex Markets

In addition to crippled bond markets, Sri Lanka forex markets are also hobbled under a series of controls. There is no spot market and forward cover is banned.

The exchange rate is decreed at 203 to the US dollar but there is no monetary policy to back it as long as there are liquidity injections to enforce artificially low interest rates.

Despite the peg being weakened by liquidity injections and low rates, more liquidity is being pumped in to the system through exporter forex surrenders worsening pressure on the exchange rate. Similar cascading policy errors had been seen in the past, analysts have shown.

In order to maintain a stable exchange rate (a credible peg) the monetary authority has to allow interest rates to move so that no money is printed to keep rates down artificially and interventions have to be unsterilized, or mostly unsterilized so that the credit system tightens and overnight rates move up.

Social Unrest Exchange Rate

Sri Lanka is following a so-called ‘flexible exchange rate’ a highly unstable pegged regime involving two conflicting anchors operated with inflationary policy to keep rates down until the currency peg collapses.

“This is new fangled words to describe highly unstable post World War II third world crawling or soft pegs without a credible monetary anchor which trigger currency crises, social unrest and sometimes civil wars,” says ENs’ economic columnist Bellwether.

“Social unrest flexible exchange rates have previously also been known as dirty floats or managed floats.”

Importers are now buying dollars at 230 to the US dollar or higher in the over-the-counter market as low rupee interest rates have incentivized exporters to keep dollars instead of converting them.

In the absence of liquidity injections any dollar hoarding should have driven up rupee rates and crowded out domestic credit, keeping the external sector in balance.

However liquidity injections permit dollars to be kept at low cost and also for domestic credit to expand unchecked triggering imports.

Sri Lanka’s policy rate is still 6.00 percent at which all interventions are sterilized.

The central bank has effectively halted convertibility (floated) the rupee for trade transactions leading to the rupee falling to 230 or weaker.

A float however does not work if liquidity continues to be injected either through failed bond auctions or sterilized interventions.

Credit expansion, monopoly, price controls

Sr Lanka is now mired in trade controls, price controls and forex shortages as the inflated reserve money supply undermined and de-stabilized the market, while import substitution oligopolies are fleeing the public under cover of trade controls.

In parliament, on Tuesday ruling party legislators called for demonetization of rupee notes and controls over kerb market operators in the style of many money printing European governments in the last century as Marxism and Keynesianism spread like new religions.

“European governments and parliaments have been eager for more than sixty years to hamper the operation of the market, to interfere with business, and to cripple capitalism,” Economist Lugwig von Misses wrote.

“They have blithely ignored the warnings of economists. They have erected trade barriers, they have fostered credit expansion and an easy money policy, they have taken recourse to price control, to minimum wage rates, and to subsidies.

“They have transformed taxation into confiscation and expropriation; they have proclaimed heedless spending as the best method to increase wealth and welfare.

“But when the inevitable consequences of such policies, long before predicted by the economists, became more and more obvious, public opinion did not place the blame on these cherished policies, it indicted capitalism.

“In the eyes of the public not anticapitalistic policies but capitalism is the root cause of economic depression, of unemployment, of inflation and rising prices, of monopoly and of waste, of social
unrest and of war.” (Colombo/Sept22/2021)

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India supports Sri Lanka Coast Guard to boost maritime security

ECONOMYNEXT – India has given 1.2 million US dollars’ worth spare parts to Sri Lanka’s Coast Guard to be used in a vessel also gifted to the Indian Ocean Island on an earlier occasion, the Indian High Commission in Colombo said.

“Handing over of the large consignment of spares symbolizes India’s commitment to support capability building towards addressing the shared challenges of Maritime Security in the region,” the Indian High Commission said

The spare parts were brought to Sri Lanka on the Indian Coast Guard Ship Sachet, an offshore patrol vessel that was on a two-day visit to the island.

The spares were formally handed over to the Sri Lanka Coast Guard Ship Suraksha which was gifted to Sri Lanka in October 2017 by India.

India has gifted spare parts for the ship in June 2021 and April 2022 and also provided assistance in refilling of Halon cylinders in January 2024. (Colombo/June23/2024)

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Sri Lanka Water Board makes profits, tax-payers inject Rs28bn

ECONOMYNEXT – Sri Lanka’s state-run National Water Supply and Drainage Board has made a profit of 5.2 billion rupees in the year to December 2023, after a tariff increase despite not getting money for 25 percent of its water it pumps out.

Total revenues went up to 61.8 billion rupees in 2023 from 35.4 billion rupees, a Finance Ministry report said.

Water revenue surged to 58.5 billion rupees from 33.1 billion rupees, cost of sales also went up to 32.8 billion rupees from 23.14 billion rupees, helping boost gross profits from 12.3 billion rupees to 29.0 billion rupees.

Finance costs surged to 14.9 billion rupees from 3.9 billion rupees,

NSWD reported net profits of 5.2 billion rupees for the year, against a loss of 2.7 billion rupees a year earlier.

The Treasury had given 28 billion rupees from tax payer money to settle loans.

During the Rajapaksa administration, macroeconomists who ran the Finance Ministry made state enterprises borrow money from banks through Treasury guarantees listing them as ‘contingent liabilities’, claiming they were ‘off balance sheet’.

The Road Development Authority, which had no revenues to speak of borrowed large amounts of money from banks which were listed as ‘contingent liabilities’ though they were a responsibility of the state from day one, allowing macroeconomists to understate both the budget deficit and national debt, critics say.

The water tariffs were raised by 81 percent after macroeconomists printed money to supress interest rates for flexible inflation targeting/potential output targeting. The currency collapsed after macroeconomists tried to float the rupee with a surrender rule in place.

Non-revenue water for which no money is collected was 25.2 percent. The agency was supposed to reduce non-revenue water. In some districts religious establishments are responsible for non-revenue water, according to an official who said it on condition of anonymity.

The water board is also unable to collect money from some services like common toilets for underserved communities. (Colombo/June23/2024 – Update II)

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Sri Lanka will expedite Indian projects: President

ECONOMYNEXT – Sri Lanka will expedite Indian-backed projects in the island, President Ranil Wickremesinghe told Indian business people after a visit by Indian External Affairs Minister S Jaishankar this week.

“I discussed with Prime Minister Modi the need to accelerate the joint program that we have decided, agreed on. So the major ones are identified, and Foreign Minister Jaishankar came down today [20] to have a discussion. Now this will show the new path we are taking,” president Ranil Wickremesinghe said.

“It won’t be individual projects. We’ve discussed a fair number of them. First is the grid interconnection between Sri Lanka and India, so that sustainable energy can be transmitted to India.

“We have the Sampur solar power project, which is a Government to Government (G2G) project, and a three island project, which is where we hope the ground breaking can take place in July,” he told Indian business people at the 31st All India Partner’s Meet 2024 (AIPM 2024), held at ICT Ratnadipa in Colombo.

The AIPM 2024 which was organised by KPGM Sri Lanka and India provided a platform for both countries to reaffirm their commitment to collaborative projects that promise to redefine bilateral relations and propel socio-economic growth.

“It’s a great pleasure and a privilege to have you in Sri Lanka, in Colombo, holding this meeting. It shows on one hand the close friendship that our two countries have, and on the other hand, the confidence that you have in Sri Lanka.

“Having now survived two difficult years, I must acknowledge that this was possible because India gave us a loan of $3.5 billion. All that will be repaid.”

Cooperation between the two nations needed to be enhanced, particularly in the energy sector, aiming to foster new development for the Northern region, Wickremesinghe said.

“We are looking at developing Palk Straight for wind energy and solar energy, both countries to get together and have a large farm for solar energy, for renewable energy. It also means that we will have a new economy for the northern province, which was worst affected by the war.”

Several Indian-backed projects in Sri Lanka have stalled due to protests from some parties, with some going to courts.

India is helping expand the Kankesanturai port, and is discussing development of the Palali and Colombo airports.

The National Livestock Development Board of Sri Lanka, in collaboration with India’s Amul Dairy Company, is involved in a project to enhance liquid milk production in the country.

The two nations are also considering establishing land connectivity.

Discussions have also taken place regarding expediting the Trincomalee Development Project, which encompasses industrial investment zones and tourist areas.

“Plans are underway to construct a multi-product oil pipeline from Nagapatnam to Trincomalee, pending the final observation report. Trincomalee is poised to become a hub for oil refining, with the development of ports and investment zones, transforming Trincomalee Port into a significant hub on the Bay of Bengal.

“Today, the entire East Coast is being opened up for tourism, with additional land earmarked for hotels in Galle and southern areas. Moreover, there are plans to establish more investment zones across the country, alongside expanding our professional training programs. In these endeavours, we are collaborating closely with India.” (Colombo/Jun22/2024)

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