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Thursday June 8th, 2023

IMF has a role in Sri Lanka after framework decided: Jayasundera

ECONOMYNEXT – The International Monetary Fund (IMF) will “definitely” have a role to play in Sri Lanka’s post-Covid-19 economic recovery, but that will be after the authorities formulate the policy framework, President’s Secretary P B Jayasundera said.

Speculations over President Gotabaya Rajapaksa’s administration going to the IMF are on the rise amid risk of sovereign debt default and possible collapse in the rupee currency. However, the government has denied that it was going to the global lender.

Jayasundera, the country’s top most civil servant and former finance secretary who has dealt with many past IMF programmes, said there is nothing the IMF can do apart from cushioning the foreign exchange reserves.

“IMF will not be here to buy debts,” Jayasundera said in an interview with EconomyNext. “Everybody will ask ‘show us your plan’.”

“So if the plan is convincing, each one has a role to play in that plan. Definitely, IMF has a role. But it is not a role by extending a loan.”

Ruling Sri Lanka Podujana Peramuna (SLPP)officials have said the government’s reluctance to go to the IMF now is because of adverse impacts of the global lender’s conditions including increasing state revenue and currency falls which will hit the people hard in 2024 when Sri Lanka holds presidential polls.

An IMF loan is accompanied by monetary and fiscal targets or quantitative performance criteria (PC) against which loan tranches are released to the central bank.

The loans are later repaid by pegging the exchange rate and collecting reserves through a ‘strong side convertibility undertaking’ or buying dollars from the market.

It can be easily done as long as money is not printed and liquidity is withdrawn (central bank credit is reduced), analysts say.

The last IMF program however contained a domestic inflation index as a PC which was as high as 8 percent allowing the central bank to print money and create forex shortages and miss forex reserve targets.

The program also allowed the central bank to manipulate yields down far into the yield curve by jettisoning a ‘bills only policy’ and buying bonds to monetize past deficits, critics have said.

Sri Lanka’s economy is now struggling with a widening budget deficit and heavy external debts while it is also facing a forex crisis, Finance Minister Basil Rajapaksa told the parliament.

The government has maintained it will repay maturing debt and avoid a sovereign default with non-debt inflows.

After exiting the IMF program in 2019 Sri Lanka cut taxes and printed more money under President Gotabaya Rajapaksa’s “Vistas of Prosperity.”

Former Central Bank Governor W D Lakshman said in his farewell press conference said he played a role in developing the economic framework and he was invited to the central bank to provide ideological backing. He had previously served on a Presidential commission on taxation.

Now the government is in the process of formulating a longer term economic plan coupled with post-Covid-19 economic recovery.

Jayasundera said the kind of recovery plan the government is now in the making is focusing on addressing fiscal issues, external finance, and troubled sectors and turned them into “more sensible economic activities”

“Those issues have to be addressed,” Jayasundera said.

“Many people think it is just a sit with the IMF and the IMF will come and give a contingent funding.”

“But IMF is only a rescue funding agency. That’s why the IMF also helps the member country to top up reserves. But we also have to have supplementary activities to build confidence and get those recovery plans anyway in place.”

The IMF in 2009 provided a 2.4 billion loan to reduce its fiscal gap and stabilize the currency and interest rates.

The 2009 program did not have an inflation target as one of the performance criteria directly conflicting with the foreign reserve target which required pegging, but a domestic reserve money target which was more complementary to the reserve target.

To tightly control liquidity injections and eliminate all anchor conflicts analysts say Sri Lanka needs a program with a progressively falling ceiling on domestic assets of the central bank as a performance criterion, where reserve money is only an indicative target.

Such a program will automatically stabilize the exchange rate and anchor inflation externally.

But Sri Lanka is now suffering from unprecedented rise in central bank credit which have triggered forex reserves falls as the liquidity turned into external demand in the credit system. The reserves analysts say are at levels which makes it difficult to credibly anchor the currency.

Following tax cut in December 2019 and a steep fall of the currency in March 2020 Sri Lanka earned downgrades, effectively locking itself out of capital markets.

Analysts have warned Sri Lanka to be careful of more downgrades as domestic assets of the central bank continue to rise.

Jayasundera said the government itself has been in the process implementing many reforms including digitalization of tax, customs reforms, and legal reforms in civil and criminal administrative and commercial laws

“Now these things are being done. Now people are only worried about Covid-19 delaying many reforms,” he said. (Colombo/Sept21/2021)

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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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