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Monday December 5th, 2022

India top lender to Sri Lanka in 2022

ECONOMYNEXT – India has disbursed or agreed to give Sri Lanka 1.55 billion US dollars in 2022 to make imports, as the country went through the worst currency crisis in the history of the island’s central bank, official data show.

By September 855 million dollars had been disbursed. The amount does not include delayed payments under the Asian Clearing Union.

Sri Lanka had signed 8 foreign financing agreements totaling 1.87 billion US dollars up to September 2022.

Exim Bank of India had given a 500 million US dollar facility to import oil, a 50 million dollar credit facility for Urea and the State Bank of India had agreed to give one billion US dollars to import commodities.

The money repaid by the importers can be used for budget finance.

From around 2015 Sri Lanka ran into extended monetary instability under so-called ‘flexible inflation targeting’ where money was printed to suppress rates, delay rate hikes, create forex shortages and break a currency peg using inflation lags and core inflation indices.

As serial currency crises emerged large volumes of money was borrowed from capital markets and China through bonds and syndicated loans, leading a steep rise in external debt while foreign reserves were run down.

The IMF gave technical assistance to the central bank to calculate an output target, diverting it from goal of maintaining economic stability and giving clues to chase an output gap, which was not permitted under its constitution (Section 5 (a) according to people who helped draw up the law.

In Sri Lanka, monetary instability loans are called ‘bridging finance’. Singapore Prime Minister Lee Kwan Yew had called foreign borrowing made after a central bank creates forex shortage ‘cover up loans’.

“If you start fiddling around with currency and you start printing notes and then you have no money really to spend and you start borrowing to cover up, you will end up in penury and bitterness,” Prime Minister Lee said on August 26, 1966.

“Tomorrow, you will hear from the Minister for Finance that we have decided that we shall not form a Central Bank. If we cannot reach a common currency with Malaya, we shall run a Currency Board as the British did for many decades.”

Asian Development Bank had given as 200 million US dollar loan for ‘food security’.

US had given a 65 million dollars grant.

Up to September 1.9 billion US dollars had been disbursed with India giving 855 million US dollars.

India had separately deferred payments under the Asian clearing union in 2022 allowing Sri Lanka’s soft-pegged central bank to intervene for private sector imports and print money to keep its policy rate down and expand a balance of payments deficit.

A soft-pegged central bank which uses reserves for imports, then prints money to prevent bank rupee reserves from adjusting down and the economy from being adjusted to the outflows.

After the ACU credits stopped, the central bank lost the ability to create BOP deficits.

Post 1931 central bank using an ideology propagated in several US and UK universities (lost-generation economics), which rejects the classical monetary principles, trigger severe external imbalances until rates suddenly skyrocket and the peg collapses.

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Sri Lanka’s shares gain in mid market trade

ECONOMYNEXT – Sri Lanka’s shares edged up in mid day trade on Monday (05), continuing the positive run for seven straight sessions on news over a possible debt restructuring from Paris Club, analysts said.

All Share Price Index gained by 0.69% or 60.10 points to 8,829, while the most liquid shares gained by 0.96% or 26.59 points to 2,801.

“The market was pushed up over the news of a potential 10 year debt moratorium,” analysts said.

The Paris Club group of creditor nations has proposed a 10-year debt moratorium on Sri Lankan debt and 15 years of debt restructuring as a formula to resolve the island nation’s prevailing currency crisis. 

Related – Paris Club proposes 10-year moratorium in 15-year Sri Lanka debt re-structure: report

The market generated a revenue of 2.1 billion rupees.

Top gainers during 1130 hours were Expolanka, Browns Investment and LOLC.  (Colombo/Dec05/2022)

 

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Sri Lanka bond yields slightly down

ECONOMYNEXT – Sri Lanka’s bond yields were slightly down at open on Monday while t- bills were inactive, dealers said.

The Central Bank’s guidance peg for interbank transactions was at 363.18 rupees against the US dollar, appreciated from 363.19 rupees on Friday.

“Only one bond is being quoted today, and the rest remaining unquoted” a dealer said.

A bond maturing on 15.05.2026 quoted at 29.30/30.00 percent down from 29.50/75 percent at Friday’s close.(Colombo/ Dec 03/2022)

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Sri Lanka should prioritize RCEP , not small FTAs: economist

ECONOMYNEXT – Sri Lanka should make joining the Regional Comprehensive Economic Partnership (RCEP) a priority instead of trying to negotiate multiple smaller deals, an economist has said.

“We do not have the bandwidth in government and the technical resources to do multiple trade agreements,” Anushka Wijesinghe an economist who has been involved in trade told a business forum in Colombo.

“I think RCEP should be number one priority, rather than three or four tiny bilateral goods agreements.”

Sri Lanka is trying negotiate a free trade deal with China and expand an existing one with India.

Data show that Sri Lanka has been able to boost exports with FTAs.

Sri Lanka has high tariff protection which ultimately backfire.

Sri Lanka has protectionist business interests their profits from overpriced goods have had priority over ordinary consumers and overall economic efficiency that comes from free trade.

Sri Lanka also has monetary instability, which has worsened under flexible inflation targeting, with a series of currency crises coming in rapid successions.

Forex shortages from mis-targeted interest rates under flexible or discretionary monetary policies have discredited free trade and liberalization in general and strengthened the hands of economic nationalists, analysts say.

The country also has monetary instability, which makes life difficult not only for investors but all economic agents.

Over the past two decades Sri Lanka’s exports have not grown as much as competitors. (Colombo/Dec05/2022)

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