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Monday March 4th, 2024

Maldives advised by IMF to run monetary policy to keep exchange rate peg unlike for Sri Lanka

THE MOSTLY FIXED PEG: Maldives also runs into forex shortages, when money is printed. The Rufiyaa kerb rate is reportedly elevated as citizens try to exchange the extra money for dollars.

ECONOMYNEXT – The International Monetary Fund has advised the Maldives to operate monetary policy consistent with maintaining its currency peg with the US dollar, as the archipelago recovered strongly from Coronavirus pandemic.

In 2022 Maldives grew by 13.9 percent and in 2023 the country is estimated to grow by 4.4 percent. Growth is projected at 5.2 percent in 2024.

“Monetary and macroprudential policies need to be tightened to ensure compatibility with the exchange rate peg, while encompassing fiscal-monetary policy coordination,” an IMF statement said after annual Article IV consultations.

“Monetary policy, in concertation with other policy levers, can contribute more effectively to addressing macroeconomic vulnerabilities. Discontinuing use of the Maldives Monetary Authority (MMA) advances is a welcome first step.”

With a fairly hardened peg, though hit from time to time by overt central bank advances and still limited open market operations, the Maldives Monetary Authority is unable to generate mass poverty and hunger with steep currency depreciation like in Sri Lanka.

The peg had served as a fairly credible anchor for monetary stability, allowing FDI to flow in and boost the tourism sector.

Maldives grows and imports labour, including as housemaids from countries like Sri Lanka and some other South Asian countries with inflationist domestic operations and bad money.

In sharp contrast to the advice given to Maldives to hold back on liquidity injections to protect the currency, Sri Lanka is told to use ‘exchange rate as the first line of defence’ to maintain a bureaucratically decided narrow policy rate with liquidity injections, in a tail wagging the dog exercise, critics say.

Analysts and classical economists have called for meaningful monetary reform in Sri Lanka to limit liquidity injections so that macroeconomists cannot deploy aggressive policy to cut rates, destroy confidence and then trigger external crises followed by high corrective rates.

Sri Lanka recently passed an IMF backed monetary law – drawn up by the agency itself – giving itself sweeping discretion over exchange and monetary policy and to print money for growth, instead of financing the deficit, critics say.

The agency has also won the right to create up to 7 percent inflation.

The rupee has collapsed to 360 to the US dollar (under Governor Nandalal Weerasinghe it has been allowed to appreciate to 314 with deflationary policy), from 4.76 to the US dollar compared to only about 15 by the Maldives Monetary Authority over the same period.

Maldives however has had fiscal problems since a civil service pay hike in the latter stages of ex-President Maumoon Abdul Gayoom who served for many decades under a stable exchange rate peg.

Maldives has also borrowed excessively, including from China after the US loosened policy and flooded markets with dollars over the last 20 years, which led to a steep rise in national debt.

Under a fixed or mostly fixed exchange rate, the lenders are hurt by a default rather than the public who only will have to pay some additional taxes.

But if macro-economists are given the legal right to depreciate, (which essentially came after the Second Amendment to the IMF’s Articles) indiscriminate poverty is among the weakest in society without any useful benefit to the debt repayment process. (Colombo/Feb07/2024)

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Sri Lanka rupee opens at 308.20/50 to the US dollar

Sri Lanka stocks reversed its falling trend and gained for the first time in six sessions on Tuesday closed stronger on Tuesday (21).

ECONOMYNEXT – Sri Lanka’s rupee opened at 308.20/50 to the US dollar Monday, from 308.80/90 on Friday, dealers said.

Bond yields were broadly steady.

A bond maturing on 01.08.2026 was quoted stable at 10.90/11.00 percent.

A bond maturing on 15.09.2027 was quoted at 11.90/12.00 percent from 11.90/12.05 percent.

A bond maturing on 01.07.2028 was quoted at 12.20/30 percent from 12.15/35 percent.

The Colombo Stock Exchange opened up; The All Share was up 0.60 percent at 10,755, and the S&P SL20 was up 1.24 percent at 3,077. (Colombo/Mar4/2024)

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Sri Lanka central bank swaps top $3.2bn by December

ECONOMYNEXT – Sri Lanka’s central bank borrowed US dollars from various counterparties through swap transactions, which had topped 3.2 billion US dollars by December 2024, official data show.

The net short position, including swaps disclosed by the central bank, grew by over almost 1.28 billion US dollars from December 2022 to 3,280 million dollars.

The gross position grew from 2,263 million dollars to 3,280 million US dollars over the year.

The central bank supported some state banks with dollars to cover their dollar exposures, which had since been paid back.

By December reported gross reserves of the central bank was 4,491 million US dollars, against swaps of 3,280 billion US dollars.

Swaps of around 1500 related to the People Bank of China.

Swaps allow a central bank to increase gross reserves, without raising domestic interest rates.

Swaps with domestic counterparties lead to liquidity being injected into money markets, which can be mopped if domestic credit growth is moderate.

At the moment many private banks have large dollar positions invested outside the country, which cannot be used for transactions domestically because of a money monopoly given to macro-economists. (Sri Lanka repays debt or collects reserves of U$5bn via banking system since rate correction)

However unwinding swaps after private credit has picked, or engaging in swaps after private credit has picked up, may lead to money being injected to maintain the policy rate, leading to excess credit by banks and balance of payments deficits and or currency collapses, analysts say.

Central bank swaps in the third quarter of 2018 led to a collapse of the currency under the ‘exchange rate as the first line of defence’ policy peddled to Sri Lanka, critics have said earlier.

Domestic currency proceeds of swaps were the primary ammunition to bust East Asian currencies in 1997-98.

Any depreciation after the swap proceeds have been used for imports (effectively mis-targeting rates) a central bank will run a forex loss.

The PBOC however had put a rule, preventing the use of the swap after gross reserves fell below 3 – months of imports, preventing Sri Lanka from getting into further trouble through the use of official reserves for private imports.

Sri Lanka’s central bank also used borrowings from the Reserve Bank of India, via the Asian Clearing Union to run BOP deficits.

Losses from exposed dollar positions of central banks which have gained ‘independence’ from fiscal rules and parliaments and engaged in macro-economic policy, including the Fed, have led to taxpayers bearing the losses in the end.

Swaps were invented by the Fed in the early 1960s, as it deployed macro-economic policy (printed money for growth) threatening its gold reserves and the Bretton Woods system.

Sri Lanka has other borrowings also, including from the IMF, which has made net foreign assets of the central bank negative. (Colombo/Mar05/2024)

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Sri Lanka loses MICE tourists to Thailand on minimum room rates

ECONOMYNEXT – Sri Lanka has lost Meetings, Incentive Travel and Exhibition travelers to competitors in East Asia and India due to minimum room rates as higher standard rooms were available in other countries at lower prices, industry officials said.

President of the Sri Lanka Association of Inbound Tourist (SLAITO) Nishad Wijetunga said they the industry managed to retain a majority of booking made before the minimum room rates were imposed by the state last year.

“However, there were MICE groups that were supposed to come and cancelled Sri Lanka and went to places like Thailand and other parts of India and we lost,” Wijetunga told EconomyNext.

“We know that large groups of MICE (tourists) are affected.”

India is a key source of MICE tourists to Sri Lanka.

Sri Lanka’s businesses have got used to protectionism and try to push up prices with import taxes to extract more money from customers using the coercive power of the state, with tiles and steel being among the most prominent examples.

RELATED: Stand-alone hotels unviable in Sri Lanka due to high construction, capital costs

High priced tiles and steel in turn makes hotels expensive to build and make the leisure industry less competitive, analysts say.

However, in tourism, unlike in building materials customers are not trapped within the country and are free to move to other markets.

Managing Director of CEC Events and Travels, Imran Hassan, said the industry lost groups to East Asia due to minimum room rate.

In one instance, an operator was in discussions to get a group of 900 passengers.

“And that moved out to Thailand,” Hassan said. “Like that, there are many instances that the minimum room rate was not conducive.”

Thailand in 2023 attracted 28.04 million tourists.

A group that used to come to Sri Lanka annually used to take 40 to 50 five-star hotel rooms. This time Sri Lanka competed by offering lower standard.

“This year, they’re only giving 10 rooms to the five-star hotels,” Hassan explained. “They are staying in smaller hotels because they can’t afford it because it has become so expensive.”

“But overall, we are working with the authorities to correct it.

“We don’t mind demand and supply situation taking the rates up as in the Maldives. But what we are saying is keep an open market.”

RELATED : Sri Lanka should say good bye to minimum room rates: President

President Ranil Wickremesinghe has said Sri Lanka cannot progress with protectionism and the country has to learn to face competition. (Colombo/Mar04/2024)

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