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Thursday June 8th, 2023

New debt process needed for countries like Sri Lanka: IMF chief

ECONOMYNEXT – A new predictable and orderly’ debt resolution process is needed for countries like Sri Lanka and Surinam which are not covered by existing frameworks, International Monetary Fund Managing Director Kristalina Georgieva has said.

Many countries which are operating unworkable impossible trinity regimes and a customers of the IMF have been further de-stabilized aggressive floating-rate-style open market operations either for explicit ‘flexible’ inflation targeting or ‘monetary policy modernization’, critics say.

Over the past decade such countries had also borrowed heavily in commercial markets amid low dollar rates and easy liquidity available amid in the wake of Fed quantity easing.

China had also freely given to impossible trinity countries including Sri Lanka with a history of monetary instability and IMF programs.

Especially from around 2018, impossible trinity nations are severe monetary instability, progressively driving them to the brink or to actual external default, especially in they had market access.

Countries which had good reserve buffers, including Bangladesh, that had cut rates instead of tightening policy as credit systems recovered from the Covid pandemic, are tumbling into currency trouble.

Meanwhile, Georgieva said, developing and low-income countries with “very limited policy space and huge development needs” were particularly vulnerable.

“In light of rising debt vulnerabilities in many countries, I strongly endorse efforts to strengthen the debt architecture and improve the speed and effectiveness of debt resolution,” IMF chief Kristalina Geogrieva said in a statement at the G20 meetings in India.

“It is therefore imperative for the G20 to strengthen the debt architecture. The G20 did so in 2020 with the Debt Service Suspension Initiative (DSSI) and by establishing the Common Framework (CF) for debt resolution.”

“Nonetheless, more predictable, timely, and orderly processes are needed both for countries under the CF and for those not covered by it, including Sri Lanka and Suriname.

“This means that we must enhance dialogue and collaboration on debt issues.”

New creditors like China has not readily agreed to re-structure debt unlike the Paris Club, India and other ad hoc participant in debt workouts, leading to the initiation of a new Global Sovereign Debt Roundtable (GSDR).

“This is the goal of the new Global Sovereign Debt Roundtable (GSDR): to bring together creditors—official, old and new, and private—and debtor countries to discuss key issues that can facilitate the debt resolution process,” Georgieva said.

“We launched the GSDR under the auspices of India’s G20 presidency last week at the deputies’ level, followed by an engaged and constructive principals meeting earlier today. We will further build on this discussion during the World Bank-IMF Spring Meetings in April.”

Sri Lanka in particular had been hit by the lack of a clarity on whether or not to re-structure domestic debt, under debt roll-over targets set by the IMF itself or a cut off date for such re-structuring which will allow interest rates to fall faster and allow banks and other to buy domestic debt.

China had given so-called ‘light assurances’ to some countries so that there were no official arrears but not committed to re-structure debt as required under IMF programs.

In the case of Sri Lanka, China had given a two year moratorium and promised to re-structure debt and Sri Lanka has sought a more specific assurance in line with the IMF deal.

China has far not given such assurances. China had instead called for relief from World Bank, Asian Development Bank and the IMF, which are considered ‘senior debt’ under current resolution frameworks and are insulated. (Colombo/Feb26/2023)

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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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