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Monday April 22nd, 2024

Political stability will help Sri Lanka turn a corner, president tells WSJ

ECONOMYNEXT – Sri Lanka has experienced the worst of its economic crisis and political stability will help the country turn a corner, starting with finalising negotiations for an International Monetary Fund (IMF) bailout, President Ranil Wickremesinghe has told The Wall Street Journal.

“I think we’ve already hit the bottom. I can see the light at the end of the tunnel; it’s how fast we can get to it,” the New York City-based business daily quoted Wickremesinghe as saying on Sunday July 31.

However, it will be some months before most Sri Lankans begin to see their economic situation noticeably improve, he had said.

President Wickremesinghe told the WSJ that he expects an IMF staff level agreement to be reached by end August, after which the country would be able to further talks with sovereign bondholders and bilateral creditors.

“We are down to the nitty-gritty,” he said. “We would have had it this month [July] if it were not for the unstable political condition.”

On a separate note, Wickremesinghe had said it was not the right time for former President Gotabaya Rajapaksa, who fled the country after protestors stormed his official residence on July 09, to return. Nor had Rajapaksa indicated any plans to return, Wickremesinghe was quoted as saying.

“I don’t believe it’s the time for him to return,” he said. “I have no indication of him returning soon.”

Wickremesinghe also defended the legitimacy of his presidency to the WSJ. His election by parliament following Rajapaksa’s resignation has been controversial, with some opposition members and sections of Sri Lanka’s youth-led protest movement claiming that he lacks a popular mandate and that the current parliament does not reflect the will of the people.

“I came in by chance. Basically the president had resigned. The country was on fire. They were taking over the buildings,” he said. “I have been elected constitutionally… it’s up to us to perform now.”

The president noted that, once an IMF agreement was in place, Sri Lanka would have to work out debt restructuring with creditors who have differing approaches.

“It’s an issue between the different approaches to debt relief between India and Japan on one side, supported by the U.S., and China on the other side,” he said. “It’s a question of getting them to agree on one plan. It’s a question of how do you deal with the haircut? How do you deal with having new money given to pay off the old loans?”

Wickremesinghe told the WSJ that the Central Bank of Sri Lanka (CBSL) was confident of “finding the cash to cover enough fuel imports.”

However, even with an IMF agreement in place, Wickremesinghe said Sri Lanka needs to secure upwards of 3 billion US dollars from other sources next year to help pay for key imports like fuel, food and fertilizers. He is also keeping an eye on the process that unfolded in Zambiya, he added. (Colombo/Aug01/2022)

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Sri Lanka motor racing crash claims 7 lives, 4 critical

ECONOMYNEXT – A deadly accident at motor Race Sri Lanka’s hill country town of Diyathalawa has claimed at least 7 lives police said, after a racing vehicle, in the seasonal Fox Hill Super Cross ploughed in to spectators after running off the track.

Another 21 spectators were injured Sunday, and hospitalized and at least four were critical, police said.

Thousands of people come to watch the Fox Hill Super Cross race, which is usually held in April, as large numbers of people head to the cooler climes in the hills.

According to footage taken by spectators one car overturned on the side of the track.

Sri Lanka’s Newsfirst television said Marshalls were waving flags to caution other vehicles, when another car went off the track and crashed into spectators. (Colombo/April21/2024)

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Widespread support for Sri Lanka debt workout, reform progress at IMF/WB meet: Minister

ECONOMYNEXT – There was widespread support for Sri Lanka’s debt restructuring and acknowledgement of progress made under an International Monetary Fund program, at meeting of the fund and World Bank, State Minister for Finance Shehan Semasinghe said.

“The strides made in our economic recovery and financial stability have been acknowledged as significant advancements towards our country’s prosperity by our stakeholders and international partners,” Minister Semasinghe said in an x.com (twitter) post after attending the meetings.

“Further, it was heartening to note the widespread appreciation and support for Sri Lanka’s debt restructuring process.

“We remain steadfast in our commitment to reaching the restructuring targets and confident of smooth progress in the continued good-faith engagements for a speedy debt resolution that will ensure debt sustainability and comparability of debt treatment.”

Sri Lanka ended a first round of talks with sovereign bondholders in March without striking a deal but some agreement on the basis for a deal.

An initial deal with bilateral creditors have been reached, but they may be awaiting a deal with private creditors to sign formal agreements.

International partners have appreciated reforms made under President Ranil Wickremesinghe, Minister Semasinghe said.

“It was great to engage in productive bilateral discussions with all of whom appreciated the recent economic developments, progress in debt restructuring, strengthening of tax administration, and ongoing governance reforms,” he said.

Sri Lanka’s rupee has been allowed to re-appreciate by the central bank amid deflationary monetary policy, bringing tangible benefits to people in the form of lower energy and food prices, unlike in past IMF programs.

Electricity prices were cut as a strengthening currency helped reduce the cost of coal imports.

Related Sri Lanka central bank mainly responsible for electricity price cut

The currency appreciation has also allowed losses to the Employment Provident Fund imposed to be partially recouped, helping old workers near retirement, as well as raising disposable incomes of current wage earners on fixed salaries.

Related Sri Lanka EPF gets US$1.85bn in value back as central bank strengthens rupee

The IMF, which was set up after World War II to end devaluations seen in the 1930s after the Fed’s policy rate infected other key central banks, started to actively encourage depreciation after a change to its founding articles in 1978 (the Second Amendment).

The usefulness of money as a store of value, or a denominator of current and future values then decline, leading to loss of real savings, real wages and increases in social unrest.

Before that, members who devalued more than 10 percent after printing money for growth or any other reason, faced the threat of suspension from the organization as punishment.

Sri Lanka’s rupee has appreciated to around 300 to the US dollar now from 370 after a surrender rule was lifted in March 2023.

But there is no transparency on the basis that economic bureaucrats are allowing the currency to gain against the US dollar (the intervention currency of the central bank).

The rupee is currently under pressure, despite broadly prudent monetary policy, due to an ‘oversold position’ in the market after recent appreciation made importers and banks to run negative open positions as the usefulness of the currency as a denominator of future value declined with sudden strenghtening. (Colombo/Apr21/2024)

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Sri Lanka choices recalled in Vietnam debate on monetary and fiscal options to target output

FIRST SIGNS: Fuel queues and shortages were developing in Vietnam in 2022 with a BOP deficit of $15.6bn in 3Q when rates were hiked to stop inflationary sterilization. Photo/Vietnamnet.vn

ECONOMYNEXT – Vietnam can grow 6.0 percent in 2024, with ‘policy support’ but there is a debate whether it should be done through fiscal (widening deficits/worsening debt or state spending) or monetary means, a top International Monetary Fund official said.

The IMF projects 6.0 percent growth for Vietnam in 2024 “as it rebounds from a challenging 2023,” Krishna Srinivasan, Director of the Asia and Pacific Department told reporters during the Spring Meetings in Washington.

Western Statism

“Now, in the case of Vietnam, I would say that there’s an issue about policy mix, whether you could get more support from the fiscal and rely less on monetary,” Srinivasan said.

“So there is an issue of policy mix which we’re talking, which we’ve been engaging the authorities with.

“I would say that policy support should be more favorable and that should, and along with external demand, help raise growth to 6 percent.”

Sri Lanka used both fiscal and monetary mix to boost growth from December 2019, triggering an external default two and a half years later.

Vietnam’s forex reserves fell below 3 months of imports in 2022 after the State Bank kept policy rates down by inflationary sterilization of forex market interventions.

The currency was then stabilized with rapid fire rate hikes and credit controls to dial back inflationary policy, just as long fuel ques started to form at petrol sheds, with angry riders already hit by rising prices due to Dong weakness. 
The return to market interest rates averted wider social unrest from being triggered by depreciation and further losses at state energy utility EVN, due to fixed prices amid soaring coal prices.

The State Bank of Vietnam later cut rates and relaxed credit controls as the BOP shifted to a surplus.

The government has since cut value added taxes. Public sector salaries are set to rise further this year, possibly as much as 30 percent, after earlier wage restraint. (Related Link: Public employee’s salaries to increase by 30 per cent from July 1: Minister)

State Driven Growth Options

The IMF also said in an Article IV consultation report released in October 2023, that fiscal metrics should be effectively undermined for ‘growth’ but more through income redistribution, and possible support for a fallout from a weak property sector.

Some Vietnamese property companies are reeling from expansion during earlier low rates and Covid-linked construction delays, which could also hit banks.

“Building on successful fiscal consolidation in recent years, there is fiscal space to provide further support,” an IMF Article IV consultation report released in October 2023 said.

“The government could scale up social safety nets that would boost growth and protect the most vulnerable households.

“Given the slowdown and the constraints faced by monetary policy, going forward, fiscal policy can take a leading role in supporting aggregate demand.

“For instance, the government could scale up social safety nets—and consider cash transfers to provide swift relief to poorer households.

“If the current turmoil proves more damaging to the economy and the financial sector, targeted support could be considered, including to help real estate developers restructure.”

Dong on thin ice

In 2023, Vietnam’s balance of payments was only marginally in surplus by 1 to 3 billion dollars a quarter, indicating that credit was still resilient after a successful ‘soft-landing’, and any further shocks from macro-economists can destabilize the external sector easily.

In the fourth quarter of 2024, Vietnam’s BOP was only 2.4 billion dollars in surplus.

Any extra spending or tax cuts which boosts the deficit due to attempts to engage in ‘macro-economic policy’ and expand government borrowings would lead to money printing under a fixed policy rate, reversing gains made by the State Bank over 2023, and pushing the Dong down, analysts say.

Western macro-economists believe that expanding government action (through the Treasury or central banks) to tinker with ‘aggregate demand’ can boost growth numbers instead of giving a chance for people and businesses to engage in real production of goods and services by providing monetary stability.

Collapsing currencies and external imbalances are then blamed on ‘current account deficits’ and ‘structural deficiencies’.

Such Keynesian and post-Keynesian beliefs have worsened since quantitative easing was normalized in the US after the Great Recession and ‘stimulus’ re-captured Western media attention despite the hard lessons of the 1960s and 1970s, critics say.

In Sri Lanka, the IMF taught a central bank that had already busted the currency from 4.70 to 131 to the dollar to calculate ‘potential output’ just as the country was barely recovering from a 30-year civil war.

Sri Lanka defaulted within 7 years of ‘data driven monetary policy’ (flexible inflation targeting with output gap targeting) and three currency crises later in peacetime amid increasingly aggressive macro-economic policy as consecutive stabilization programs reduced growth numbers.

Aggressive Macro-economic Policy

After using higher deficits and inflationary rate cuts in 2015 amid low inflation, inflationary rate cuts despite tax hikes in 2018 (fiscal policy is tight therefore monetary has to be loose mantra), macro-economists took a proverbial Keynesian bull by the horns and cut both taxes and rates from December 2019 saying there was a ‘persistent output gap’.

Related Sri Lanka fiscal stimulus to close output gap

Analysts say there is no real choice between monetary or fiscal deterioration to achieve macroeconomic policy desires of interventionists, in a country with a bureaucratic interest rate.

A policy rate, unless hiked, will automatically result in inflationary monetary operations as domestic credit picks up, irrespective of whether it is driven by private or state credit.

Any so-called ‘fiscal support’ can only be given without harming the exchange rate in a country that has a reserve collecting central bank with a policy rate, by liquidating any sovereign wealth funds or borrowing abroad and pushing up net external debt, analysts say.

By worsening external net debt levels, desires of macro-economists can be satisfied without harming monetary stability and the living standards of the population in general or nutrition of the children of the poorest sections of society by so-called exchange rate flexibility or debasement.

In Sri Lanka, potential output is now written into a brand new IMF-backed monetary law even before the first default workout is complete. Potential output is mentioned in every monetary policy statement, not stability. (Colombo/Apr20/2024)

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