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Friday December 9th, 2022

Private credit in Sri Lanka turns negative after four years in Jan 2019

ECONOMYNEXT – Sri Lanka’s credit to private borrowers from commercial banks turned negative in January 2019 for the first time since 2014, official data showed in the wake of two currency collapses in 2018 and a political crisis in the last quarter.

Private credit was last negative in May 2014.

The rupee stabilized in January.

Weak credit allows the central bank to purchase dollars exercising its strong side convertibility undertakings and mop up inflows, shrink the external current account and build reserves by keeping the system slightly tighter than a free market peg (currency board).

Credit Slowdown

Outstanding private credit fell 4.3 billion rupees from 5,561.4 billion rupees in December 2018 to 5,557.1 billion rupees in January 2019.

Credit to state enterprises also contracted 44.3 billion rupees to 711.1 billion rupees, for reasons that are not clear.

Total credit to government rose 110.2 billion rupees in January, including 43.7 billion rupees in central bank credit.

Central bank credit expanded 43.7 billion rupees to 515 billion rupees in January from 471.3 billion rupees in December with the monetary authority using part of its forex reserves to part settle a billion US dollar bond in January 2019.

In Sri Lanka the way central bank reserves are appropriated do not cause pressure on the currency (monetary policy neutral) as the transaction goes through one bank without affecting reserve money.

Currency Collapse

Sri Lanka rupee fell from 153 in January to around 161 by August as the central bank stopped sterilization auctions in February 2018 and printed tens of billions of rupees to enforce a rate cut in April as well as re-finance a so-called ‘buffer strategy’.

From February to 2018 to end April 2018, central bank credit rocketed from 225 billion rupees to 291.3 billion rupees. The rupee ended up at 161 to the US dollar in the first run.

In the second run central bank credit rose from 245 billion rupees in August to 471 billion rupees by December. Part of the money was printed after pressure was triggered on the rupee after defending the currency when capital flight intensified during a political crisis.

President Maithripala Sirisena, appointed Mahinda Rajapaska as Prime Minister suddenly and illegally suspended parliament, harming foreign investor confidence.

The rupee fell to 182 by the end of the year.

With private credit slowing or contracting, pressure went off the rupee in January. Meanwhile the central bank has bought dollars in 2019.

But it also allowed the rupee to appreciate in 2019. It takes longer for a country recover from a credit contraction when the currency also falls.

After the 1997-98 East Asia crisis, Hong Kong which had a currency board (hard peg with floating interests) was the first to recover with its gross domestic product reaching pre-crisis levels by 1999.

Monetary Instability

Sri Lanka’s soft-pegged central bank is a key challenge to the country’s progress, which has been printing money and generating instability since it was set up in 1950.

Money printing causes cascading expansion in credit pushing imports up and making dollar outflows exceed inflows, leading to pressure on the pegged exchange rate.

The central bank prints money to cut the rate weakening the peg (pushing the peg from the strong side of its convertibility undertaking to the weak side) but does not allow rates to float to bring the peg back to the strong side.

It then injects liquidity and fnally raises rates when instability worsens and after the rupee has fallen in a strategy dubbed ‘rawulath ne kendath ne’ by critics.

In 2019 however the central bank injected most money through term auctions which may have allowed the crisis to end faster.

In Sri Lanka authorities are driven by Mercantilism and believe that balance of payments troubles comes from imports and not by money printing and credit.

Analysts have also faulted the International Monetary Fund for giving Sri Lanka a forex reserve target (with an implicit strong side convertibility undertaking) but no commensurate ceilings on domestic assets to block money printing and keep the peg on the strong side.

In 2017 the central bank wantonly pushed its convertibility undertaking from 150 to 153 rupees to the US dollars based on a real effective exchange rate targeting strategy despite the peg being on the strong side. (Colombo/April01/2019)

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Sri Lanka president slams power regulator chief after conflicting with minister

ECONOMYNET – The powers to change the electricity tariff in Sri Lanka is vested with the Minister of Power and not the Public Utilities Commission (PUCSL), President Ranil Wickremesinghe told the Parliament.

The minister of Power and Energy, Kanchana Wijesekara has requested an upward price revision to be implemented in two phases both in January and July next year, saying the recent tariff hike was not enough for the state-run utility provider Ceylon Electricity Board (CEB) to continue uninterrupted power supply.

However, Jaynaka Ratnayake, the Chairman of the PUCSL had said  the recent tariff hike is enough for the CEB to cover the cost of production and it will not allow another price hike. However, he has said a twice a year price revision is necessary though it should be in April and October instead of January and July.

President Wickremesinghe said the PUCSL chief was opposing the tariff hike due to his personal reasons.

“The power is vested with the Minister and me. I am the one who made the PUCSL act and I know what is in it,” Wickremesinghe told the parliament on Thursday. quoting a letter from the Attorney General which mentioned provisions in the island nation’s Electricity Act.

Accordingly the Act, the PUCSL would be statutorily obliged to give effect to such policy. It is observed that neither the Act nor the PUCSL Act contains any provisions that empowers the PUCSL to change or act invariant of such policy guidelines.

“The Chairman of the PUCSL is misguiding the general public. I have to meet him and see,” Wickremesinghe said.

WIckremesinghe said the Chairman does not want the tariff hike because he owns one of the highest electricity consuming companies.

“He is the Chairman of the Trillium corporation. It is the firm that takes up the most energy”, he said.

The Trillium group is managed by Janaka Ratnayake and he also holds positions as the chairman and CEO of Trillium Property Management & Services Ltd., City Housing and Real Estate PLC, Trillium Residencies Ltd., Computer Care (Pvt) Ltd., and Rent a Comp Services (Pvt) Ltd., and JR Management Consultants (Pvt) Ltd.

“It means when the electricity bill increases, his expenses increase as well”

He said the CEB still has a loss of 300 billion rupees since 2013 and it needs to be covered.

The CEB issue can be solved only in three ways, either printing more money, increasing value added tax or increasing the tariffm, he said. (Colombo/Dec08/2022)

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Sri Lanka President bemoans over inconsistent LNG deals

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe bemoaned over successive governments’ liquefied natural gas (LNG) deal that has brought in all the world powers into the discussion.

Wickremesinghe’s center-right United National Party (UNP) had discussions with India and Japan between 2002-2004 for an LNG project.

“Following dialogues with India and Japan, the UNP government could come to agreements to get two LNG power plants. After we were defeated the successor government, without cancelling those agreements granted it to New Fortress company in USA,” Wickremesinghe told the parliament.

“Thereafter, as they did not like New Fortress, they gave it back to Pakistan and China. So within the same premises, there were China, Pakistan, India, USA, Japan and only Russia was not there.”

“It was wonderful that a world war did not ignited there as there were five main powers in the world.”

“Now there is no LNG or anything here and now they ask me to solve this issue.”

Wickremesighe’s outburst comes as his government is forced to raise tariffs on power prices after successive governments failed to implement cheap and renewable power generation projects.

He said a total loss for the state-run Ceylon Electricity Board since 2013 was 300 billion rupees and a possible drought next year could increase the 2023 electricity cost to 420 billion rupees.

“If it rained, we need Rs. 352 billion while Rs. 295 is required if rained so much to have floods. How are we going to find this money? We would have to print money, but Rupee would depreciate. We would have to increase VAT but it would increase the price of all commodities or to charge it direct.” (Colombo/Dec08/2022)

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Air quality drop forces Sri Lanka to close schools; public warned

ECONOMYNEXT – A rapid drop in air quality in Sri Lanka has forced the Colombo government to close all schools across the country after a deep depression over Southeast Bay of Bengal, officials said.

The Education Ministry, issuing a special notice on Thursday said, it has decided to close all government schools for Friday, after discussing with the officials in Meteorology Department and Disaster Management Center.

An official said the drop was due to the deep depression over Southeast Bay of Bengal carrying the air from India.

Due to the depression over South east Bay of Bengal (370 km east of Trincomalee) has concentrated into a cyclonic storm “Mandous” by Wednesday night.

“Cyclone in the Bay of Bengal that is the prime reason for the increase in the pollution load as we receive more wind from India,” H.D.S.Premasiri, Senior Scientist, Coordinator-Air Quality, noise and vibrations at National Building Research Organization (NBRO) told EconomyNext on Thursday.

Officials said there is a likelihood of the cyclone moving west-northwestwards and further intensify into a severe cyclonic storm tonight and cross North Tamil-Nadu, Puducherry and South Andhra Pradesh coast around midnight of 09 th December and the maximum wind speeds will be 70-90 km per hour and can increase up to 90 in sea areas.

“Hopefully, today we can expect normalization in the environment and the effects of the fog will disappear”.

According to the NBRO’s real time Air Quality Index Indicator, the quality of air in northwestern coastal district of Puttalam has dropped drastically and indicated a particular matter (PM) 132, while Kegalle (85) and Mannar (84) were the districts which had next worst air quality.

According to NBRO, Battaramulla, Polonnaruwa, Dambulla, Kegalle, Mannar and Puttalam indicate a poor quality of air due to higher PM.

“The fog will lead to lung and breathing issues,” Premasiri said.

“So the public is warned to wear a mask when they travel outside. The pollution highly prevails in city areas and has a less impact on the other parts of the areas.” (Colombo/ Dec08/2022)

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