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Monday February 6th, 2023

Sri Lanka 2020 deal talks hit a snag on debt sustainability: IMF spokesman

ECONOMYNEXT- Talks on an International Monetary Fund program in 2020 had hit a snag over policies required for debt sustainability and fix balance of payment trouble, an official had said as the island follows alternative strategies to repay debt.

Sri Lanka and the IMF initiated talks on Rapid Finance Instrument in 2020 when the Coronavirus epidemic struck, but no deal was reached.

“So we have sought, but not reached understanding, on how to fulfill the key requirements for what could be a rapid financing instrument which would include policies to continue ensuring debt sustainability to address the balance of payment challenges including from the COVID‑19 impact on tourism and to preserve international reserves,” IMF spokesman Gerry Rice told reporters in Washington.

Sri Lanka has a Latin America style central bank set up by a Federal Reserve ‘money doctor’ in the style of one developed in Argentina by Raul Prebisch.

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How Sri Lanka, Latin America was busted by Fed money doctors creating strongmen, anti-Americanism: Bellwether

Fed’s Latin America unit chief Robert Triffin set up similar central banks in a number countries with unrestrained money printing powers during and after the Great Depression, that led to massive currency collapses as soon as private credit picked up or the Fed tightened policy.

They were either set up anew or original gold-standard central banks with stronger restraints were diluted with ‘counter-cyclical’ interventionist capacity.

Prebisch and Triffin later independently advised other central banks in Latin America, which got into similar troubles.

Prebisch led a mission to Honduras in 1943 to set up a soft-peg which had gone to the IMF 25 times and Venezuela in 1948 (Heterodox Central Banking in the Periphery). He also invited Prebisch to join him in some.

Forex shortages from liquidity injections then led to import controls, the denial of free trade to the poor and import substitution oppression of the entire populace by rent seeking producers, critics say.

Many of the countries ended up in import substitution and default in forex debt.

IMF is monitoring Sri Lanka, Rice said.

“Indeed, Sri Lanka has relied on important restrictions since last year and recently introduced additional measures such as a requirement to convert 25 percent of export proceeds,” he said.

“We continue to closely monitor these economic policy financial developments in Sri Lanka including the recent agreement on a swap line with the People’s Bank of China.”

IMF programs themselves fail on inconsistent policy involving a so-called highly unstable panic triggering ‘flexible exchange rate’ with little or no credibility which is neither a consistent peg nor a consistent floating regime.

In 2018 Sri Lanka’s currency was busted purely by open market operations amid some Fed tightening and a domestic credit recovery leading to a consumption and growth collapse, when an unprecedented fiscal correction was made.

The IMF program had a high inflation target of up to 8 percent, while giving a forex reserve target which requires pegging, leading to contradictory money and exchange policies (soft-pegging).

Sri Lanka current balance of payments troubles stemmed from open market operations aimed at yield curve targeting that began around August 2019.

The IMF itself gave the central bank technical assistance to calculate an ‘output gap’ leading to it being targeted despite the central bank having no mandate to target growth and create monetary and economic stability but only to maintain economic and price stability.

When open market operations reversed in August 2019, Sri Lanka had about 8.8 billion dollars of forex reserves and access to capital markets.

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Sri Lanka prints Rs2.2bn 10-month money below overnight policy rate

Sri Lanka’s killer ‘flexible exchange rate’ strikes again: Bellwether

Foreign investors exit Sri Lanka rupee bonds for second week

Policy then worsened with a tax cut in December and rate cuts from January and unprecedented liquidity injections from around March 2020. (Colombo/Mar13/2019)

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Sri Lanka to address SME tax problems at first opportunity: State Minister

ECONOMYNEXT – Problems faced by Sri Lanka’s small and medium enterprises from recent tax changes will be addressed at the first opportunity, State Minister for Finance Ranjith Siyambalapitiya said.

Business chambers had raised questions about hikes in Value Added Tax, Corporate Income Tax and the Social Security Contribution Levy (SSCL) that’s been imposed.

It should be explored on how to amend the Inland Revenue Act, Siyamabalapitiya said, adding that the future months should be considered as a period where the country is being stabilized.

Both the VAT and SSCL are effectively paid by customers, but the SSCL is a cascading tax that makes running businesses difficult.

In Sri Lanka SMEs make up a large part of the economy, accounting for 80 per cent of all businesses according to according to the island’s National Human Resources and Employment Policy.

(Colombo/ Feb 05/2023)

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Sri Lanka revenues Rs158.7bn in Jan 2023 up 51-pct

ECONOMYNEXT – Sri Lanka’s government revenues were 158.7 billion rupees in January 2023 but expenditure and debt service remained high, Cabinet spokesman Minister Bandula Gunawardana said.

In January 2022 total revenues were Rs104.5 billion according to central bank data.

Sri Lanka’s tax revenues have risen sharply amid an inflationary blow off which had boosted nominal GDP while President Ranil Wickremesinghe has also raised taxes.

Departing from a previous strategy advocated by the IMF expanding the state and not cutting expenses, called revenue based fiscal consolidation, he is attempting to do classical fiscal consolidation with spending restraint.

President Ranil Wickremesinghe has presented a note to cabinet requesting state expenditure to be controlled, Gunawardana told reporters.

State Salaries cost 87.4 billion rupees.

Pensions and income supplements (Samurdhi program) were29.5 billion rupees.

Other expenses were 10.8 billion rupees.

Capital spending was   21 billion rupees.

Debt service was 377.6 billion rupees for January which has to be done with borrowings from Treasury bills, bonds and a central bank provisional advance of 100 billion rupees, Gunawardana said.

Interest costs were not separately given. (Colombo/Feb05/2023)

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Sri Lanka’s Ceylon Tea prices down for second week

ECONOMYNEXT – Sri Lanka’s Ceylon Tea prices fell for the second week at an auction on January 31, with teas from all elevations seeing a decline, data showed.

“In retrospect, the decline in prices would be a price correction owing to the overall product quality and less interest from some key importers due to the arrival of cargo at destinations ahead of schedule,” Forbes and Walker tea brokers said.

The weekly sale average fell from 1475.79 rupees to 1465.40 rupees from a week ago, according to data from Ceylon Tea Brokers.

The tea prices are down for two weeks in a row.

High Growns

The High Grown sale average was down by 20.90 rupees to 1380.23 rupees, Ceylon Tea Brokers said.

High grown BOP and BOPF was down about 100 rupees.

“Ex-Estate offerings which totalled 0.75 M/Kg saw a slight decline in quality over the previous week” Forbes and Walker said.

OP/OPA’s in general were steady to marginally down.

Low Growns

In Low Grown Teas, FBOP 1 was down by 100 rupees and FBOP was down by 50 rupees while PEK was up by 150 rupees.

The Low Growns sale average was down by 8.55 rupees to 1547.93 rupees.

A few select Best BOP1s along with Below Best varieties maintained.

OP1                     Select Best OP1’s were steady, whilst improved/clean Below Best varieties maintained.   Others and poorer sorts were easier.

PEKOE                 Well- made PEK/PEK1s in general were steady, whilst others and poorer sorts were down.

Leafy and Semi Leafy catalogues met with fair demand,” Forbes and Walker brokers said.

“However, the Small Leaf and Premium catalogues continued to decline.

“Shippers to Iran were very selective, whilst shippers to Türkiye and Russia were fairly active.”

This week  2.2 million Kilograms of Low Growns were sold.

Medium Growns

Medium Grown BOP and BOPF fell by around 100 rupees

The Medium Growns sale average was down by 33.40 rupees to 1199.4 rupees.

“Medium CTC teas in the higher price bracket witnessed a similar trend, whilst teas at the lower end were somewhat maintained subject to quality,” Forbes and Walker brokers said.

“Improved activity from the local trade and perhaps South Africa helped to stabilize prices to some extent.”

OP/OPA grades were steady while PEKOE/PEKOE1 were firm, while some gained 50-100 rupees at times.

Well-made FBOP/FBOPF1’s were down by 50-100 rupees per kg and more at times.

(Colombo/Feb 5/2023)

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