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Sunday February 25th, 2024

Sri Lanka bank credit jump Rs1.2trn in March in soft-peg collapse

ECONOMYNEXT – Sri Lanka’s bank credit surged in March 2022 after a collapse of a soft-peg and the value dollar books of banks from inflated in domestic currency as an intermediate regime central bank attempted to regain control of reserve money through a float.

Intermediate regimes (central banks with foreign reserves that also engage in aggressive open market operations to print money and keep interest rates down) are the most dangerous monetary regime invented by mercantilists.

In March 2022 the rupee fell from 201 to the US dollar to 299 based on official data, inflating the rupee value of dollar loans, in the biggest economic crisis triggered by the Latin America style central bank in its 72 year history.

Inflation of Liability Dollarization

Total credit from the banking system to the government, state enterprises and private firm jumped 1.2 trillion rupees in March, up from 128 billion rupees a a month earlier as dollar books inflated.

Commercial bank credit to government grew 209 billion rupees with 137 billion rupees coming from dollar book inflation.

Credit to state enterprises also grew 310 billion rupees with 77 billion rupees coming from overseas banking units.

Private credit grew 694 billion rupees in rupee terms, with 221 billion rupees coming from overseas banking unit. It is not clear whether domestic units also have dollar borrowings.

Central bank credit also grew 240 billion rupees in March.

Sri Lanka runs from currency crisis to currency crisis due to the intermediate regime central bank which has anchor conflicts in line with the so-called ‘impossible trinity’ of monetary policy objectives triggering exchange and trade controls when money is printed suppress interest rates.

The country’s Latin America style central bank was set up in 1950 and it had gone to the International Monetary Fund 16 times with as the soft-peg came under pressure from low interest rates maintained by money printing.

The lack of any appreciation about the value of monetary stability (sound money) as a foundation for economic growth is found among both third world economists and also in Western prescriptions for the third world, who favour unstable intermediate regimes which place discretion above rules under the guise of central bank independence, critics say.

Sri Lanka itself was following flexible inflation targeting (discretionary domestic anchor) while operating a flexible exchange rate (discretionary external anchor) which led to three currency crises in 2015/16, 2018 and also 2020/2021/2022 which is still under way.

Both legislators and interventionist economists have opposed single anchor monetary regimes (currency board or a clean float), while paying lip service the impossible trinity of monetary policy objectives.

Inflating Credit

While dollar credit inflated in March, rupee borrowings of private firms also tend to rise as the currency collapse inflates prices and working capital needs grow, analysts have warned earlier when discretionary flexible inflation targeting and output gap targeting became official policy.

Distress borrowings also tend to grow in such countries unless the exchange rate is stabilized.

By end April 2022 consumer price inflation has hit 29.8 percent.

Analysts have faulted the International Monetary Fund for giving technical assistance to calculate an output gap, which was targeted with liquidity injections, ultimately de-stabilizing a country at peace through a series of currency crises.


How to fix Sri Lanka’s debt crisis, unstable peg, avoid sudden stop event: Bellwether

Sri Lanka is not Greece, it is a Latin America style soft-peg: Bellwether

“The days are gone in which most persons in authority considered stability of foreign exchange rates to be an advantage,” commented Ludwig von Mises, a classical economist.

“Devaluation of a country’s currency has now become a regular means of restricting imports and expropriating foreign capital.

“It is one of the methods of economic nationalism. Few people now wish stable foreign exchange rates for their own countries. their own country, as they see it, is fighting the trade barriers of other nations and the progressive devaluation of other nations’ currency systems.

“Stability of foreign exchange rates was in their eyes a mischief, not a blessing. Such is the essence of the monetary teachings of Lord Keynes. The Keynesian school passionately advocates instability of foreign exchange rates.”

Ironically, East Asia including China until 2005 had some of the strongest exchange rates in the world either orthodox nutral policy currency boards or regimes which are tighter than currency boards where foreign reserves exceed reserve money. (Colombo/May16/2022)

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Sri Lanka could get US$500mn from ADB in 2024

ECONOMYNEXT – Sri Lanka could receive 500 million US dollars in support from the Asian Development Bank in 2024 based on the progress of policy reforms, Country Director of the Manila-based lender, Takafumi Kadono said.

The ADB expect to go to its Board around March or April with a 100 million US dollar power sector loan subject to the cabinet of ministers of approving a revised electricity reform bill.

A 100 million dollar loan to support SMEs could also be approved in the early part of the year. Sri Lanka is setting up a credit guarantee agency to support credit for small firms.

A 200 million dollar credit for financial sector was also slated for the year. The ADB gave the first tranche of the financial sector policy loan late last year.

A $100mn for the water sector could also be approved later in the year.

Sri Lanka could get around 200 to 300 million US dollars a year at the lowest rate, or concessional ordinary capital resources (COL) rate of 2 percent.

The balance of would come at the ordinary capital resource rate linked to SOFR.

The ADB has also started work on a ‘Country Partnership Strategy’ for Sri Lanka covering the 2024-2028 period, Kadodo said. (Colombo/Feb25/2024)

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Sri Lanka’s multi-aligned foreign policy based on friendship: Min

ECONOMYNEXT – Sri Lanka’s multi-aligned foreign policy is based on friendship to all and enmity to none, its Minister of Foreign Affairs has said.

“Non-alignment means not becoming a bystander. Non-alignment means you are not forced or coerced into a camp to take sovereign decisions… you make your own choices. Whether it is commercial, security, regional or otherwise,” M U M Ali Sabry said on X (twitter).

“I have repeatedly stressed that sovereignty is the right to have your own opinion on what’s right and wrong, and to stand by your principles. Our multi-aligned foreign policy is based on friendship to all and enmity to none,” Sabry was quoting from his speech at the Lakshman Kadirgamar Institute of International Relations and Strategic Studies (LKI) Foreign Policy Forum, on the theme ‘Reassessing Non-Alignment in a Polarised World’.

Sri Lanka is one of the founding members of the Non-Aligned Movement.

The strategically located island has been increasingly walking a fine line between opposing global factions as it seeks to come out of a financial crisis. (Colombo/Feb24/2024)

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Sri Lanka’s Commercial Bank Dec net down on tax provisions

ECONOMYNEXT – Sri Lanka’s Commercial Bank of Ceylon reported profits of 6.9 billion rupees from the December 2023 quarter down 21 percent, despite an improvement in net interest income and lower provisions, amid a change in tax provisions.

Pre-tax profits were 8.89 billion rupees up from 2.4 billion rupees. There was a 6.4 billion tax reversal last year compared to a 1.7 billion rupee tax charge this year.

Commercial Bank reported earnings of 5.26 rupees for the quarter. For the year to December 2023 earnings were 16.07 rupees per share on total profits of 21.1 billion rupees, down 11.3 percent.

Net fee and commission income was down 1.2 percent to 6.1 billion rupees.

Net interest income went up 16.8 percent to 25.5 billion rupees, with interest income rising marginally by 1.3 percent to 73.0 billion rupees and interest expense falling 5.45 percent to 47.5 billion rupees.

Loans and advances to customers grew 4.06 percent to 1.17 billion rupees in the year to December. Debt and other financial instruments fell 10.5 percent to 649 billion rupees.

Financial assets measured and fair value through other comprehensive income was at 287 billion rupees, up from 117 billion rupees.

Impairment charges were 13.1 billion rupees, down from 19.6 billion rupees last year.

Gross assets were up 6.45 percent to 2.36 billion rupees. Net assets were up 5.51 percent to 214 billion rupees. (Colombo/Feb24/2024)

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