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Tuesday January 31st, 2023

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 shares down for 2nd day as tax hike, delay in Chinese debt assurance weigh

ECONOMYNEXT – Sri Lanka’s shares edged down on Tuesday as worries over delay in financial assurances from China which is mandatory for a $2.9 billion dollar IMF loan and rise in protests against tax hike kept investors in check, analysts said.

The main All Share Price Index (ASPI) edged down by 0.28 percent or 24.62 points to 8,865.05. It fell for the second session after hitting more than three-month high.

“The market is looking for more macro cues because of faster Chinese debt assurance was expected. The market is also hit by fall in corporate earnings due to high taxes,” an analyst said.

China has given an initial response on debt re-structuring to Sri Lanka though analysts familiar with the process say it is not a ‘hard assurance’ sufficient for the IMF program to go through.

The International Monetary Fund is working with China on extending maturities of Chinese loans to defaulted countries like Sri Lanka, as there is resistance to hair-cuts, Managing Director Kristalina Georgieva told reporters on January 14.
The earnings for first quarter are expected to be negative for many corporates with higher taxes and rising costs. However, investors had not expected earnings to be low in the December quarter because of year end pick ups on heavy counters, the analyst said.
Earnings in the second quarter of 2023 are expected to be more positive with the anticipation of IMF loan and possible reduction in the market interest rates as the tax revenue has started to generate funds.

However, the central bank said the IMF deal is likely in the first quarter or in the first month of the second quarter.

The most liquid index S&P SL20 dropped by 0.64 percent or 17.74 points to 2,764.51 points.

The central bank has said it could cut interest rates in future when the country sees fall in inflation, which has already started decelerating.

The market saw a turnover of 1.7 billion rupees, slightly lower than the month’s daily average of 1.8 billion rupees and while being significantly lower than 2022’s daily average turnover of 2.9 billion rupees.

The bourse saw a net foreign inflow (NFI) of 93 million rupees extending the net offshore buying to 413 million rupees so far this year.

Top losers were LOLC, Royal Ceramics Limited and Hayleys. (Colombo/Jan31/2023)

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Sri Lanka exports fall in December as global recession weighs

ECONOMYNEXT – Sri Lanka’s merchandise exports earnings fell 9.7 percent in December year-on-year as the island nation saw a drop in buying from its key export destinations which are facing a looming recession after the Russia-Ukraine war.

The earnings from the merchandise exports recorded $1.04 billion  in December 2022 compared to the same month in the previous year as per the data released by the Sri Lanka Customs.

“This was mainly due to the decrease in export earnings from Apparel & Textiles, Tea, Rubber based Products, and Coconut based Products, Food & Beverages, Spices & Essential Oils and Fisheries products,” the Export Development Board (EDB) said in a statement.

“The reason for this decline was due to the ongoing recession in major markets due to rising cost of production, energy etc. Imports declined sharply due to inflation and demand for goods and services are reduced.”

However, Sri Lanka saw a record export earning of $13.1 billion in 2022 due to increased demand in the key exports throughout the year

Earnings from all major product sectors except Electrical & Electronic components as well as Diamonds, Gems & Jewellery fell in December.

Exports of Apparel & Textiles decreased by 9.6 percent to $480.3 million in December 2022.  Export earnings from Tea fell by 3 percent to $107.3 million, Rubber and Rubber Finished products dropped 20.3 percent to $74.5 million,

However, export earnings from the Electrical & Electronics Components increased by 16.18 percent to $42.9 million in December 2022, while Diamond, Gems & Jewelry jumped 35.7 percent to $30.8 million. (Colombo/Jan31/2023)

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Sri Lanka records over 6,000 dengue cases in first three weeks of January

ECONOMYNEXT – Sri Lanka recorded over than 6,000 dengue cases in the first three weeks of January 2023 after a spell of heavy monsoon rain though a drop in cases is likely from February, officials said.

Health officials identified 6,204 dengue patients by January 22, up from 5,793 recorded in the corresponding period last year.

“A rise in cases can be observed in the November-January period with the heavy rain due to the northeast monsoon,” an official from the National Dengue Control Unit told EconomyNext.

Of all reported cases, 46.3 percent were from the Western Province, official reports showed.

Akuressa, Batticaloa, Eravur, Trincomalee, Madampe, Badulla, Eheliyagoda, Kegalle, Kalmunai North and Alayadivembu MOH areas were identified as high-risk areas for dengue during the third week of January by the health officials.

“We are expecting a decline in dengue cases soon. The Western province is always in the top position with the highest number of dengue cases. Apart from that, we are seeing a higher number of cases during this period in areas like Puttalam, Jaffna districts. A certain number of cases have also been recorded in the Kandy district,” the official said.

“Usually the cases peak in December, but they decline by February. This year, too, we are facing this scenario. There is an increase of dengue during the months of November, December and January”.

Due to the economic situation in the country, the Public Health Inspectors (PHIs) in an earlier report said, diesel and pesticides are not being provided by the ministry.

However, rejecting the allegation, the official from the NDCU said the government has provided enough funds for get the necessary pesticides but it is being used according to a scientific method to avoid building a resistance in the dengue mosquito.

“The recommendation is to do the fogging if there is a dengue outbreak or if there are few patients reported from the same locality.

“If you use this pesticide haphazardly, the mosquitos will develop resistance against it,” the official said, adding that there are adequate stocks of the chemical available. (Colombo/ Jan 31/2023)

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