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Monday February 6th, 2023

Sri Lanka banks cut foreign borrowings, see more deposit dollarization

ECONOMYNEXT – Sri Lanka’s banks have sharply cut foreign borrowings over the past year, official data show as the country ran out of rating space after seven years of state expansion and monetary indiscipline.

State and private commercial bank borrowing heavily to abroad to buy dollar denominated Sri Lanka Development Bonds, give offshore banking unit loans to the government after 2015 which expanded from 17 to 20 percent of GDP over 5 years.

State-run Ceylon Petroleum Corporation also borrowed each time money was printed to suppress rates, under ‘flexible inflation targeting’.

Meanwhile some banks also bought discounted international sovereign bonds as foreign investors dumped them.

As downgrades came swiftly in 2020 towards CCC with money printing ratcheted up, banks lost the ability to borrow abroad. They also could not renew maturing loans as counterparty funding limits were cut.

Short term foreign currency borrowings of banks had peaked at 4.6 billion US dollars in the third quarter of 2020, central bank data show and had fallen to 1,442 billion US dollars by the first quarter of 2021 in a steep correction.

Long term loans which were around 1.5 billion US dollars in the first quarter of 2020 fell to 1,072 million by the first quarter of 2021.

Short term currency and deposits of commercial banks went up from about billion US dollars in the first quarter of 2020 to around 4.3 billion US dollars by the first quarter of 2022.

Sri Lanka in 2020 introduced special deposit schemes also to draw foreign funds.

Meanwhile some who had invested in SLDBs had also started to pull out fearing a hair-cut.

Data show that foreign borrowings of banks ratcheted up in the 2015/2016 and 2018 currency crises which were triggered money printed to suppress interest rates under ‘flexible’ inflation targeting, a highly unstable monetary regime peddled by Western Mercantilists to third world countries with ‘fear of floating’.

Sri Lanka also has a fear of hard-pegging.

Sri Lanka expanded the state from 2015 to 20 percent of GDP from 2017 after abandoning spending based consolidation (cost cutting) under revenue based consolidation despite having a bloated state and an oversized military.

 

Revenue based consolidation (expanding the state with a higher level of taxes) as well as borrowings have long been advocated by the Janatha Vimukthi Peramuna and is also generally followed by other leftists and American progressives.

During repeated currency crises under ‘flexible’ inflation targeting up to 2019, Sri Lanka also borrowed heavily through International Sovereign bonds as the country lost the ability to repay maturing debt in rupees, forcing foreign borrowings to go up at the gross financing level.

State-run Ceylon Petroleum Corporation also borrowed from commercial banks and suppliers as forex shortages from liquidity injections made under flexible inflation targeting created forex shortages making difficult for the CPC to convert rupees to dollars.

Flexible inflation targeting was coupled with deliberate money printing to target an output gap. The International Monetary Fund gave technical advice to calculate the output gap and target it with printed money.

After two currency crises depressed output Sri Lanka cut taxes in December 2019 saying there was a ‘persistent output gap’ and printed even more money than before. (Sri Lanka fiscal stimulus to close output gap)

In 2019 as the impact of state expansion under revenue based fiscal consolation and the foreign borrowings under flexible monetary policy became clear, analysts warned that the country would soon run out rating space and to discontinue unrestrained monetary policy.

Related

Sri Lanka needs monetary discipline to avoid further downgrades: Bellwether

“Sri Lanka is a country that had mostly kept monetary stability in the worst years of the war with the help of the ideology then prevailing,” EN’s economic columnist Bellwether warned in December 2019 as money printing began around August in a sign of things to come.

“But now each new episode of monetary indiscipline is costing the country one notch in the rating scale.

“Sri Lanka will soon run out of rating space to tap capital markets if the flexible exchange rate/call money rate targeting continues in the next recovery space.

“Sri Lanka will face credit downgrades and possible sovereign default of dollar debt unless the highly unstable discretionary ‘flexible exchange rate’ is restrained and some monetary discipline is brought in.

“Pakistan, whose central bank also prints money with a peg, and frequently runs to the IMF now has a B- rating. But B- is barely above CCC.

“From two levels below investment grade in 2005, Sri Lanka is now a little above CCC, which is a distressed debt level. It is not a place to take monetary risks in particular.

“The central bank and others are talking about the need to get down interest rates,” the column which was written before the 2019 elections but money printing through outright purchases had started around August of the year said.

“That is not re-asssuring.

“It is doubtful whether China will give loans like earlier to boost growth as it is having its own troubles. China’s flexible exchange rate is taking a toll, as are state owned enterprises. However China may give debt relief to Sri Lanka.

“If rates are cut further and money is printed, the recovery in 2020 will be short-lived or not at all, and another currency crisis will be generated and downgrades will follow.”

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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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