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Monday March 4th, 2024

Sri Lanka banks repay debt or collect US$1.7bn to Sept 2023

ECONOMYNEXT – Sri Lanka’s banks have repaid foreign debt or collected up to 1.7 billion US dollars from January to September 2023, official data show, as more market driven interest rates reduced domestic credit and investment.

Net foreign assets of Sri Lanka’s commercial banks went up to 426 billion rupees (about 1.31 billion US dollar, up from a negative 153 billion rupee (about 424 billion rupees) in December.

Bank foreign assets were negative by 732 billion rupees (about 2.1 billion US dollars) by April 2022 when rates were hiked by Governor Nandalal Weerasinghe to stop mis-targeting.

G-sec yields rose as investors bought bonds, despite the threat of a deliberate default through domestic debt restructuring, ending possible hyperinflation. Taxes were also raised later by President Ranil Wickremesinghe to reduce domestic credit and fuel market priced to reduce SOE credit.

Banks were later repaid dollar bonds in rupees, triggering an imbalance in their forex exposure (net open positions), with no dollars to balance their deposits and credit lines taken to provide the loans to the government.

Banks then bought dollars in the open market to repay maturing credit lines or simply to collect dollars to cover their foreign currency deposits which were then parked in nostro accounts of correspondent banks. Banks also had to provide for hair cuts on sovereign bonds.

Since April 2022 commercial banks have collected dollars or repaid debt amounting around 3.4 billion US dollars. The central bank has also collected reserves from around September 2022.

While the default ended most government debt repayments it triggered private outflows as credit lines were not rolled over and the ability to get new loans were lost.

Market interest rates and ending central bank inflationary policy (reverse repo injections) halts forex shortages allowing foreign loans to be repaid.

Sri Lanka’s government borrowed heavily through sovereign bonds and also Sri Lanka Development Bonds after the end of a civil war as repeated rate cuts enforced with printed money to push growth from around 2011, triggered repeated currency crises.

Printing money for growth systematized as targeting ‘potential output’ after 2015 has now been legalized in an overtly inflationist monetary law backed by the International Monetary Fund in 2023, critics have warned.

Keynesians who mis-target rates through bureaucratic policy rates believe that it requires an external current account surplus to repay debt, and are usually unable to grasp that the repayment of debt (a deficit financial account) through an unhampered market rate is what triggers a current account surplus.

The false doctrine was expressed by J M Keynes as the “transfer problem” which classical economists pointed out in the 1920s was a non-existent problem as long as there was no bureaucratic policy rate.

Any money borrowed from the domestic market – Treasuries issues in the case of the government, and deposits and loan repayments in the case of banks – automatically reduce domestic spending and investment of the private sector, reducing imports or other outflows and creating the required foreign exchange to repay debt.

“Sri Lanka’s so-called Active Liability Management Law is an overt reflection of the spurious monetary doctrine as reflected in the Keynesian transfer problem”,” says EN’s economic columnist Bellwether.

Analysts had warned several that the mis-understanding over the balance of payments and the transfer problem would lead to sovereign default in Sri Lanka as it had done in other countries, starting from post World War I Germany. (Sri Lanka’s Weimar Republic factor is inviting dollar sovereign default: Bellwether)

Related

Sri Lanka’s economic consequences of the peace; monetary instability and trade lockdown: Bellwether

Sri Lanka debt crisis trapped in spurious Keynesian ‘transfer problem’ and MMT: Bellwether

How Sri Lanka’s IMF-backed ‘Young Plan’ fired a foreign debt death spiral: Bellwether

Sri Lanka economy bought to tipping point by monetary fallacies: Bellwether

Sri Lanka posted a balance of payments surplus (foreign reserve collections of the central bank) from around September 2022.

Sri Lanka has posted current account surpluses amid foreign reserve collections by the private banks and the central bank over recent quarters.

RELATED: Sri Lanka current account surplus US$600mn in 1Q amid financial outflows

Current account surpluses (or deficits) in the absence of central bank inflationary policy are neither good nor bad, but are a reflection of net domestic investment and the behaviour of the external financial/capital accounts.

However, any current account deficits worsened by open market operations, and a bureaucratic policy rate to target potential output or inflation tend to trigger external monetary instability.

The inflationary policy is reflected in giving foreign reserves for private imports, operationally as sterilizing outflows to suppress short term rates.

An SOE central bank however cannot give reserves for private imports on a net basis for any length of time without disturbing reserve money, triggering BOP deficits and mounting imbalances in credit and deposits which require steep rate hikes to correct.

Countries that depreciate currencies and destroy the real value of savings (inflate away savings) to impoverish savers, may be forced to borrow abroad triggering chronic current account deficits over long periods of time.

Countries with monetary instability and depreciating currencies also have high nominal interest rates. (Colombo/Dec03/2023)

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Sri Lanka rupee opens at 308.20/50 to the US dollar

Sri Lanka stocks reversed its falling trend and gained for the first time in six sessions on Tuesday closed stronger on Tuesday (21).

ECONOMYNEXT – Sri Lanka’s rupee opened at 308.20/50 to the US dollar Monday, from 308.80/90 on Friday, dealers said.

Bond yields were broadly steady.

A bond maturing on 01.08.2026 was quoted stable at 10.90/11.00 percent.

A bond maturing on 15.09.2027 was quoted at 11.90/12.00 percent from 11.90/12.05 percent.

A bond maturing on 01.07.2028 was quoted at 12.20/30 percent from 12.15/35 percent.

The Colombo Stock Exchange opened up; The All Share was up 0.60 percent at 10,755, and the S&P SL20 was up 1.24 percent at 3,077. (Colombo/Mar4/2024)

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Sri Lanka central bank swaps top $3.2bn by December

ECONOMYNEXT – Sri Lanka’s central bank borrowed US dollars from various counterparties through swap transactions, which had topped 3.2 billion US dollars by December 2024, official data show.

The net short position, including swaps disclosed by the central bank, grew by over almost 1.28 billion US dollars from December 2022 to 3,280 million dollars.

The gross position grew from 2,263 million dollars to 3,280 million US dollars over the year.

The central bank supported some state banks with dollars to cover their dollar exposures, which had since been paid back.

By December reported gross reserves of the central bank was 4,491 million US dollars, against swaps of 3,280 billion US dollars.

Swaps of around 1500 related to the People Bank of China.

Swaps allow a central bank to increase gross reserves, without raising domestic interest rates.

Swaps with domestic counterparties lead to liquidity being injected into money markets, which can be mopped if domestic credit growth is moderate.

At the moment many private banks have large dollar positions invested outside the country, which cannot be used for transactions domestically because of a money monopoly given to macro-economists. (Sri Lanka repays debt or collects reserves of U$5bn via banking system since rate correction)

However unwinding swaps after private credit has picked, or engaging in swaps after private credit has picked up, may lead to money being injected to maintain the policy rate, leading to excess credit by banks and balance of payments deficits and or currency collapses, analysts say.

Central bank swaps in the third quarter of 2018 led to a collapse of the currency under the ‘exchange rate as the first line of defence’ policy peddled to Sri Lanka, critics have said earlier.

Domestic currency proceeds of swaps were the primary ammunition to bust East Asian currencies in 1997-98.

Any depreciation after the swap proceeds have been used for imports (effectively mis-targeting rates) a central bank will run a forex loss.

The PBOC however had put a rule, preventing the use of the swap after gross reserves fell below 3 – months of imports, preventing Sri Lanka from getting into further trouble through the use of official reserves for private imports.

Sri Lanka’s central bank also used borrowings from the Reserve Bank of India, via the Asian Clearing Union to run BOP deficits.

Losses from exposed dollar positions of central banks which have gained ‘independence’ from fiscal rules and parliaments and engaged in macro-economic policy, including the Fed, have led to taxpayers bearing the losses in the end.

Swaps were invented by the Fed in the early 1960s, as it deployed macro-economic policy (printed money for growth) threatening its gold reserves and the Bretton Woods system.

Sri Lanka has other borrowings also, including from the IMF, which has made net foreign assets of the central bank negative. (Colombo/Mar05/2024)

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Sri Lanka loses MICE tourists to Thailand on minimum room rates

ECONOMYNEXT – Sri Lanka has lost Meetings, Incentive Travel and Exhibition travelers to competitors in East Asia and India due to minimum room rates as higher standard rooms were available in other countries at lower prices, industry officials said.

President of the Sri Lanka Association of Inbound Tourist (SLAITO) Nishad Wijetunga said they the industry managed to retain a majority of booking made before the minimum room rates were imposed by the state last year.

“However, there were MICE groups that were supposed to come and cancelled Sri Lanka and went to places like Thailand and other parts of India and we lost,” Wijetunga told EconomyNext.

“We know that large groups of MICE (tourists) are affected.”

India is a key source of MICE tourists to Sri Lanka.

Sri Lanka’s businesses have got used to protectionism and try to push up prices with import taxes to extract more money from customers using the coercive power of the state, with tiles and steel being among the most prominent examples.

RELATED: Stand-alone hotels unviable in Sri Lanka due to high construction, capital costs

High priced tiles and steel in turn makes hotels expensive to build and make the leisure industry less competitive, analysts say.

However, in tourism, unlike in building materials customers are not trapped within the country and are free to move to other markets.

Managing Director of CEC Events and Travels, Imran Hassan, said the industry lost groups to East Asia due to minimum room rate.

In one instance, an operator was in discussions to get a group of 900 passengers.

“And that moved out to Thailand,” Hassan said. “Like that, there are many instances that the minimum room rate was not conducive.”

Thailand in 2023 attracted 28.04 million tourists.

A group that used to come to Sri Lanka annually used to take 40 to 50 five-star hotel rooms. This time Sri Lanka competed by offering lower standard.

“This year, they’re only giving 10 rooms to the five-star hotels,” Hassan explained. “They are staying in smaller hotels because they can’t afford it because it has become so expensive.”

“But overall, we are working with the authorities to correct it.

“We don’t mind demand and supply situation taking the rates up as in the Maldives. But what we are saying is keep an open market.”

RELATED : Sri Lanka should say good bye to minimum room rates: President

President Ranil Wickremesinghe has said Sri Lanka cannot progress with protectionism and the country has to learn to face competition. (Colombo/Mar04/2024)

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