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Wednesday June 7th, 2023

Sri Lanka blames erratic weather, intermediaries, as food prices soar

ECONOMYNEXT – Sri Lanka’s soaring food prices are due to bad weather and intermediaries, and they will come down in time for April New Year, Minister Anura Priyadarshana Yapa said as the island wallowed in a period of stagflation after a currency collapse.

“It is well-known that vegetable prices wrere going up rapidly in the last few months,” Yapa told reporters in Colombo.

“The main reason for this is the climate anomalies which resulted in excess rain in both upcountry and low country regions simultaneously.”

“This hindered all agricultural activity where farmers faced great difficulty as some crops were completely destroyed, leading to an unusual increase in prices of vegetables and rice.

“Therefore, a price increase happened in vegetable and rice prices throughout the country.”

Sri Lanka rice prices have also gone up, despite having an estimated half a million tonne surplus last year.

Sri Lanka projects 0.5mn tonne rice surplus in 2019

Trebling and Quadrupling

Sri Lanka’s vegetables prices have more than doubled (cabbages up 176 percent to 180 rupees a kilogram, beans up 166 percent to 367 rupees, and snake gourds up 163 percent to 200 percent in the third week of January 2020 from a year earlier according to official data.

Some vegetables have trebled (tomatoes up 242 percent to 342 rupees a kilo and while carrots have quadrupled to (up 302 percent to 464 rupees a kilogram over the year, according to data published by the central bank.

In Sri Lanka the central bank prints large volumes of money in April and December to accommodate a seasonal demand in cash, which analysts say tends to push up prices.

From around 2018, the central bank has started to over-accommodate money pushing up excess liquidity in excess of 50 billion rupees on some days to target the call money rate, also putting pressure on the rupee in May and January.

However liquidity was tight at the end of 2019, which helped moderate prices despite a currency fall.

Analysts had warned that prices including imports will go up, as credit picks up. However the official inflation index in which the food component and tradables have been reduced showed 4.8 percent inflation in December as vegetable prices rose. January data is not out yet.

Government agencies around the world under reports inflation by building indices with consumption baskets of higher income brackets, so that the weight of food is as low as possible.

Traded commodities generally respond faster to money printing than, services, or manufactured and branded goods.

Because energy, also a traded commodity that responds fast to currency movements and liquidity, is consumed more by higher income groups, ‘core-inflation’ indices that do not reflect consumption patterns of anyone have been developed, critics say.

Sri Lanka’s growth has slowed and inflation has picked up in a so-called stagflation conditions after the currency collapsed in 2018.

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Sri Lanka in stagflation after flexible exchange rate collapse

The liquidity injections in April comes after the Maha harvests, but the December injections come in a in between the Yala and Maha harvests.

In 2018 a balance of payments crisis was triggered party because Sri Lanka printed money to cut rates while the US tightened, also brining down global commodity prices. But US policy is now also loose, which is firing international commodity prices.

Minister Yapa expects prices to come down over the next few months.

“With the easing of heavy rainfall, farmers can now cultivate without any problems,” he said.

“We can see the prices already beginning to fall and will hopefully continue in the coming months.”

Sri Lanka’s Maha harvests would come to the market from around next month.

Usual Suspect

He also blamed ‘intermdiaries’. Errant traders and black marketers (an automatic result of price controls) are a favourite target of politicians in many countries.

“Intermediaries also cause price distortions in the market which in a way contributes to this problem,” Yapa said.

“We should gradually evolve into a market where producers communicate directly with consumers more often,” he said.

In the US, when the Fed print money and drives up commodity prices, ‘speculators’ in forward markets are also blamed. The general public laps up such statements eagerly, analysts say.

If the price spike is purely due to a fall in harvests, the farmers would get more cash to cover their losses and build up capital for the next season, bringing down prices.

In Sri Lanka such cycles are sometimes also disrupted due to price controls, though it has been difficult to enforce price controls in vegetables, and markets signals generally work,

The minister claimed the answer to high vegetable prices lie in moving into technologically advanced cultivation methods like greenhouse which could regulate temperature and humidity.

Sri Lanka’s food prices are generally higher than the world due to protection given to farmers through import duties.

Some import duties in foods have been cut as commodity prices surged around the world in recent weeks.

Inflation Always and Everywhere is monetary

Though productivity in agriculture has surged including in the US, a central bank that targets a positive inflation number tends to print more money to keep its target, which tends to generate bubbles and collapses as well as permanent rises in prices.

Permanent price rises are more pronounced in soft-pegged regimes, which suffer the inflation of the reserve currency, through exports and imports and also generate their own inflation by busting the peg.

While seasonal price spikes can be due to supply disruptions – which can be worsened by monetary accommodation – permanent prices rises over several years, overtaking productivity improvements, is due to central banking in general and positive inflation targeting in particular.

In January 18, 2002, beans were only 48 rupees, carrots 45 rupees, snake gourd 14 rupees and ahs plantains 40 rupees.

The price rises over the past 18 years were not due to supply disruption or intermediaries but due to the collapse of the rupee, and monetary inflation from the Federal Reserve, to whose currency the Sri Lanka rupee is soft-pegged to, analysts say.

Before paper fiat money was born with the collapse of the Bretton Woods system, period of inflation was followed by periods of deflation. (Colombo/Jan22/2020)


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Sri Lanka’s shares slip on profit taking and selling pressure

ECONOMYNEXT – Sri Lanka’s shares closed lower on Wednesday after four consecutive gains in previous sessions spiraled into selling interest and profit taking, an analyst said.

The main All Share Price Index was down 0.28 percent or 24.39 points to 8,722.06, this is the lowest the index has been since May 02, while the most liquid index S&P SL20 was down 0.40 percent or 9.92 points to 2,468.44.

“The market was gaining in the previous sessions and there is selling and profit taking present today, due to continuously being on green,” an analyst said.

In the previous sessions the market was seeing gains, due to lowered policy rates and low inflation stimulating buying interest and driving the sentiment up, an analyst said.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

“There are gradual improvements in the market sentiment, with positive sentiments coming in from lowered policy rates and inflation,” an analyst said.

The market generated foreign inflows of 12 million rupees and received a net foreign inflow of 18 million rupees, due to low share prices and discounted shares followed by a dividend announcement.

The market generated a revenue of 554 million rupees, this is the lowest the turnover has been since May 10, while the daily turnover average was 1 billion rupees. From the total generated revenue, the banking sector contributed 120 million rupees, Diversified Banks contributed 115 million rupees and the Capital Goods Industry generated 78 million rupees.

Top losers during trade were Sampath Bank, Commercial Bank and Aitken Spence. (Colombo/June06/2023)

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Sri Lanka Treasuries yields plunge, 12-month down 318bp

ECONOMYNEXT – Sri Lanka’s Treasuries yields plunged across maturities at Wednesday’s auction with the 12-month yield falling 318 basis points, in one of the biggest one day falls, data from the state debt office showed.

The 3-month yield fell 244 basis points to 23.21 percent.

The 6-mont yield fell 339 basis points to 21.90 percent, along with the 12 months to 19.10 percent.

The short-term yield curve is inverted.

The central bank last week cut its policy rate 250 basis points in a signaling move but is not printing money to enforce the rate cut.

The debt office sold all 140 billion rupees of offered securities. (Colombo/June07/2023)

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Sri Lanka forex reserves rise US$722mn in May 2023

ECONOMYNEXT – Sri Lanka’s foreign reserves grew 722 million US dollars to 3,483 million US dollars in May 2023 from 2,761 million US dollars in April, official data showed amid weak credit and better inflows.

Sri Lanka lost almost all its reserve in over two years as the central bank sold reserves and printed money to keep rates down (sterilized reserves sales) including borrowed dollars from India.

Gross official reserves fell to a low of 1,705 million US dollars in September 2022.

Sri Lanka’s central bank hiked rates in April 2022 to slow credit and also stopped printing money after it ran out of borrowed Asian Clearing Union dollars from India.

Sri Lanka’s gross official reserves are made up of both monetary reserves of the central bank and any balances of the Treasury account from loans or grants it gets.

The central bank’s net foreign reserves are still negative after busting up borrowed reserves to suppress rates. By April (before the collection of reserves in May) the central bank’s net reserves were negative by 3.7 billion US dollars.

In May alone 662 million US dollars were bought from the market, Central Bank Governor Nandalal Weerasinghe said.


No pre-determined level to stop Sri Lanka rupee appreciation: CB Governor

Borrowing dollars through swaps and busting them up, was invented by the US Federal Reserve as it was printing money and breaking the Bretton Woods system in the early 1970s.

Sri Lanka received a 350 million US dollar tranche from the Asian Development Bank and 331 million US dollars from the IMF to the Treasury for budget support.

The loans can be sold to the central bank by the government to generate rupees and spend. However, since credit is weak, not all the inflows go out of the country particularly as the central bank is conducting deflationary open market operations on a net basis.

By allowing the rupee to appreciate unlike in previous episodes of recovery in an IMF program, after a bout of money printing, the central bank is bringing down inflation – in some cases absolute prices – and restoring confidence and easing the ‘pain’ of ‘monetary policy’ or stimulus.


Why is Sri Lanka’s rupee appreciating?

Though exports are falling, tourism revenues are also picking up.

The budget support loans, tourism receipts less the reserve collected will widen the trade deficit. Building foreign reserves involves lending money to the US or other western nations and is similar to repaying foreign debt. (Colombo/June07/2023)

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