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Thursday August 18th, 2022

Sri Lanka budget deficit 12.2-pct of GDP in 2021

ECONOMYNEXT – Sri Lanka has recorded a budget deficit of 12.2 percent of gross domestic product in 2021, with 1,225 billion rupees printed under output gap targeting with flexible inflation targeting, official data show.

The debt ratio with Treasury guarantees and net central bank foreign debt was had risen to 115.9 percent of GDP.

Sri Lanka has raised 1,457 billion rupees in revenues in 2021 or 8.7 percent of GDP, down from 9.1 percent of GDP or 1,373.3 billion rupees in 2020, according to fiscal data released.

Output Gap Targeting

In 2019, the government raised 1,890.9 billion rupees of 12.6 percent of GDP until the country’s economists cut taxes to target an output gap.

“The switching of resources from unproductive public expenditure to the private firms and individuals will be growth friendly in a context where there has been a persistent output gap,” the Finance Ministry said in December 2019. (Sri Lanka fiscal stimulus to close output gap)

“Higher growth will have a positive impact on the overall debt dynamics of the country as well.”

To prevent the extra money in private hands from going back to the budget through bond auctions, the central bank then imposed price controls on bond auctions and bought large volumes of securities with printed money.

There have been claims that 600 billion rupees a year in taxes were lost a year due the tax cuts.

However in 2021, twice the value of the tax cuts or 1,225 billion rupees was printed as the balance of payments was blown wide open, losing the ability to repay foreign loans and an import boom started with the excess money.

The central bank has discretionary independence to whatever it’s Governor and Monetary Board wants going against its mandate of maintaining economic and price stability in Section 5(a) of its governing law using other provisions and its involvement in a Treasury securities auctions committee. (Sri Lanka central bank to work closely with finance ministry in developmental state: Governor)

Ironically the tool to calculate the output gap was given by the International Monetary Fund.

Sri Lanka began ‘flexible inflation targeting with output gap targeting (stimulus with printed money) after 2015 eventually driving a country without a war into default with three currency crises in quick succession.

Flexible policy unconstrained by law

The output gap targeting was done with a flexible exchange rate, which is neither a clean float nor a hard peg leading to anchor conflicts and currency collapses.

The flexible exchange rate or a soft-peg is the third rate unstable intermediate used in many third world countries that go the International Monetary Fund with balance of payments trouble. Balance of payments crises do not take place in hard pegs of clean floats.

From 2015 to 2019 two currency crises were triggered by money printed to target an output gap under ‘flexible inflation targeting.’

At the time money printing was justified on the claim that “output gap stabilization is an important concern in a flexible inflation targeting regime” and that it “argues for a relaxation of monetary policy.”

During the ousted Yahapalana regime a new law was brought to legalize flexible and discretionary policy instead of committing the Monetary Board to a rule of law and reducing its discretionary powers. The law also sought to indemnity staff.

Deficit

As total revenues went up to 6.1 percent to 1,457 billion rupees current spending went up 2.8 percent to 2,747 billion rupees.

The current account deficit or the gap between total revenues and only current spending was 1,290 billion rupees flat from 1,298 billion rupees a year earlier.

Capital spending was 774 billion rupees, down 0.6 percent from 791 billon rupees a year earlier.

The overall budget deficit (after grants) was 2,057 billion rupees or 12.2 percent of GDP compared to 2,085 billion rupees of 13.9 percent of GDP in 2020.

The Finance Ministry had claimed the deficit was 11.1 percent of GDP in 2020 by shifting some arrears to the previous year.

Foreign borrowings were a negative 13.9 billion rupees with the rating steadily downgrade since 2015 under flexible inflation targeting with output gap targeting and eventually being locked out of capital markets in 2020.

Money Printing

In 2021 1,225.2 billion rupees was printed, up from 505.8 billion rupees in 2020.

In the 2018 currency crisis when the then administration gave full independence to the central bank they were unable to stop 247 billion rupees from being printed or to stop output gap targeting.

Then Minister Harsha de Silva pleaded with the central bank to raise rates, but the pleas were ignored.

In 2019, 109 billion rupees in central bank credit was reversed, but output gap targeting began from August ending pushing the balance of payments into negative territory.

The deficits are still continuing with a broken pegged regime.

The central government debt of GDP ratio went up 104.9 percent from 98 percent. With government guaranteed debt it was 113.6 percent of GDP.

The central bank also became a net dollar borrower in 2021. When negative net foreign assets are added, the debt to GDP ratio was up to 115.9 billion rupees.

Analysts and economists have called for legal changes to the central bank’s law and the removal of provisions that allows it to practice flexible inflation targeting, output gap targeting and trigger economic and price instability and commit it to a rule of law.

The output gap targeting under flexible inflation targeting which triggered three currency crises from 2015 to 2022 and brought a country at peace into default and the flexible exchange rate to collapse is likely illegal under section 5 (as) critics say. (Sri Lanka has a corrupted inflation targeting, output gap targeting not in line with monetary law: Wijewardena)

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Sri Lanka stocks end steady after CB held policy rates steady; turnover slumps to over 2-wk low

ECONOMYNEXT – Sri Lanka stocks closed steady on Thursday (18) with turnover slumping to more than two-week low after the central bank held the key policy rates steady, dealers said.

The main All Share Price Index (ASPI) edged up 0.04% or 3.22 points to 8,910.57. On Tuesday, it fell from its highest
close since March 30.

“We saw the market stabilizing after slipping for the last two days on profit taking,” a top analyst said.

“But overall there was continued buying interest on the energy sector and in addition, we saw buying coming into the plantation-related stocks and their holding companies.”

There had been selling pressure on the banking sector, he said.

At the monthly policy review meeting held today, the central banks kept the rates unchanged.

Market analysts said investors have been looking for profit taking after the index gained nearly 2,000 points in the 12 consecutive sessions through Monday.

Investors, however, have been shifting from top liquid shares to energy and plantation sectors now, analysts said.

The market generated 2.72 billion rupees in turnover, its lowest since August 3 and less than this year’s average daily turnover of 3.13 billion rupees. This is also the lowest turnover in last nine sessions.

Sri Lanka has already declared sovereign debt default on April 12 this year and failed to pay its first sovereign debt in May amid a deepening economic crisis which later turned into a political crisis and led to a change in the president, cabinet, and government.

The more liquid S&P SL20 index ended 0.52% or 15.33 points up at 2,962.33.

Sri Lanka is facing its worst fuel and economic crisis in its post-independence era and the economy is
expected to contract 7 percent this year.

The main ASPI gained 15.2 percent in August so far after gaining 5.3 percent in July. It lost 9.3 percent in
June, 23 percent in April, and 14.5 percent in March.

The market index has lost 27.1 percent so far this year after being one of the world’s best stock markets
with an 80 percent return last year when large volumes of money were printed.

Net foreign inflow was 83 million rupees on Thursday, but the total net foreign outflow so far this year is 1.09 billion rupees.

Investors are also concerned over the steep fall of the rupee from 203 to 370 levels so far in 2022.

LOLC pushed the index up, closing 3.4 percent firmer at 589.3 rupees a share.

Sri Lanka Telecom closed 24.9 percent up at 42.2 rupees a share, and Dipped Products slipped 5.5
percent to 44.3 rupees. (Colombo/Aug17/2022)

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Sri Lanka rupee, yields in govt securities slightly changed

ECONOMYNEXT – Sri Lanka Central Bank’s guidance peg for interbank transactions weakened on Thursday (18) and yields in Treasury bonds picked up slightly while in T-bill edged down in dull trade after the central bank kept key monetary policy rates steady, dealers said.

On Thursday, before the market opened, the central bank held its key policy rates steady at 15.50 percent, while data showed market interest rates are close to twice the rate of them while private credit and imports falling as a consequence.

The central bank is injecting 740 billion rupees of overnight money to banks at 15.50 percent, which were originally injected mostly after reserves were sold for imports (or debt repayments) to artificially keep down rates (sterilized interventions), effectively engaging in monetary financing of imports.

The injections (sterilizing outflows) prevent the credit system from adjusting to the outflows and encourage unsustainable credit without deposits, which is the core problem with soft-pegged central banks, triggering a high rate and an economic slowdown later.

A bond maturing on 01. 06. 2025 closed at 27.90/28.00 percent, slightly up from 27.75/90 percent on Wednesday.

The three-months bill closed at 28.30/29.25 percent, down from 29.25/30 percent on Wednesday.

Sri Lanka’s central bank announced a guidance peg for interbank transactions weakened by one cent to 360.97 rupees against the US dollar on Thursday from 360.96 rupees.

Data showed that commercial banks offered dollars for telegraphic transfers between 367.97 and 370.00 for small transactions.  (Colombo/ Aug 18/2022)

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Japan grants medical equipment worth 500-mn yen to Sri Lanka govt hospital

ECONOMYNEXT –  The  Japanese government has granted medical equipment worth 500 million Japanese yen to the Sri Jayawardenepura government hospital to improve the hospital’s treatment facilities under Japan’s Non-Project Grant Aid Programme.

A statement by the Department of External Resources said the grant was given in response to a request by Sri Lanka’s government.

Under the 500 million Japanese yen (approximately 1,265 million rupees) grant assistance, angio-CT machine, other radiology equipment, ophthalmic instruments, surgical instrument sets (stainless steel with satin finish), 15 dental units with accessories, liver transplant instrument sets, and a cardiac catheterization laboratory will be provided, a statement said on Thursday August 18.

Sri Lanka due to its worst economic crisis in its post-independence history is currently facing shortages of essential medicine, non-essential and lifesaving medicines pressuring the health sector to only attend to emergency cases to preserve available limited medicine stocks.

On Thursday at the policy rate announcement media briefing by the Central Bank of Sri Lanka (CBSL), Governor Nandalal Weerasinghe said, with the strict measures taken in the recent past, Sri Lanka is currently managing the limited forex income coming into the country to purchase essential goods such as fuel and medicine.

Sri Lanka has received various grants from several countries including China and India which gave a 200 million US dollar credit line to purchase medicine from India.

In June, Minister of Health Keheliya Rambukwella said there is no shortage of vital medicines in the country and all medicines will be restocked by August 2022. However, shortages of medicine aer still being reported in various hospitals islandwide.

“This improvement at the hospital will facilitate the enhancement of the quality of the care provided especially to the patients with non-communicable diseases while enabling high quality medical professional training to medical undergraduates and postgraduates from the National School of Nursing at the aculty of Medical Sciences of the University of Sri Jayawardenepura,” the External Resources Department statement said.

“This project will eventually assist the development of human resources of the health sector in Sri Lanka,” it said. (Colombo/Aug18/2022)

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