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Monday December 5th, 2022

Sri Lanka budget revenues surge 38-pct to August 22 as economy inflates

ECON0MYNEXT – Sri Lanka state revenues surged 38 percent from a year earlier to 1,448 billion rupees in the eight months to August 2022, Finance Ministry data showed as the economy inflated in the wake of a currency collapse after two years of money printing.

Tax revenues surged 35 percent to 1,283 billion rupees amid tax hikes and high inflation even as the real economy contracted as attempts were made to stop the currency crisis, in familiar repeated phenomenon seen in countries with soft-pegged central banks.

The government has also hiked taxes, bringing in more revenue.

As a share of GDP tax revenues were still at 5.4 percent down from 5.7 percent as the economy was estimated to inflate to at least 23.8 trillion rupees in 2022 from 16.8 trillion rupees.

Current spending rose 20 percent from a year earlier to 1,571 billion rupees driven mainly by rising interest costs.

Soft-Pegging

High and volatile interest costs are also a familiar feature of countries with soft-pegged (intermediate regime) central banks which generate monetary instability.

Interest costs rose to 927.4 billion rupees from 833.0 billion rupees as breaks were put on the currency crisis amid a deficit.

Current spending was down to 6.1 percent of GDP from 6.3 percent a year earlier as the economy inflated, a phenomenon where budget and debt become manageable as debt is inflated away known as high inflation and financial repression.

Sri Lanka’s inflation hit 70 percent in the third quarter but interest rates were only around 30 percent.

Classical economists and analysts have called for a currency board to be set up so that money cannot be printed by interventionists (post-Keynesians or Mercantilists) to create currency crises which are then followed by output shocks and high interest rates.

Sri Lanka saw heightened monetary instability in the wake of ‘flexible’ inflation targeting, perhaps the most deadly dual anchor conflicting soft-pegging regime ever peddled to hapless developing nations without a doctrinal foundation in sound money, according to critics.

The framework which helped drive a country at peace into default with surging ‘cover up loans’ as forex shortages made in difficult to repay foreign debt (a phenomenon known as the transfer problem) is to be legalized under a deal with the International Monetary Fund.

Policy makers in such countries – characterized by Latin America – have both ‘fear of floating’ and currency board phobia preventing the operation of a consistent single anchor monetary regime with low interest rates and external stability.

Such countries have long term low growth as about 18 months in a four year credit cycle is spent recovering from the previous currency crisis from ‘flexible’ and ‘data driven’ policy.

The lags in inflation allowed Sri Lanka central bank to suppress rates with money printing and bombard the exchange rate peg until it collapses, creating currency crises in 2015/16, 2018 and in 2020/2022.

Deficits down

The current account or revenue deficit of the budget, or the gap between total revenues and current spending was 851.7 billion rupees, down 18 percent from 1,036 billion rupees.

As share of GDP the current account deficit was down to 3.6 percent of GDP from 6.2 percent.

Capital spending was up 35 percent to 395.6 billion rupees up to August. However as a share of GDP it remained at 1.7 percent as the economy inflated.

The overall deficit was 1,244 billion rupees down 6 percent from a year earlier. As a share of the inflated economy, the deficit was down to 5.2 percent from 7.9 percent a year earlier.

The primary deficit, which is the deficit before interest costs fell to 317.06 billion rupees up to August down from 495.25 a year earlier.

The IMF usually targets a primary deficit because interest costs tend to rise as a currency crisis triggered by the soft-pegged central bank is halted.

Up to August 2022, 1,217 billion rupees were printed (classified as central bank credit to government), up from 665.5 billion rupees last year, compared to a deficit of only 1,244 billion rupees.

It is as if no private sector or EPF money was used to finance the deficit.

Critics have said that Sri Lanka’s central bank usually monetizes not the annual deficit, but the gross domestic finance requirement (maturing bills from past deficits) due to an obsession with controlling Treasuries yields, and the action is then blamed on the ‘budget deficit’.

In 2022 Sri Lanka’s central bank repaid state foreign loans, and also sterilized interventions after using deferred payments on Asian Clearing Union dues from India.

Offsetting reserves sold for imports is effectively private sector financing, but due to the use of Treasury bills for the activity, the practice is also blamed on ‘budget deficits’.

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Time right for elections, Sri Lanka Podujana Peramuna ready to face any poll: Basil

File photo: SLPP national organiser Basil Rajapaksa

ECONOMYNEXT — The time has come for an election in Sri Lanka and the ruling Sri Lanka Podujana Peramuna (SLPP) is ready to face any election, SLPP national organiser Basil Rajapaksa said, dismissing claims that the party has come to fear elections in the face of growing unpopularity and increased factionalisation.

Speaking to reporters at an event held in Colombo Monday December 05 morning to mark the fourth anniversary of the party’s media centre, Rajapaksa handwaved off assertions that the SLPP has splintered in the wake of the mass protests that ousted his brother and former President Gotabaya Rajapaksa.

“No, our party hasn’t fragmented, not the way this cake was cut,” he said, pointing to the cake that was cut to celebrate the media centre’s anniversary.

“There may be some [dissenters], but we are with the people,” said Rajapaksa.

Political analysts, however, note that the once mighty SLPP has indeed fractured to at least four or five distinct factions. One group, according to party sources, is with President Ranil Wickremesinghe who is keen to involve younger SLPP legislators in his economic reform agenda. The second is with former Media Minister Dullas Alahapperuma who launched an unsuccessful bid for the presidency and was roundly defeated by Wickremesinghe at the July 19 presidential vote in parliament. The third group now sits as independent MPs in parliament, while a fourth faction are with former President Mahinda Rajapaksa, the SLPP patriarch.

There is another group that remains loyal to Basil Rajapaksa, though all but one SLPP legislator voted for the 21st amendment to the constitution that prohibited dual citizens from entering parliament. Rajapaksa, a dual citizen with US passport, recently returned to the island after a private visit to his second home.

The former finance minister, who resigned after a wave of protests that demanded his departure along with that of his presidential brother, for their alleged role in Sri Lanka’s prevailing currency crisis, the worst in decades, was in a jovial mood at the anniversary event on Monday and was seen heartily indulging reporters who were throwing loaded question after loaded question at him.

Asked about future plans of the SLPP, Rajapaksa quipped that they couldn’t be revealed to the media at this stage.

“However, time has come for an election. It’s difficult to say how it will be at present, but as a party, we’re ready to face any election,” he said.

Rajapaksa’s apparent confidence in facing an election is in direct contrast to speculation that the SLPP is banking on President Wickremesinghe’s refusal to dissolve parliament anytime soon. Opposition lawmakers have accused Wickremesinghe of providing sanctuary and promising security to the deeply unpopular party by not calling early elections.

“We have won every election we faced so far. We are thankful to the Sri Lankan people for that. If we were unable to meet their expectations 100 percent, we regret that. We will correct any shortcomings and will work to fulfill the people’s aspirations,” said Rajapaksa.

Asked if he is going to remain in active politics despite the blanket ban on dual citizens, the former minister said, again with a chuckle: “Active politics… well, I’m not in governance anymore. Governance [for me] has been banned by the 21st amendment. So no, I’m not in governance, but I am in politics,” he said.

Pressed about possibly entering parliament again, he said: “How can I?”

Nor is Rajapaksa saddened by the development, he claimed. “No, I’m happy about it,” he said.

The former two-time finance minister, noted for his clash of views with Wickremesinghe when the latter was invited by then President Gotabaya Rajapaksa for a round of discussions on economic recovery, was cautiously complimentary when asked about the new president. It was the SLPP’s backing that guaranteed Wickremesinghe his lifelong ambition.

“I think that selection was the correct one. We have maintained from the start that all of us in government or opposition must be able to freely engage in politics,” he said, referring to assurances that the president has purportedly given SLPP parliamentarians that they will not face the kind of retaliatory mob violence that engulfed the nation on May 09 after alleged SLPP goons attacked peaceful anti-government protestors in Colombo.

A reporter asked if Rajapaksa believes the incumbent president is capable of taking the country on the right path to recovery?

“The first task was accomplished, by allowing us to engage in politics and to get on the streets. There are economic and other issues, and we have high hopes that they will be resolved,” he said. (Colombo/Dec05/2022)

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Sri Lanka proposed power tariff not to recover past losses: Minister

ECONOMYNEXT – The government has not proposed a power tariff increase to recover past losses, Minister of Power and Energy Kanchana Wijesekera in response to a statement attributed the head of the power regulator commission.

“The proposal that was presented was for an automatic cost reflective tariff mechanism to be implemented to supply uninterrupted power & to recover the current cost of power supply,” Minister Wijesekera said in twitter.com message.

“Govt has not proposed to recover past loses of CEB from a tariff revision…”

The cabinet of ministers had given the nod tariff revisions twice a year to prevent large losses from building up as in the past.

The Public Utilities Commission has disputed costs protected for the power utility saying the petroleum utility was keeping large margins in selling fuel.

The government in a budget for 2022 also proposed to tax surcharge to recover losses.

The regulator also disputed power demand forecasts.

Also read; Sri Lanka regulator disputes CEB costs, demand projections for 2023

The PUCSL cannot increase tariffs to recover past losses, Chairman Janaka Ratnayake said. (Colombo/Dec05/2022)

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Sri Lanka’s shares gain in mid market trade

ECONOMYNEXT – Sri Lanka’s shares edged up in mid day trade on Monday (05), continuing the positive run for seven straight sessions on news over a possible debt restructuring from Paris Club, analysts said.

All Share Price Index gained by 0.69% or 60.10 points to 8,829, while the most liquid shares gained by 0.96% or 26.59 points to 2,801.

“The market was pushed up over the news of a potential 10 year debt moratorium,” analysts said.

The Paris Club group of creditor nations has proposed a 10-year debt moratorium on Sri Lankan debt and 15 years of debt restructuring as a formula to resolve the island nation’s prevailing currency crisis. 

Related – Paris Club proposes 10-year moratorium in 15-year Sri Lanka debt re-structure: report

The market generated a revenue of 2.1 billion rupees.

Top gainers during 1130 hours were Expolanka, Browns Investment and LOLC.  (Colombo/Dec05/2022)

 

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