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Tuesday June 18th, 2024

Sri Lanka CB Governor meets exporters and importers

ECONOMYNEXT – Newly re-appointed Central Bank Governor Nivard Cabraal has met Sri Lanka’s key exporters and importers shortly after taking office as the country face foreign exchange shortages and reserve depletions.

“The exchange of views with the main #Importers & #Exporters in Sri Lanka was very helpful,” Cabraal said in a

“Their commitment to stabilize our economy is very encouraging. I look forward to working with them.”

Sri Lanka’s exporters have been hoarding dollars amid record low interest rates enforced by liquidity injections via domestic operations amid and expanding budget deficit and recovering private credit.

Importers also have been given incentives to bet against the rupee by with low rates making stock holding cheap.

The liquidity injections were mainly effected by scuttling bond auctions through price controls, leading to a failure to channel private savings in the budget deficit and an expansions of central bank credit which then hit forex reserves as the new rupees were used.

Cabraal lifted the price controls pushing allowing the rates to rise across maturities at this week’s auction, in a move that will help reduce foreign reserve depletion.

However two days later, data showed that domestic operations had injected 87-day money into an existing liquidity short at below the 3-month rate and as low as 6.08 percent, or providing 87-day money at only 08 basis points higher than the overnight rates.


Sri Lanka prints Rs103.5bn below 3-month Treasuries yield to reverse SRR

There have been calls to shut down the domestic operations department (re-create an East Asia style currency board) to ensure that liquidity injections cannot de-stabilize the external sector, generate import controls and social unrest, or a return to rule-based monetary regime involving low inflation targeting with an independently floating exchange rate.

Sri Lanka has a highly discretionary monetary regime which has no credible domestic anchor (‘flexible’ inflation targeting) with an inflation target as high as 6.0 percent, which had already been exceeded.

Neither is there a credible external anchor due to a ‘flexible’ exchange rate, though foreign reserve collection is a clearly articulated goal in all monetary policy statements.

Analysts warned in late 2019 that the obsession with low rates would land the country in trouble. Long term watchers of central bank policy errors have observed that whatever is said to the contrary the actual final target seems to be interest rates.


Sri Lanka heading for uncertainty with low rate obsession: Bellwether

The rupee has fallen from 131 to 203 officially over the last 5-years amidst the anchor conflicts and forex markets are still dysfunctional.

Amid Covid-19 lockdown driven slowdowns in private credit slowdowns most South and East Asian central bank’s with more credible central banks have collected foreign reserves, generating foreign asset driven excess liquidity and low interest rates. (Colombo/Sept24/2021)

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Sri Lanka telecommunications bill some clauses ruled unconstitutional by SC: Speaker

ECONOMYNEXT – Sri Lanka’s Supreme Court has found a number of clauses in a proposed amendment to the Telecom Telecommunications Amendment bill unconstitutional, speaker Mahinda Yapa Abeywardana said.

“Clause No 8, proposed section 9A 2 of the bill is inconsistent with Article 12 1 of the constitution, however this inconsistency shall cease if word ‘may’ will be replaced with word ‘shall’ as set out in the determination of the supreme court.”

“Clause No 9 is inconsistent with Article 12 1 of the constitution and only can be passed with special majority required under paragraph 2 of the Article 84. However, the inconsistency shall cease if clause is amended as set out in the determination of the supreme court.

Clause No 12, proposed section 17 10 of the bill is inconsistent with Article 12 1 of the constitution and can only be passed with special parliament majority required under Article 84 paragraph 2. However, the inconsistency shall cease if clause is amended as set out in the determination of the supreme court.”

Sections of clauses 13, 18, 20, 33 and 35 were also in violation of the constitution, and could only be passed by a special majority of parliament. (Colombo/Jun18/2024)

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Sri Lanka to exempt one house from imputed rent wealth tax: President

ECONOMYNEXT – Sri Lanka will exempt one house from a proposed wealth tax outlined in an International Monetary Fund program, President Ranil Wickremesinghe said.

About 90 percent of the people’s houses are likely to be exempt from the proposed tax, he said.

“[O]ne house will be exempt from this,” President Wickremesinghe told parliament Monday.

“It is going to have a very high threshold and I do not think the vast majority of the people in this country should even be worried about their house

“Don’t worry your house will be safe.”

The IMF program document however did not mention an exempt on one house, but did mention a threshold.

Taxing houses and thrift in general could have detrimental effects on people’s well-being housing stock and their willingness to remain in the country without migrating, critics say.

Related Sri Lanka to tax imaginary rents on houses under IMF deal

The mechanism of imputed rents was used because rates on houses was assigned to provincial councils and courts could strike it down.

Opposition legislator Harsha de Silva said the Samagi Jana Balwegaya welcomed President Wickremesinghe’s statement. (Colombo/June18/2024)

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Sri Lanka rupee opens weaker at 304.30/55 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee opened at 304.30/55 to the US dollar on Tuesday, while bond yields were broadly stable, and stocks opened 0.02 percent up, dealers said.

The rupee closed at 304.00/15 to the greenback on Friday, before the long weekend.

In equities, Colombo’s All Share Price Index opened 2.06 points higher at 12,312 while the S&P SL20 of more liquid stocks opened down 0.07 percent or 2.63 points to 3,642.

The market turnover was 3.3 million rupees.

In the secondary market, yields were broadly stable, dealers said.

A bond maturing on 15.12.2026 was quoted at 10.10/30, up from 10.05/30 percent.

A bond maturing on 01.07.2028 was quoted at 11.05/30 percent, up from 11.05/20 percent.

A bond maturing on 15.09.2029 was quoted stable at 11.80/85 percent.

A bond maturing on 01.10.2032 was quoted at 11.95/12.10 percent, down from 12.00/10 percent.

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