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Wednesday June 19th, 2024

Sri Lanka CB Governor warned on pitfalls by Wijewardene amid contradictory rupee moves

ECONOMYNEXT – Sri Lanka’s newly re-appointed Central Bank Governor Nivard Cabraal has been warned on the usual pitfalls that that monetary authorities that produce unstable money fall to as positive economic action on bond auctions were contradicted by other bureaucratic moves.

Cabraal removed price controls on bond auctions which could eventually allow a widened budget deficit to be financed by private savings once rates move to market clearing levels.

In the recent past money had been printed to pay state workers who buy goods and drive imports to unsustainable levels.

Some money was also printed to repay maturing government securities which were been turned into rupees giving resources for banks to lend to customers for consumption or investment, also driving imports up.

Cabraal had said he would place stability before growth (stimulus) shortly after taking office.

W A Wijewardene, a former Deputy Central Bank Governor wrote in his column in Sri Lanka’s Daily FT newspaper that Governor Cabraal had also indicated in several interviews that he wanted to stop money printing and reverse asset purchases.

“This is an encouraging development,” he said.

In 2008 and 2009, when Sri Lanka was facing an intensified civil war and the fallout of the Greenspan-Bernanke bubble, Wijewardene was Deputy Governor and Cabraal was Governor.

At the time rates were allowed to rise high levles and some bonds were also sold on ‘tap’ or placed, to avoid money printing and create monetary instability. Some who mis-understood the move criticized it later. However others said it should have been ended after conditions normalized.

Wijewardene had dubbed the cascading policy errors in 2020 and 2021 that led to balance of payments deficits, crippling of bond and forex markets and the loss of confidence in the national currency, the ‘Lakshman shock’ which was apparently achieved in the pursuit of Modern Monetary Theory.

Even developed countries with fully floating rates cannot print money without triggering commodity and asset price bubbles as had been seen in the past. Global commodities are now rising in the so-called Powell Bubble.

Peg Without Convertibility Undertaking

In 2020, amid money printing, the central bank suddenly decreed that the exchange rate should be 203 to the US dollar and banks were barred from finding dollars and selling them to importers at higher rates. At the time importers were buying dollars around 225 – 203 to the US dollar.

The central bank had already suspended convertibility at 203 the new rupees it was producing for trade transactions (dollars were not being sold to enforce the rate) making the rupee fall to around 230 to the US dollar in forex markets (effectively a float).

Importers were getting dollars by settling part of the money outside the foreign exchange market.

However the banks have now been informed to strictly adhere to the rate and discourage such settlements.

“Instead of freeing the market from these crutches, the Central Bank under Governor Cabraal’s leadership has issued a confidential warning letter to CEOs of banks that they should strictly adhere to the limits given in the Lakshman Shock by enforcing the regulation on both exporters and importers,” Wijewardene said.

“This is untypical of Governor Cabraal who had been raised and trained in the private sector and who had held that post previously.

“He should have known that unless the Central Bank was prepared to supply an unlimited amount of dollars to the market (provide convertibility), commercial banks cannot hold on to the fixed rate of Rs. 203 per dollar.

“The result was the lengthening of the queue for dollars and the expansion of the black market further.”

Consistent Regime

Under a consistent peg, such as in Hong Kong (against the US dollar), Brunei (against the Singapore dollar), Bhutan (against the Indian rupee) or Nepal (against the Indian rupee) when convertibility is provided by the monetary authority through dollar sales, liquidity tightens and rates move up.

There area also other mostly consistent pegs such the Saudi Riyal, UAE Dirham, Qatar Riyal, Kuwaiti Dinar against the US dollar.

The rising rates and tightening liquidity ‘rations’ rupees, keeping the exchange rate stable.

However under a policy rate targeting framework, if new rupees are provided in unlimited quantities to enforce interest rates, resisting a contraction reserve money, preventing a tightening of domestic credit, the currency will weaken.

However under a policy rate targeting framework, new rupees are provided in unlimited quantities to enforce interest rates, resisting a contraction of reserve money preventing a tightening of domestic credit and maintaining the peg.

The central would then lose its reserves.

“..[If the Bank assuming, that because a given quantity of circulating medium (reserve money) had been necessary last year, therefore the same quantity must be necessary this, or for any other reason, continued to re-issue the returned notes, the stimulus which a redundant currency first gave to the exportation of the coin would be again renewed with similar effects,” classical economist David Ricardo explained this early in the 19th century.

“In this manner if the Bank persisted in returning their notes into circulation, every guinea might be drawn out of their coffers.”

Sri Lanka’s forex reserves are now at a low level and the central banks reserve related liabilities are up.

A ‘float’ however prevents interventions and can stabilize a currency – usually after a fall – as long as new money is not printed to pay state workers.

Cabraal lifted price controls on Treasuries auctions allowing more money to be raised from private savings. At the last bill auction at least 2.0 billion rupees was printed.

The central bank’s domestic operations department also injected 103 billion rupees in the banking system to partially reverse a previous statutory reserve hike, which had created large asset liability mis-matches in some banks.

However raising concerns, some money was injected for 87 days at rates as low as 6.08 percent far below before the 3-month bill yield of 6.38 percent.

Meanwhile in another move raising concerns the central bank published a statement explaining an apparent need to expand enforced surrenders of US dollars, which also create new liquidity.

Related

Sri Lanka central bank explains forex repatriation, Zimbabwe style surrender rules

Such policies are usually followed by many third world central banks which trigger forex shortages, currency collapses and social unrest.

Zimbabwe earlier this year raised the surrender requirement to 40 percent from 30 percent. (Colombo/Sept26/2021)

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Central banks expect to increase gold reserves after buying 1,037 tonnes in 2023: Survey

ECONOMYNEXT – About 29 percent of central banks in the world intended to increase their gold reserves in 2023, up from 24 percent in 2023 and just 8 percent in 2019, a survey by the World Gold Council showed.

“The planned purchases are chiefly motivated by a desire to rebalance to a more preferred strategic level of gold holdings, domestic gold production, and financial market concerns including higher crisis risks and rising inflation,” the WGC said.

About 81 percent of 70 central banks that responded to the survey expected global central bank holdings of gold to go up, from 71 percent in 2023.

While in prior years, gold’s “historical position” was the top reason for central banks to hold gold, this factor dropped significantly to number five this year.

This year, the top reason for central banks to hold gold is “long-term store of value / inflation hedge” (88%), followed by “performance during times of crisis” (82%), “effective portfolio diversifier” (75%) and “no default risk” (72%).

Concerns about sanctions were listed as by 23 percent of emerging market central banks (0 advanced).

De-dollarization as a reason to hold gold gained ground, but was not among the main reasons.

About 13 percent of emerging market central banks listed de-dollarization as one of the reasons to buy gold up from 11 percent last year and 6 advanced nations said the same from zero last year.

Around 49 percent of central banks expected gold reserves to be moderately lower five year from now in the 2024 survey, against 49 percent in 2023 and 38 percent in 2022.

About 13 percent of central banks surveyed said US dollar reserves would be significantly lower in the 2024 survey, up from 5 percent in 2023 and 4 percent in 2022. (Colombo/June18/2024)

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Sri Lanka rupee closes weaker at 304.75/305.40 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed weaker at 304.75/305.40 to the US dollar Tuesday, down from 304.15 to the US dollar Friday, dealer said, while some bond yields edged up.

Sri Lanka’s rupee has weakened amid unsterilized excess liquidity from earlier dollar purchases.

Excess liquidity fell from as high as 200 billion rupees, helped by some sales of maturing bills and also allowing some term contracts to run out.

However the central bank has started to inject liquidity again below its policy rate to suppress interest rates.

On Tuesday 30 billion rupees was printed overnight at an average yield of only 8.73 percent.

Separately another 25 billion rupees was printed till June 25 at 8.09 percent to 9.05 percent, which was still below overnight the policy rate of 9.5 percent.

Nobody has so far taken the central bank to court for printing money beyond overnight at rates lower than the overnight rate.

Sri Lanka operates an ad hoc exchange rate regime called ‘flexible exchange rate’ which triggers panic among market participants, as the central bank stays away when spikes in credit either creates import demand or unsterilized credit is used up.

“If large volumes of unsterilized liquidity is left, the exchange rate has to be closely defended to prevent speculation involving early covering of import bills and late selling of exports proceeds,” EN’s economic columnist Bellwether says.

“Just as an appreciating or stable exchange rate leads to late covering of import bills, a falling rates leads to immediate covering of import bills.

“Keeping exchange rates stable is a relatively simple exercise but it is difficult to do so if short term rates are also closely targeted with printed money, as liquidity runs out, as if the country had a free float and no reserve target.”

“When there is a large volume of excess liquidity remaining (except those voluntary deposited for long periods by risk averse banks) the the interest rates structure is under-stated compared to the reported reserves.

“Interest rates would be a little higher than seen in the market if the liquidity was mopped up and domestic credit and imports were blocked to prevent the reserves from being used up.”

In East Asia there is greater knowledge of central bank operational frameworks, though International Monetary Fund driven flawed doctrine are also threatening the monetary stability of those countries, critics say.

Related

Vietnam selling SBV bills to stabilize the Dong, as Sri Lanka rupee also weakens

Sri Lanka’s rupee started to collapse steeply after the IMF’s Second Amendment in 1978 along with many other countries as flawed operational frameworks gained ground without a credible anchor.

A bond maturing on 15.12.2026 closed at 10.10/30 percent up from 10.05/30 percent Friday.

A bond maturing on 15.10.2027 closed at 10.60/57 flat from 10.60/80 percent.

A bond maturing on 01.07.2028 closed at 11.15/35 percent, up from 11.05/20 percent.

A bond maturing on 15.09.2029 closed at 11.80/90 percent unchanged.

A bond maturing on 15.10.2030 closed at 11.90/12.00 percent.

A maturing on 10.12.2031 closed at 11.95/12.10 percent.

A bond maturing on 01.10.2032 closed at down at 11.95/12.10 percent, down from 12.00/10 percent. (Colombo/Jun14/2024)

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Sri Lanka’s Ceylon Chamber links up with Gujarat Chamber

ECONOMYNEXT – The Ceylon Chamber of Commerce has signed an agreement with the Southern Gujarat Chamber of Commerce and Industry (SGCCI) to increase trade cooperation between India and Sri Lanka.

The MOU was signed by CCC CEO Buwanekabahu Perera, SGCCI President Ramesh Vaghasia, in the presence of Dr Valsan Vethody, Consul General for Sri Lanka in Mumbai, India.

“With the signing of the MoU, … the Ceylon Chamber of Commerce and SGCCI aim to facilitate trade between the two countries via initiatives such as trade fairs and delegations, business networking events, training programmes,” the Ceylon Chamber said in a statement.

“This partnership will open doors for Sri Lankan businesses to explore opportunities in Surat’s dynamic market and enable the sharing of expertise and resources between the two regions.”

Established in 1940, SGCCI engages with over 12,000 members and indirect ties with more than 2,00,000 members via 150 associations. It promotes trade, commerce, and industry in South Gujarat.

The region’s commercial and economic centre Surat has risen to prominence as the global epicenter for diamond cutting and as India’s textile hub, and is ranked the world’s 4th fastest growing city with a GDP growth rate of 11.5%

Surat’s economic landscape is vibrant and diverse. As India’s 8th largest and Gujarat’s 2nd largest city, it boasts the highest average annual household income in the country.

The nearby Hazira Industrial Area hosts major corporations like Reliance, ESSAR, SHELL, and L&T. (Colombo/Jun18/2024)

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