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Friday August 12th, 2022

Sri Lanka central bank busts US$9.8bn since Feb 2020 to suppress rates, for stimulus

ECONOMYNEXT – Sri Lanka’s central bank has spent 9.8 billion US dollars in reserves, including about 4.48 billion US dollars in borrowed money in the process of maintaining artificially low interest rates while operating a reserve collecting peg, data show.

Sri Lanka intensified stimulus (output gap targeting) from 2020 intensifying a policy broadly followed under flexible inflation targeting over the previous five years which triggered two currency crises in 2015/2016 and 2018, under a flexible exchange rate or soft-peg, which reduced growth (output).

The International Monetary Fund itself had given technical assistance for the trigger happy central bank to calculate an output gap.

Output Gap Targeting/Flexible Inflation Targeting

In December 2019 Sri Lanka’s state economists cut taxes saying there was a ‘persistent output gap’ in fiscal stimulus and followed it up with rate cuts and liquidity injections to stop rates from going up.

In February liquidity injections began including with a central bank profit transfer.

At the time the central bank had net reserves of about 5.3 billion US dollars and Sri Lanka had gross official reserves 7.9 billion US dollars which included borrowings from the International Monetary Fund and any fiscal balances.

In March the currency fell steeply under a zero-credibility flexible exchange rate but the peg stabilized in the Coronavirus lockdowns and credit slowdown that followed.

Large scale liquidity injections were the made for a ‘fuel price stabilization fund ‘and also to meet a real demand for money during the lockdowns.

The central bank then imposed ceiling on Treasuries auctions effectively operating ceiling policy rates across the yield curve and scuttling Treasuries auctions wholesale.

Large volumes of money was injected to re-purchase government securities from scuttled auctions under so-called Modern Monetary Theory and the central bank lost its ability to collect reserves (sterilize or mop up inflows) to repay debt and its reserves were depleted.

As economic activity and private credit recovered the central bank steadily lost reserves to debt repayment.

In 2015/2016 and 2018 Sri Lanka’s government and the Ceylon Petroleum Corporation borrowed heavily from commercial markets and banks as liquidity injections created forex shortages.

But after 2020 Sri Lanka lost access to commercial banks. After a series of downgrades there was also capital flight from the banks.

The central bank then started to borrow more dollars through international and domestic swaps, without allowing rates and liquidity to tighten to stop the reserve outflow.

Monetary Finance of Imports

Meanwhile from around late 2021, economists outside the central bank also called for reserves to be used for imports, at whatever the pegged rate.

A central bank with a policy rate which gives reserves for imports then sterilizes the dollar sales with adding new money to the banking system to suppress interest rates (soft-peg) effectively engages money financing of imports and private sector activity, by preventing a tightening of bank liquidity.

In order to maintain the credibility of the peg and monetary stability interventions have to be unsterilized or at least partially unsterilized with liquidity tightening and rate moving up.

Related

Sri Lanka continues monetary financing of imports, pegging after ‘running out’ of reserves

By December 2021 imports shot up to 2.2 billion US dollars a month as interventions around 300 to 400 million US dollars a month were made.

Calls to use reserves for imports (soft-peg) continued to intensify from economists and others outside the central bank, though by September 2021 the central bank was using borrowed money to finance imports.

Those who called for reserves to be used for imports, which necessarily involve pegging at the intervention rate for imports, simultaneously called on the central bank not to peg in an unusual monetary irony.

Borrowing for imports

Sri Lanka is currently using borrowed US dollars from India under the Asian Clearing Union to intervene and operate a peg at 360 to the US dollar.

Sri Lanka’s central bank however raised rates in April, in a bid to reduce or end money printing and allow rates to go up and private savings to be directed to the budget deficit after a collapse of the currency from200 to 360 to the US dollar and from 182 since the stimulus began.

Maturing debt can also be rolled over as paper at higher rates.

The collapse of the currency and the spike in interest rates is referred as ‘rawluth ne kendeth ne’ (neither the interest rate nor the exchange rate is saved in the end) by critics.

Sri Lanka’s central bank was about 4.48 billion US dollars debt by June having spent 9.8 billion US dollars since February 2020 to finance imports, finance debt repayment and also some other capital flight as investors exited due to the loss of the credibility usually found in flexible exchange rates or soft-peg.

Soft-pegs (flexible exchange rates) were built by mainly US based officials including Harry Dexter White and John H Williams in the course of building the Bretton Woods system of failed pegs in the false belief that there was monetary policy independence in pegging to an anchor currency.

Pegs around the world, which are trying to operate credit cyclical counter to that of the peg are now under pressure as anchor reserve currencies as the US dollar is raising rates.

Analysts have called for strict controls on the domestic operations (issued department activity of a note issue bank) of Sri Lanka’s monopoly note issue bank to maintain monetary and social stability.

However attempts are being made to legalize flexible inflation targeting with flexible exchange rate that drove the country at peace into three currency crises and default with discretionary policy and severe anchor conflicts.

Forex shortages and currency crises are a problem associated with flexible exchange rates or soft-pegs with anchor conflicts and are absent in consistent single anchor regimes such as clean floats (domestic anchor only) and hard pegs (external anchor only). (Colombo/Aug01/2022)

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  1. Anonymous says:

    Cabraal is a qualified Chartered Accountant (FCA) in Sri Lanka. But the professional body has not done anything to expell him from their membership on his wrong behavior. The professional body is protecting him and is leading a bad example for many Chartered Accountants working worldwide in different companies on their ethical behavior.

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Comments (1)

Your email address will not be published.

  1. Anonymous says:

    Cabraal is a qualified Chartered Accountant (FCA) in Sri Lanka. But the professional body has not done anything to expell him from their membership on his wrong behavior. The professional body is protecting him and is leading a bad example for many Chartered Accountants working worldwide in different companies on their ethical behavior.

Sri Lanka cancels visa of Scotswoman who documented anti-govt protests

ECONOMYNEXT – Sri Lanka’s Department of Immigration and Emigration has cancelled the visa of Kayleigh Fraser, a Scotswoman who had been documenting the country’s anti-government protests on social media.

Immigration officers had approached Fraser at her home on August 02 and confiscated her passport.

“This is what will happen if you raise your voice against state violence in Sri Lanka,” Fraser wrote on Wednesday August 10, posting a letter ordering her to leave the country by August 15.

“I am proud to have been a part of this. I am proud to have met so many of you. I have… so many social enterprises I want to work on here that I know will benefit so many,” Fraser said on Instagram.

“Deporting me is a massive, massive mistake for this country. The love I have for it and its people appears to be a threat to the current rulers. Does that sound right to you?”

Fraser posted that she was not prepared for the financial cost of flights and relocation, and that all her funds were in Sri Lankan currency, and that banks were not allowing foreign transactions.

Police spokesperson Nihal Thalduwa had told a privately owned news organisation that Fraser was sharing “negative content” about Sri Lanka via her social media.

“It is not right for a foreign national to be in our country and share such mass negative content. She is not a media personnel either, to cover the protests and GotaGoGama,” he has said.

Fraser has been vocal about state sanctioned violence against protestors.

News of Fraser’s deportation has caused a small riot on social media, with many protestors voicing out their support for the foreigner who documented and showed support next to them.

Seemingly indiscriminate arrests of protestors aided by an ongoing State of Emergency have both angered and frightened Sri Lankan protestors, and many active protestors have gone into hiding to evade arrest.

Some protestors said they were “taking a break” or “distancing themselves” due to continued harassment.

However, the authorities maintain that all arrests are in accordance with the law. The government has pointed to acts of retaliatory mob violence on May 09 and the forced occupation of government buildings by protestors on July 09.

“They are calling us terrorists for holding placards. This was such a peaceful protest, the only terrorism carried out was by the government against the people,” said an active protestor, who preferred not to be named.

Fraser wrote that Sri Lankans should not forget that they got to the streets for a system change.

“Live in such a way that your children will thank you for the world they inherit,” she said.

“It’s not over till it’s over. I have an unbelievable amount of high profile people fighting this order for me to leave.”(Colombo/Aug11/2022)

 

 

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Sri Lanka to acquire 35,000MT of petrol; unloading on Aug 12

ECONOMYNEXT-  Sri Lanka to receive a cargo of 35,000 metric tonns of petrol on Thursday August 11 with unloading scheduled for Friday, Minister of Power & Energy Kanchana Wijesekara said.

Wijesekara tweeted that the ship will arrive at the Colombo port Thursday night, and that the payment for the cargo had been completed with the support of the Central Bank by Wednesday.

The minister had said earlier on Wednesday that a separate cargo of crude oil is also expected on Saturday August 13, and from August 19 onwards, locally produced fuel is expected to be released to the market from the Sapugaskanda refinery.

Meanwhile, in an earlier report, Lanka IOC, a local unit of the Indian Oil Corporation (OIC), said a vessel carrying 30,000 metric tons of fuel for LIOC is scheduled to arrive between August 10 and 15.

Related: Three shipments of fuel to arrive in Sri Lanka by mid, end July, August: Lanka IOC

Meanwhile, Wijesekara said that 5.7 million people have signed up for the QR-code facilitated National Fuel Pass.

From July 21 up to now, Wijesekara said, a total of 54.9 million litres of fuel had been sold through 1,053 CPC fuel stations while 207 LIOC stations have sold 11.26 million litres of fuel. (Colombo/Aug11/2022)

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MPs nominated to Sri Lanka’s parliamentary committee on public finance

The sun sets over the Parliament at Shri Jayewardenepura

ECONOMYNEXT – Sri Lanka’s parliament has appointed members to its Committee on Public Finance, Speaker Mahinda Yapa Abeywardena said.

According to his announcement made in parliament on Wednesday August 10, in terms of the provisions of the Standing Order 121 of Parliament, MPs Bandula Gunawardana,  Vidura Wickramanayaka,  Nalin Fernando,  Anura Priyadharshana Yapa,  Vijitha Herath,  Duminda Dissanayake,  Shehan Semasinghe,  Premitha Bandara Tennakoon and Harsha de Silva have been appointed.

Indika Anuruddha Herath,  Siripala Gamalath, Seetha Arambepola, Suren Raghavan,  M A Sumanthiran,   Kavinda Heshan Jayawardhana,  Mujibur Rahuman,  Harshana Rajakaruna,  Chaminda Wijesiri,  Isuru Dodangoda,  Anupa Pasqual and  (Prof) Ranjith Bandara also have been appointed to serve as members in the Committee on Public Finance.

President Ranil Wickremesinghe tabled a proposed framework during his time as Prime Minister under President Gotabaya Rajapaksa for sectoral oversight committees in parliament with the objective of increased bipartisan parliamentary involvement in governance and policy-making.

Wickremesinghe told parliament on July 06 that under such a system, the entire parliament irrespective of party difference will participate in governance.

On July 06, he said he had approached former Speaker of Parliament Karu Jayauriya to formulate a proposal on activating the sectoral oversight committees.

Sectoral Oversight Committees shall function for the duration of Parliament and conduct its inquiries notwithstanding any adjournment or prorogation of Parliament, according to the parliament website.

The Committee of Selection shall determine the subjects and functions to be allocated to each Sectoral Oversight Committee.

The Sectoral Oversight Committees shall have the power to examine any Bill, any subsidiary legislation including Regulation, Resolution, Treaty, Report or any other matter relating to subjects and functions within their jurisdiction.

The Parliament, any Committee or a Minister may refer any matter to a Sectoral Oversight Committee having jurisdiction over the subject or function for its consideration and report. (Colombo/Aug11/2022)

 

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