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Tuesday February 7th, 2023

Sri Lanka central bank buys US$103mn from banks net in Dec 2022

ECONOMYNEXT – Sri Lanka’s central bank has bought 274.4 million US dollars in December 2022, and sold only 170.6 million US dollars through a peg operated around 360 to the US dollar, official data shows.

The central bank has operated a peg around 360 to the US dollar after allowing rates to go up in April 2022.

However, until around July, the agency sold dollars and sterilized them using dollars given by India by deferring money due through the Asian Clearing Union.

The peg is operated at 360/370 to the US dollar by purchasing dollars through a surrender rule and selling them for imports such as oil and other urgent purchases.

The 360 to the US dollar peg, has effectively externally anchored the monetary system and allowed 12-month inflation to fall rapidly, much faster than under a standard IMF program as prescribed now.

In countries such as Argentina, where the currency is collapsing under an International Monetary Fund program, a ‘flexible exchange rate’ is operated with a ‘rate of crawl’ of 6 percent a month fueling inflation, energy enterprise losses and putting further pressure on the hungry and helpless.

In 2023, Sri Lanka is set to legalize a ‘flexible exchange rate’, an impossible trinity intermediate regime which is neither clean float nor a hard peg, under a program with the IMF.

Though the central bank was running monetary policy consistent with a peg until December, there is not much market credibility.

December is a month where credit is usually weak but there are extra inflows from remittances and also exporters who pay early salaries to workers and is a good candidate month to float a currency, after hiking rates to get market credibility and re-peg.

From January 2023 the central bank has started liquidity operations injecting money through term auctions and also an outright auctions.

Analysts have cautioned against injections that will result in net excess liquidity at a time when foreign banks which are cash plus are buying up Treasury bills after window access was restricted.

The net purchases of 103 million dollars in December is the highest since a private credit collapse after lockdown in April 2020.

The central bank also has to settle loans to the International Monetary Fund, and service swaps if required. The government also has to settle loans coming due to the World Bank and Asian Development Bank which are not defaulted.

Since the ACU deferments ended Sri Lanka’s external sector has started to stabilize.

From August the central bank has bought 184.9 million US dollars on a net basis from commercial banks and gross reserves have been stable.

Commercial banks have also settled over 500 million US dollars in credit over the latter part of 2022, data showed. (Sri Lanka commercial banks repay foreign credits)

Soft-pegged countries get into to trouble due to liquidity injections made to suppress rates, which trigger extra imports and reserve losses.

In such third world unstable countries there is a belief that reserves can be used for imports, without allowing rates to go up.

But by injecting money to sterilize interventions, the central bank effectively engages in re-financing private credit with what classical economists called ‘fictitious capital’, allowing banks to lend without taking deposit from customers, firing unsustainable outflows.

Due to the use of Treasury bills for open market operations, such injections are mis-classified as credit to government (deficit monetization) and politicians are blamed. (Colombo/Jan22/2022)

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Sri Lanka Railways to seek PPPs to boost revenue streams

CURFEW RUSH: Commuters scrambling to get home after curfew was declared in Sri Lanka on March 20, 2020.

ECONOMYNEXT – Sri Lanka Railway department hopes to expand Public Private Partnerships and earn more non-passenger revenues to offset recurring operational costs, an official said.

“For the past 10 years, except the last few years, the Railway operational income only covers around 50 percent of the operational expense of the Department,” the General Manager of the Railway, D.S. Gunasinghe told EconomyNext.

“Our plan is to increase the non-passenger revenue of the Railway department.

“And we cannot expect and do not hope for money from the government.”

Sri Lanka Railways already has agreements with Prima, a food firm, and Insee Cement, which is bringing in additional income, Gunasinghe said.

“We had agreements for material transportation such as sand in the past, however it was canceled but we hope to start it again” he said.

The department will rent out its storage facilities and circuit bungalows for the tourism sector to create additional revenue streams.

Sri Lanka Railways recorded an operating loss of 10.3 billion rupees during 2021, compared to a loss of 10.1 billion rupees in 2020, the Central Bank 2021 annual report showed.

The total revenue of the SLR stood at 2.7 billion rupees, a 41.3 percent drop from a year ago.

(Colombo/ Feb 06/2023)

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Sri Lanka’s doctors distribute anti-tax hike leaflets to train commuters

ECONOMYNEXT – Doctors representing Sri Lanka’s Government Medical Officers Association (GMOA) distributed leaflets outside the Colombo Fort railway station against a progressive tax hike, threatening to address the government in a “language it speaks”.

GMOA Secretary Haritha Aluthge told reporters outside the busy Fort railway station Monday February 06 afternoon that all professional associations have collectively agreed to oppose the personal income tax hike.

“The government is taking a lethargic approach. They cannot keep doing this. They have a responsibility towards the citizens, the country and society,” said Aluthge.

The medical officer claimed that the government was acting arbitrarily (අත්තනෝමතික).

“If it cannot understand the language they’ve been speaking, if the government’s plan is to put all professionals out on the street, if it doesn’t present a solution, all professional unions have decided unanimously to address the government in a language it speaks, ,” he said.

Aluthge and other GMOA members were seen distributing leaflets to commuters leaving the railway station. Doctors in Sri Lanka in general are likely to earn higher salaries than the average train commuter, and a vast majority of Sri Lanka’s population, most of whom take public transport, don’t fall into the government’s new tax bracket. Many doctors, though certainly not all, collect substantial sums of money at the end of every month as doctor’s fees in private consultations.

About two miles away from the doctors, the Ceylon Blank Employees’ Union, too, engaged in a similar distribution leaflet campaign on Monday at the Maradana railway station. A spokesman promised “tough trade union” action if there was no solution offered by next week.

Sri Lanka’s cash-strapped government has imposed a Pay As You Earn (PAYE) tax on all Sri Lankans who earn an income above 100,000 rupees monthly, with the tax rate progressively increasing for higher earners, from 6 percent to 36 percent.

A person who paid a tax of 9,000 rupees on a 400,000 rupee monthly income will now have to pay 70,500 rupees as income tax, the latest data showed. This has triggered a growing wave of anti-government protests mostly organised by public sector trade unions and professional associations.

Even employees of Sri Lanka’s Central Bank recently joined a week-long “black protest” campaign organised by state sector unions against the sharp hike in personal income tax, even as Central Bank Governor Nandalal Weerasinghe said painful measures were needed for the country to recover from its worst currency crisis in decades.

The government, however, defends the tax hike arguing that it is starved for cash as Sri Lanka, still far from a complete recovery, is struggling to make even the most basic payments, to say nothing of the billions needed for public sector salaries.

Economists say Sri Lanka’s bloated public service is a burden for taxpayers in the best of times, and under the present circumstances, it is getting harder and harder to pay salaries and benefits.

Sri Lanka’s new tax regime has both its defenders and detractors. Critics who are opposed to progressive taxation say it serves as a disincentive to industry and capital which can otherwise be invested in growth and employment-generating business ventures. Instead, they call for a flat rate of taxation where everyone is taxed at the same rate, irrespective of income.

Others, however, contend that the new taxes only affect some 10-12 percent of the population and, given the country’s economic situation, is necessary, if not vital, at least for a year or two.

Critics of the protesting workers argue that most of the workers earn high salaries that most ordinary people can only dream of, and, they argue, though there may be some cases where breadwinners could be taxed more equitably, overall, Sri Lanka’s tax rates remain low and are not unfair.  (Colombo/Feb06/2023)

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Sri Lanka bond Yields end steady

ECONOMYNEXT – Sri Lanka’s bond yields closed steady on Monday, dealers said while a guidance peg for interbank transactions remained unchanged.

A bond maturing on 01.07.2025 closed at 32.15/30 percent, steady from Friday’s 32.05/10 percent.

A bond maturing on 01.05.2027 closed at 28.90/29.10, steady from Friday’s 28.90/20.05 percent.

The Central Bank’s guidance peg for interbank US dollar transactions appreciated by one cent to 361.96 rupees against the US dollar.

Commercial banks offered dollars for telegraphic transfers at 370.35 rupees on Monday, data showed. (Colombo/Feb 06/2023)

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