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Tuesday February 27th, 2024

Sri Lanka central bank complied with govt directions as allowed by law: Deputy Governor

ECONOMYNEXT – Sri Lanka’s central bank had complied with government directions as permitted by available monetary law, central bank officials said, in the wake of a controversy caused by President Gotabaya Rajapaksa slamming the central bank after summoning the Governor to his office.

Sri Lanka’s central bank was ordered to engage in a series of ‘quasi-fiscal’ activities which should have been performed by the Treasury by printing large volumes of money, on top of direct finance of the budget which had led to currency pressure and difficulties in servicing foreign debt.

Sri Lanka is now in the grip of ‘Nixon shock’ style import controls not seen since the 1970s though the country is a global leader in the fight against Coronavirus, and is a little behind Vietnam due to a reluctance to test high risk groups.

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Cabinet Orders

The cabinet had originally ordered 50 billion rupees to be given from the central bank (printed money), for banks to give loans.

“The proposal came originally from the government to introduce a 50 billion rupee scheme,” Deputy Governor Nandalal Weerasinghe explained responding to queries from reporters in Sinhalese.

“But there was no money allocated from the government, the Treasury. We were asked to implement it.”

Under Section 88 of Sri Lanka’s Monetary Law Act there was a provision to set up a medium and long term credit fund based on the rupee reserves available on the balance sheet of the central bank.

“Based on the balance sheet of the central bank it was a maximum of 30 billion rupees,” Weerasinghe said.

“That is how we started by allocating 30 billion. That is why we had to limit it to each bank to a certain amount in the first stage thought larger number of applications came.”

About 57 billion rupees of applications had come to the bank under the first scheme. By limiting it to a share to each bank it totaled about 28 billion rupees.

“In the second instance after a cabinet decision were told to increase it to 150 billion rupees on June 03,” Weerasinghe said.

“Again there was no assistance from Treasury.”

Weerasinghe said under Section 83 of the MLA there was a way to give short term money to banks against collateral given by banks.

The balance from the 58 billion rupees of applications was given under the second provision.

The Best Option

In the third instance banks are being asked to give loans under a credit guarantee from the central bank, in a third quasi-fiscal activity using Section 108 of the Monetary Law Act.

“Under that the central bank can give credit guarantees of behalf of the government,” Weerasinghe said.

The balance of credit directed by the cabinet of ministers would be given under central bank guarantees using money already in banks.

“That is the best solution to my knowledge,” Weerasinghe said. “If there is money the central bank will not have to pump new money.”

The central bank had cut the reserve ratio twice releasing around 180 billion rupees to banks.

Over 200 billion rupees had been printed to finance the deficit.

When money is printed – unless domestic credit weakens – foreign exchange shortages occur.

Central Bank Governor W D Lakshman said President Rajapaksa had not sought an explanation from the central bank before blaming the institution.

He said now communications channel had been set up with the government.

Quasi-Fiscal

Quasi-fiscal activities including central bank re-finance (printing money for banks to give loans) as well as monetization of debt (printing money for the deficit) has led to the collapse of currencies, high inflation, high reserve ratios, which in turn leads to more re-finance and subsidized credit.

Sri Lanka’s central bank law was developed by John Exter an expert sent the US which gave Sri Lanka a highly discretionary central bank, which was supposed to ‘sterilize’ the balance of payments and escape the effects of commodity price fall (credit collapses of the anchor currency central bank) among others.

Though Sri Lanka’s economic troubles of foreign exchange shortages, exchange controls started less than two years of setting up the central bank other countries which used all such facilities available in the law had suffered more.

Exter also built the central bank for Philippines, which had chronic currency troubles went bankrupt partly due to quasi-fiscal activity including risks taken through forex swaps.

Eventually quasi-fiscal activities would land on the Treasury in the form of recapitalization of the central bank or reduced profits when credit guarantees materialize. However in the interim fiscal data would look better.

The central bank of Philippines had to be re-capitalized.

Classical Principles

Economic analysts say South Korea suffered similar troubles due to a central bank set up another Fed expert, Arthur Bloomfield.

Korea reformed its central bank several times and eventually got it right in the mid 1980s shortly before a massive national strike.

“Basically these banks were set up under New Dealer influenced thinking, led by the then chief of the Fed’s Latin America section Robert Triffin,” EN’s economic columnist Bellwether says.

“Interventionists generally lionize South Korea saying subsidized credit was given, but no one asks why subsidized credit had to be given in the first place.

“In countries like Singapore and Hong Kong, interest rates were low and exchange rates were stable because their monetary authorities operated on classical economic principles.”

Korean interest rates are also low after monetary reforms.

Singapore has announced a ‘stimulus’ using forex reserves in the first instance. When money is printed and domestic credit picks up forex, reserves are anyway lost.

Analysts had warned earlier not to print money and maintain monetary stability as it would lead to downgrades.

Related

Sri Lanka prints more money as rating downgraded to just above CCC

Sri Lanka needs monetary discipline to avoid further downgrades: Bellwether

When the currency comes under pressure, fears over debt repayments trigger credit downgrades. (Colombo/July10/2020 – Udate II)

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Sri Lanka president appoints Supreme Court-faulted official as police chief after CC clearance

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe appointed Deshbandu Tennakoon as the 36th Inspector General of Police (IGP) of the country after the Constitutional Council (CC) cleared the official who along with three other police officers were asked by the Supreme Court to compensate 2 million rupees in a fundamental rights case last year.

“President Ranil Wickremesinghe has appointed Deshbandu Tennakoon as the IGP in accordance with the provisions of the Constitution,” the President’s Media Division (PMD) said.

The island nation’s Supreme Court on December 14 ordered Tennakoon when he was the Acting IGP and three other officials to pay a compensation of 500,000 rupees each for the violation of the fundamental rights of an individual.

The Supreme Court also instructed the Police Commission to take disciplinary action against the said Police officers after it considered the petition filed by W. Ranjith Sumangala who had accused the Police officers of violating his fundamental rights during his detention at Mirihana Police Station in 2011.

The Supreme Court held that the four police officers violated the fundamental rights of the petitioner by his illegal arrest, detention and subjection to torture at the Mirihana Police Station, which was under the supervision of Tennakoon at the time of the arrest.

President’s Secretary Saman Ekanayake presented the official appointment letter to Tennakoon on Monday (26) at the Presidential Secretariat.

When Tennakoon was asked over if the Supreme Court decision would have an impact on his appointment as the IGP last week, he declined to comment, saying that it was a Supreme Court matter and he does not want to say anything about it.

Tennakoon was also criticized by Colombo Archbishop Cardinal Malcolm Ranjith when he was appointed as the Acting IGP citing allegations against him related to security lapses leading up to the Easter Sunday attacks which killed at least 269 in April 2019.

However, Tennakoon rejected the allegations. (Colombo/Feb 26/2024)

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No water tariff hike in Sri Lanka this year: Minister

Millennium Challenge Corporation Photo.

ECONOMYNEXT – Sri Lanka’s planned water tariff formula is ready, and the government will implement it this year only if the formula’s tariff is lower than the current price, Water Supply Minister Jeevan Thondaman said.

President Ranil Wickremesinghe’s government has been implementing IMF-led pricing policies on utilities and the Water Supply Ministry has already come up with a formula.

“There is a water tariff formula in place right now and we are waiting for it to be drafted and seek approval from the cabinet,” Thondaman told reporters at a media briefing in Colombo on Monday.

“Once this water tariff formula is in place, there will be an annual revision with an option of biannual review.

The formula has been developed with the help of the Asian Development Bank. The formula includes electricity and exchange rate among many others as components like the fuel formula.

The National Water Supply and Drainage Board (NWS&DB) increased the water tariff in August 2023, claiming that the operating cost had been increased owing to high interest payment for bank loans and increased electricity prices.

The last year revision saw the consumers paying 30-50 percent increase from the existing water bill.

Minister Thondaman said he will implement the new formula this year only if there is a reduction.

TARIFF CUT WILL BE IMPLEMENTED 

“We will have to wait to see what the formula is. If the formula shows us there needs to be a reduction in the water tariff, we can implement it. But if there is an increase, why should we burden the people when we are on a road to recovery?” he said.

He said a group of experts including University Professors are working on the formula and the numbers.

“Once they come with the number, we will have to take a decision on whether we are going to impose on the people or not,” he said.

“We have already spoken to the Asian Development Bank and informed them we have established the formula. But according to the ADB requirement of this policy-based loan, the implementation period is only in 2025.”

“But right now, you want to take the approval for the formula for sustainability.”

The Energy Ministry is considering a drastic slash in electricity tariff soon. Thondaman said the exact numbers will be decided on after the finalized electricity tariff.

However, he said that as per the formula, there has to be a up to 10 percent increase in the water tariff as of now.

“Given the current formula set up, there must be around a 9-10 percent increase. It was actually at 14 percent. What we have done is since it is at 14 percent, we also did a calculation to see how we can do a cost cutting,” he said.

“So, despite our cost cutting measures, there will be an increase of 9 or 10 percent. But we will not be imposing it as of now because this year is meant to be policy sector reforms. Next year is meant to be the implementation.”

“As per August 2023 water tariff hike, we are able to come close to sustainable. So right now, there is no issue in the water sector. But a formula eventually needs to be established.” (Colombo/Feb 26/2024)

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Sri Lanka rupee closes at 310.80/311.00 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 310.80/311.00 to the US dollar Monday, from 310.95/311.05 on Thursday, dealers said.

Bond yields were down.

A bond maturing on 01.02.2026 closed stable at 10.60/80 percent.

A bond maturing on 15.09.2027 closed at 11.80/90 percent down from 11.90/12.05 percent.

A bond maturing on 15.03.2028 closed at 12.00/12.15 percent down from 12.10/25 percent.

A bond maturing on 15.07.2029 closed at 12.20/70 percent from 12.20/95 percent.

A bond maturing on 15.05.2030 closed at 12.30/70 percent down from 12.40/95 percent.

A bond maturing on 15.05.2031 closed at 12.60/80 percent from 12.45/13.00 percent.

A bond maturing on 01.07.2032 closed at 12.50/90 percent from 12.50/13.30 percent. (Colombo/Feb26/2024)

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