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Wednesday June 19th, 2024

Sri Lanka central bank makes Rs788bn forex loss in 2022, net loss Rs374bn

ECONOMYNEXT – Sri Lanka’s output gap targeting, intermediate regime central bank has posted a net loss of 374 billion rupees in 2023 and made a loss of 778 billion rupees on negative foreign reserves, official data showed.

Foreign reserves of Sri Lanka’s central bank turned negative after it borrowed and lost dollars in 2022 as liquidity was injected through inflationary open market operations to suppress rates using the cover available from data-driven flexible inflation targeting.

Forex shortages emerge quickly from inflationary open market operations but it may take up to a year or 18 months for ‘inflation’ to show up in a retail price index after private credit becomes positive from the end of the previous currency crisis.

The central bank borrowed from the Reserve Bank of India and Bangladesh through swaps.

Losses from swaps totaled 127 billion rupees in 2023.

The central bank started the 2020-22 output gap targeting exercise with an outstanding loan from the International Monetary Fund from an earlier currency crisis. There is also a liability now under the Asian Clearing Union.

The overall revaluation forex loss was 610 billion rupees in 2023 from negative reserves. Usually a pegged central bank with reserves makes profits if there are residual reserves.

Interest costs on foreign exchange liabilities were 32 billion rupees.

Sri Lanka’s dollar liabilities went up in three areas as forex shortages emerged from flexible inflation targeting/output gap targeting and the country lost the ability to settle loan installments and other payments from inflows.
 
As forex shortages emerged from flexible inflation targeting from 2015, Sri Lanka initially borrowed through International Sovereign Bonds and budget support loans from China to cover current spending as well as to settle maturing loan installments in the years with inflationary monetary policy.

The Ceylon Petroleum Corporation was made to borrow dollars as inflationary open market operations triggered forex losses. The CPC also suffered massive losses at each depreciation from suppressed policy rates.

As credit rating fell and the central government and CPC gradually lost the ability to borrow in each currency crisis the central bank borrowed money heavily in the last year.

The central bank’s gross borrowings which were 1.4 billion dollars in 2019 went up to 2.1 billion US dollars in 2020, 3.5 billion dollars in 2021 and 5.2 billion US dollars in 2022.

Eventually it ended up with gross reserves from a swap with China, which it was not allowed use for imports after printing money. 

Related Sri Lanka central bank US$4bn in debt by March 2022

The central bank’s equity in rupees collapsed to 82 billion rupees from 463 billion rupees a year earlier from the losses.

The Central Bank of Sri Lanka made profits of 487 billion rupees on its domestic assets book where money was printed and given to holders of maturing bonds from past deficits and to offset (sterilize) forex interventions  with inflationary open market operations as well as some financing of actual deficits.

In previous years transfer of reserves in rupee had led to more foreign reserve losses.

From 2015 to 2022 Sri Lanka had monetary stability to settle foreign loans, make other payments like oil and collect reserves only in 2017 and 2019.

Monetary stability has been restored at great cost in 2023 by the central bank. The currency appreciated in March. When currencies appreciate, a central bank with negative reserves will show profits on its dollar book.

Sri Lanka got caught up in the what classical economist Robert Mundel called the international disequilibrium system in August 1950. (Colombo/Apr28/2023)

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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.

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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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