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Sunday February 25th, 2024

Sri Lanka central bank not yet trippled Zimbabwe style quasi-fiscal facility

FIAT MONEY: Minister Bandula Gunewardene says money is not a game.

ECONOMYNEXT – Sri Lanka’s central bank has not yet tripled a re-finance (printed money) facility to 150 billion rupees (about 800 million US dollars) to give COVID-19 relief loans as ordered by President Gotabaya Rajapaksa, Information Minister Bandula Gunewardene said.

“I said as cabinet spokesman last week that President had ordered the central bank to give 150 billion rupees of re-finance,” Minister Gunewardene said.

“But it has not happened.”


The central bank had already provided 50 billion rupees central bank credit (printed money) re-finance facility for banks to give loans without using real savings (deposits which offsets total consumption).

Minister Gunewardene said there were complaints from borrowers that banks were not giving loans as ordered under a debt moratorium already approved.

“Next week the President will take another action on this,” he said.

When credit is given with printed money, the excess demand from the newly created money puts pressure on the exchange rate and the central bank has to sell dollars to mop up the rupees in forex markets (defend the rupee).

The sale of domestic currency securities to mop up the new rupees will also result in (quasi-fiscal) losses to the central bank. Sri Lanka’s central bank is already giving forward guarantees to banks which results in quasi-fiscal losses when the rupee falls steeply.

Further Reading: Central Bank Quasi-Fiscal Losses and High Inflation in Zimbabwe

A 150 billion rupee facility amounts to about 800 million US dollars in potential forex reserve losses when the rupee is defended against the newly created money. Sri Lanka had forex reserves of about 7.2 billion rupees by the end of April.

Sri Lanka has already placed exchange and import control after printing money in March and April.

Minister Gunewardene said the central bank was an independent financial authority.

Api Nodanner Mudal

“It is like the Elections Commission,” he said. “Money is not a game (Moodhull kiyan-nay sel-ler muck nevei. Api nodun-ner moodull). It is on a paper banknote that the entire economy’s trust is place.

“The monetary board has the monopoly power to issue money. It is not a power that the government has. It is like the Elections Commission.

“To that independent financial authority, the President has given instruction (oopperdes). It has been informed that those instructions have not been carried out.”

“Agencies that issue money – Reserve Banks all over the world operate like that. The President will make the necessary intervention next week.”

Sri Lanka’s high inflation and currency depreciation in the 1980s which blocked people from getting full benefits of a re-opened economy in 1978 was also partly due to central bank re-finance of bank credit.

Then-Governor A S Jayewardene stopped central bank re-finance of bank credit known as quasi-fiscal activities and also halted the direct purchase of Treasury bills at auctions, helping bring back monetary stability, end widespread strikes and keep the economy from collapsing as the war intensified.

However many of his prudential rules have been broken over the past three years, critics have said.

The collapse of the Zimbabwe dollar about 15 years ago and the country’s slide into hyperinflation was also worsened by several re-financed credit schemes.

The Reserve Bank of Zimbabwe set up a Productive Sector Facility (PSF) commercial firms, and Agricultural Sector Enhancement Facility (ASPEF) for farms about 15 years ago triggering severe foreign exchange shortages.

Another fund Parastatals and Local Authorities Reorientation Programme (PLARP) re-financed state enterprise and sub-national agencies. (Colombo/June11/2020-sb)

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Sri Lanka could get US$500mn from ADB in 2024

ECONOMYNEXT – Sri Lanka could receive 500 million US dollars in support from the Asian Development Bank in 2024 based on the progress of policy reforms, Country Director of the Manila-based lender, Takafumi Kadono said.

The ADB expect to go to its Board around March or April with a 100 million US dollar power sector loan subject to the cabinet of ministers of approving a revised electricity reform bill.

A 100 million dollar loan to support SMEs could also be approved in the early part of the year. Sri Lanka is setting up a credit guarantee agency to support credit for small firms.

A 200 million dollar credit for financial sector was also slated for the year. The ADB gave the first tranche of the financial sector policy loan late last year.

A $100mn for the water sector could also be approved later in the year.

Sri Lanka could get around 200 to 300 million US dollars a year at the lowest rate, or concessional ordinary capital resources (COL) rate of 2 percent.

The balance of would come at the ordinary capital resource rate linked to SOFR.

The ADB has also started work on a ‘Country Partnership Strategy’ for Sri Lanka covering the 2024-2028 period, Kadodo said. (Colombo/Feb25/2024)

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Sri Lanka’s multi-aligned foreign policy based on friendship: Min

ECONOMYNEXT – Sri Lanka’s multi-aligned foreign policy is based on friendship to all and enmity to none, its Minister of Foreign Affairs has said.

“Non-alignment means not becoming a bystander. Non-alignment means you are not forced or coerced into a camp to take sovereign decisions… you make your own choices. Whether it is commercial, security, regional or otherwise,” M U M Ali Sabry said on X (twitter).

“I have repeatedly stressed that sovereignty is the right to have your own opinion on what’s right and wrong, and to stand by your principles. Our multi-aligned foreign policy is based on friendship to all and enmity to none,” Sabry was quoting from his speech at the Lakshman Kadirgamar Institute of International Relations and Strategic Studies (LKI) Foreign Policy Forum, on the theme ‘Reassessing Non-Alignment in a Polarised World’.

Sri Lanka is one of the founding members of the Non-Aligned Movement.

The strategically located island has been increasingly walking a fine line between opposing global factions as it seeks to come out of a financial crisis. (Colombo/Feb24/2024)

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Sri Lanka’s Commercial Bank Dec net down on tax provisions

ECONOMYNEXT – Sri Lanka’s Commercial Bank of Ceylon reported profits of 6.9 billion rupees from the December 2023 quarter down 21 percent, despite an improvement in net interest income and lower provisions, amid a change in tax provisions.

Pre-tax profits were 8.89 billion rupees up from 2.4 billion rupees. There was a 6.4 billion tax reversal last year compared to a 1.7 billion rupee tax charge this year.

Commercial Bank reported earnings of 5.26 rupees for the quarter. For the year to December 2023 earnings were 16.07 rupees per share on total profits of 21.1 billion rupees, down 11.3 percent.

Net fee and commission income was down 1.2 percent to 6.1 billion rupees.

Net interest income went up 16.8 percent to 25.5 billion rupees, with interest income rising marginally by 1.3 percent to 73.0 billion rupees and interest expense falling 5.45 percent to 47.5 billion rupees.

Loans and advances to customers grew 4.06 percent to 1.17 billion rupees in the year to December. Debt and other financial instruments fell 10.5 percent to 649 billion rupees.

Financial assets measured and fair value through other comprehensive income was at 287 billion rupees, up from 117 billion rupees.

Impairment charges were 13.1 billion rupees, down from 19.6 billion rupees last year.

Gross assets were up 6.45 percent to 2.36 billion rupees. Net assets were up 5.51 percent to 214 billion rupees. (Colombo/Feb24/2024)

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