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Thursday July 18th, 2024

Sri Lanka central bank orders 5.0-pct ceiling on foreign currency deposits

ECONOMYNEXT – Sri Lanka’s central bank has ordered a 5.0 percent ceiling on foreign currency deposits in a bid to reduce a gap between rupee yields and dollar yields, an order under the country’s banking law shows.

Sri Lanka last week raised the policy rate at which overnight money is printed to 6.0 percent from 5.50 percent and also a 12-month de facto rate through which large volumes of money is printed to keep gilt yields down by 55 basis points to 5.93 percent, which is still below the overnight rate.

Dollar yields had moved up to around 7 percent.

“The maximum interest rates that may be offered or paid by a licensed commercial bank and the National Savings Bank on all foreign currency deposits shall not exceed an Annual effective Rate of up to 5 percent,” the order said.

In the case of special deposit accounts, introduced recently, a higher rate could be paid.

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Sri Lanka to put ceilings on exporter dollar deposit rates

Low rupee rates and expectations of a devaluation had led exporters and others to hold on to dollars an and borrow rupees.

Borrowing rupees to hold dollars should in normal circumstances led to a reduction in credit for other activities and therefore imports, squeezing the current account, but with the central bank printing new money, the correction does not happen.

Sri Lanka is also planning to borrow dollars abroad through various credit lines, pushing up long term indebtedness and widening the short term current account deficit further.

Domestic dollar yields began to rise rupee yields from late 2020 as money printing (stimulus) and an inconsistent flexible exchange rate (now you give convertibility to the note issue, now you don’t) and a widening budget deficit triggered three rate cuts in less than a year.

The downgrade pushed up bonds on sovereign bond yields and also led to a trimming of limits on cross-border lending by counterparty banks, creating a severe dollar liquidity crunch in domestic credit markets.

State run banks were also funding a massive dollar position in state-run Bank of Ceylon, built up in years when money printing (call money rate targeting, output gap targeting and MMT), created forex shortages.

Banks also had to repay loans taken to buy domestic law dollar bonds (Sri Lanka Development Bonds) where yield also went up.

Sri Lanka’s monetary policy had deteriorated sharply over the last five years, with unusually discretionary policy involving a ‘flexible’ exchange rate (discretionary external anchor) and ‘flexible’ inflation targeting (discretionary domestic anchor) worsening years of monetary anchor conflicts.

The central bank instead of shifting to a consistent policy framework started to control bond auctions through so-called ‘Stage III’ method, and also imposed lending rate controls and deposits rates controlled.

Razeen Sally, a classical economist had warned Sri Lanka against a steady shift away from markets and back to a controlled or centrally planned economy.

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Sri Lanka caught in ‘fatal conceit’ of swinging away from markets

“Underlying all this is a misguided world view,” Sally said delivering a lecture marking 69 years of Sri Lanka’s central bank in 2019, after two currency crises in rapid succession triggered import controls.

“It is a world view Lord (John Maynard) Keynes and his Bloomsbury circle had shared. And (Friedrich) Hayek accused Keynes and his ilk of suffering from a fatal conceit, for that very reason,”

“Why is the world view misguided?

“It is as if you could get a committee of really good super qualified, intelligent people, together. Who are platonic guardians as it were, who only have the public interest in mind. They are the best committee to sort out the complex problems of the world because they know best.

“They also assume they have the requisite knowledge to intervene here, there and everywhere as superior to the market, in particular situations.”

“Let me choose a generic example. And this happens around the world, sometimes also here in Sri Lanka.

“The generic example is, say, the monetary board of a central bank that actually tells market actors beginning with commercial banks what interest rates they should charge, to whom they should lend and under what conditions.

“And when these market actors don’t behave accordingly, they are ticked off like naughty school children and sometimes threatened with punitive action.”

“In a market economy that is not appropriate and I think it is a fundamental mis-understanding of what a market economy is about.

“Not least because it assumes that a certain committee of good men, have better interests and knowledge,” he said. (Colombo/Aug25/2021)

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Sri Lanka to conduct threat assessments for presidential candidates

ECONOMYNEXT – Sri Lanka’s President Ranil Wickremesinghe has submitted a cabinet paper proposing security measures for presidential candidates and former presidents, following the recent attack on former US President Donald Trump during a campaign rally in the USA.

“This proposal suggests the appointment of a committee to conduct threat assessments and provide necessary security for Presidential candidates as well as former Presidents,” a statement from his media division said.

The committee will include the Secretary of the Ministry of Public Security as Chair, the Chief of Defence Staff, the Inspector General of Police, the Chief of National Intelligence, and the Senior Deputy Inspector General of Police/Elections.

A Deputy Inspector General of Police will be appointed to oversee all security arrangements.

The committee and the designated officer will work closely with the Election Commission to ensure seamless coordination of security arrangements, the PMD said.

After today, July 17, Sri Lanka’s Election Committee is empowered to announce a date for the presidential polls due to be held this year.

Minister of Foreign Affairs M U M Ali Sabry has said the election will be held on October 5 or 12.

Members of the Samagi Jana Balawegaya (SJB) have said that the government should be accountable for the security of Opposition Leader Sajith Premadasa, the SJB’s presidential candidate. (Colombo/Jul17/2024)

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Sri Lanka rupee closes flat at 303.80/304.00 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed almost flat at 303.80/304.00 to the US dollar on Wednesday, from 303.70/304.00 to the US dollar on Tuesday, dealers said, while bond yields were down.

A bond maturing on 15.12.2026 closed at 10.60/75 percent, down from 10.82/92 percent.

A bond maturing on 15.12.2027 closed at 11.60/38 percent, down from 11.65/75 percent.

A bond maturing on 01.05.2028 closed at 11.72/78 percent, down from 11.80/90 percent.

A bond maturing on 15.09.2029 closed at 12.05/10 percent, down from 12.05/20 percent. (Colombo/Jul17/2024)

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Sri Lanka stocks close down, John Keells, Hemas, Hayleys push turnover

ECONOMYNEXT – The Colombo Stock Exchange closed down on Wednesday, data on its site showed.

The broader All Share Index closed down 0.41 percent, or 48.44 points, at 11,830; while the more liquid S&P SL20 Index closed down 0.52 percent, or 17.91 points, at 3,456.

Turnover was 1.2 million. A big part of this (Rs597mn) came from John Keells Holdings Plc (down at 194.25).

“There was foreign buying interest on John Keells and Hemas,” Softlogic Stockbrokers said.

“We saw foreign interest in selective counters persist.”

Hemas Holdings Plc contributed Rs143mn to the turnover, and the share closed down at 81.10.

Hayleys Plc contributed Rs156mn to the turnover, and the share closed up at 101.50.

The three crossings made up 67 percent of the turnover.

The capital goods counters, with all the bluechips, was the leading sector contributing to the day’s turnover.

With the exception of Hayleys and a couple of other companies, the counter saw most stocks close down or flat.

Sentiment around the banking counters also remained negative.

“The volatility in investor sentiments persisted. There are a lot of spectators in the market over the last few weeks, despite some positive news coming in.”

Treasury bill and bond rates have also dropped.

The top contributors to the ASPI were Melstacorp Plc (up at 86.00), SMB Finance Plc (up at 0.70), and TeeJay Lanka Plc (up at 40.00).

There was a net foreign inflow of 392 million. (Colombo/Jul17/2024)

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