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Friday February 23rd, 2024

Sri Lanka central bank swaps surge, forward premiums negative in MMT

ECONOMYNEXT – Sri Lanka’s central bank swap transactions with market participants and others to borrow reserves have surged in 2020, official data shows as rates were cut and historic volumes of money was printed under modern monetary theory turning forward premiums negative.

Sri Lanka ended monetary stability from around January 2020 cutting rates despite a tax cut and then injecting liquidity from around February 2020, with a cyclical credit recovery due from a 2018 currency crisis.

In March a Coronavirus crisis hit the country and a ‘flexible exchange rate’ panic drove the rupee towards 200 to the US dollar before interventions began, earning a credit downgrade.

Swap Rise

Outstanding central bank swaps which were down to 357 million dollars in December 2019, then started to climb as more reserves were borrowed.

Gross reserves hit 7.9 billion dollars (7.4 billion without swaps as) in February as a central bank profit transfer was made in the form of liquidity in the first of the so-called ‘helicopter drops’ of liquidity bombshells into the credit system.

By November gross reserves were down to 5.5 billion US dollars and reserves after swaps were 4.1 billion US dollars. Information of Asian Clearing Union balance is not available.

By end November excess liquidity was 185 billion rupees which if turned into credit would result in another billion dollars in forex reserves to defend to keep a peg with the US dollar. In December more money was printed and reserves had also been appropriated, data show.

Meanwhile swap premiums turned negative as a confidence shock worsened with further downgrades to ‘CCC’.

Rates are now at historic lows with money printing, and the failing reserves show a drain through the financial account which is indicative of interest rates out of line with the balance of payments. Stock prices are soaring.

The Catbird Seat

In late 2020 forward premiums, which were progressively narrowing amid money printing and weakening confidence, turned negative. In the past the forward cover was given at a premium.

But under the current extraordinarily loose policy which is said to be following modern monetary theory, domestic dollar yields are higher than rupees, swap premiums have turned negative.

In effect analysts say market participants are in the unusual position of being paid to buy forward cover. It is also discouraging exporters from selling forward.

Analysts had warned in the past that central bank swaps, instead of borrowing outright represented a serious risk for the agency as it represented a forex risk to the agency and that many soft-pegged central banks including the Bank of Thailand and Bank of England (during ERM soft-peg) had suffered massive losses while giving ammunition to speculators.

If swaps mature during a crisis, liquidity is usually injected to maintain policy rates.

Analysts have warned that any credit pick up from a stronger economic activity would further pressure the currency regardless of whether there are import controls or not, but early corrective action could also turn the situation around.

Central Bank purchases of dollars have also eased as credit recovered.

Related

Sri Lanka central bank forex interventions turn negative in November

With most imports wanted by economic agents – which are anyway taxed at high levels – being controlled, imports deemed bureaucratically desirable are allowed in. They are taxed at a lower rates depriving revenue requiring more money to be printed.

In the recent past Sri Lanka abandoned both a policy corridor and started call money rate targeting, which analysts say is perhaps the biggest economic risk the country since a civil war, and also jettisoned a ‘bills only’ policy buying longer term bonds to create money.

However both in 2017 and 2019 swaps were unwound, strengthening bought reserves, despite operation twist style activity combined with a flexible exchange rate undermining monetary stability.

Sri Lanka has a central bank set up by a Federal Reserve money doctor in the style of several set up in Latin America inspired by the creator of the Argentina Central Bank Raul Prebisch. However at the time reckless open market operations were not envisaged. (Colombo/Jan12/2021)

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Sri Lankans may need to wait for Monetary Board meeting minutes despite new Act

ECONOMYNEXT – Sri Lankans may have to wait more time to read the meeting minutes of the Central Bank’s Monetary Board, a top official said, despite a new act that has made the central bank to be more transparent and accountable for its decisions.

Many central banks including the United States’ Federal Reserve, India’s Reserve Bank, and Bank of Mexico release the minutes of their monetary policy meeting to ensure transparency.

The new Central Bank Act passed by the Parliament in line with the guidance by the International Monetary Fund (IMF) includes measures for Sri Lanka’s central bank to be more transparent and accountable.

These measures include releasing the Monetary Policy Report every six months and the first such report was released on February 15.

However, the central bank has not taken a decision to release the minutes of the Monetary Board meetings on the monetary policy.

“Going forward, one day this could happen,” Chandranath Amarasekara, Assistant Governor at the Central Bank told reporters on Wednesday (21) at a media briefing.

“Right now, we have just started working on the new Central Bank Act. We are not there yet. There is no such decision on releasing minutes yet.”

The central bank in the past printed billions of rupees to keep the market interest rates artificially low and provide cheap funding for successive governments to propel a debt-driven economy.

It’s decision, however, led Sri Lanka into an unprecedented economic crisis in 2022 with sovereign debt default.

It also propped up the rupee currency artificially in the past to maintain a stable exchange rate at the expense of billions of US dollars. The move also contributed for the economic crisis and later the central bank was forced to allow over 60 percent depreciation in the rupee in March 2022.

However, none of the top central bank officials was held responsible for wrong decisions to hold interest rates artificially low with money printing and propping up the rupee. (Colombo/Feb 23/2024)

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Amid mass migration, Sri Lanka to recruit volunteers as English teachers

ECONOMYNEXT- Sri Lanka is planning to appoint foreign and expatriate volunteers to teach English for Sri Lanka students, the Ministry of Higher Education said, amid thousand of teachers migrating to other countries after the island nation’s unprecedented economic crisis.

Over five thousand teachers have left the country with the Education Ministry permission using the government’s circular of temporarily leaving state jobs while tens of thousands of teachers have left the country without informing the relevant authorities, Education Ministry officials say.

That had led to an acute teacher shortage in the country.

Suren Raghavan, the State Minister for Higher Education said the shortage has aggravated because most of the graduates who have an English degree become writers and join the private sector due to higher salary.

“They do not join government schools. This is a problem all over the country which is why we need to have an online system,” Raghavan told EconomyNext.

Separately he said on Thursday at a press conference that he had spoken to Canadian and Australian High Commissions to get the assistance of where their English teachers who have experience in teaching English as a second language in South Asia.

He also said that there is a number of teachers in the Unite Kingdom have shown interest in teaching English and they have experience in teaching in other Asian countries such as Burma and India while the teaching would be done free of charge.

The new move also comes at a time when the country’s English literacy rate is on the decline, according to the Minister.

President Ranil Wickramasinghe announced the English-for-all initiative three months ago with plans to improve English literacy at school and university level. (Colombo/Feb 23/2024)

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Sri Lanka tea production up 1.4-pct in Jan 2024, exports up 6.8-pct

ECONOMYNEXT – Sri Lanka’s tea production was up 1.4 percent to 18.73 million kilograms in January 2024, with high growns falling and low and mid growns rising, industry data shows.

High grown tea in January 2024 was 3.56 million kilograms, down from 3.36 million, medium growns were 2.6, up from 2.5 million kilograms and low growns were 12.56 million, up from 12.32 million kilograms last year.

Exports, including re-exports were up 6.88 percent to 18.76 million kilograms, industry data published by Ceylon Tea Brokers show.

Export earnings were reported at 102 million US dollars, up from 99.5 million dollars last year. The average FOB price was 5.45 US dollars a kilo down from 5.67 dollars last year.

Tea in bulk was 8.5 million kilograms valued at 12.79 billion rupees, tea in packets was 7.8 million kilograms valued at 13.1 billion rupees and tea in bags was 1.8 million kilos, valued at 5.06 billion rupees.

The top buyer was Iraq with 2.5 million kilos, up from 2.1 million last year followed by the UAE with 1.99 kilos, up from 1.86 million last year.

Russia bought 1.98 million kilos, down from 2.0 last year, Turkey bought 1.72 million kilos, from 2.3 million last year, while Iran bought 1.32 million, up from 614 million last year. (Colombo/Feb23/2024)

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