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Sunday December 3rd, 2023

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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UAE investors express interest in Sri Lanka’s energy, tourism, ports, real estate: Ali Sabry

ECONOMYNEXT – A group of investors based in the United Arab Emirates have expressed their interest in renewable energy, tourism, ports, and real estates, Foreign Minister Ali Sabry told Economy Next.

A Sri Lankan delegation led by President Ranil Wickremesinghe is in Dubai to take part in the 2023 United Nations Climate Change Conference (COP28).

Sabry said a group of large investors met the President on Friday and discussed possible opportunities in Sri Lanka.

“We met big investors here particularly on renewable energy, tourism, port development and also infrastructure development and real estate. That’s where they are doing very well,” Foreign Minister told Economy Next.

“Our embassy will organize a higher-level business delegation to visit Sri Lanka to look at the available opportunities.”

“There is a lot of traction and interest in Sri Lanka.”

Sri Lanka has been exploring to attract investors to crisis hit Sri Lanka which declared bankruptcy in April last year with sovereign debt default.

Since then, most investors have taken a step back from investing in the island nation due to its inability to serve debts and uncertainty over such investments.

Several government officials said investors may start pouring dollars into Sri Lanka very carefully after they see some certainty of debt repayments. (Dubai/Dec 3/2023)

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Sri Lanka to push for green initiative investment “after OCC finalizing” debt deals – President

ECONOMYNEXT – Sri Lanka will push for investment into green initiatives globally after the Official Creditor Committee (OCC) finalizing on the island nation’s debt restructuring, President Ranil Wickremesinghe told Economy Next at the 2023 United Nations Climate Change Conference (COP28).

President Wickremesinghe along with local and global advisors has inaugurated three ambitious projects to convert climate change-led disaster funding, which is mostly seen as donations, into viable commercial enterprises involving private sector investments.

The idea is to rally all the global nations in the Tropical Belt threatened by disasters related to climate change and bargain collectively with advanced economies which emit more greenhouse gases into the environment resulting in global warming for more green initiatives like renewable energy projects.

Wickremesinghe initiated a Climate Justice Forum (CJF), Tropical Belt Initiative (TBI), and called on the world to help establish the International Climate Change University in Sri Lanka.

His moves have been welcomed by global leaders, though analysts said an initiative like TBI is a “bold and imaginary” step.

“This is the first step. We have now put forward the proposal,” Wickremesinghe told Economy Next on Sunday on the sideline of the COP28 in Dubai’s EXPO 2020.

“There is an interest. We have to wait for OCC finalizing (debt restructuring) before pushing for investments.”

HARD INVESTMENTS

Global investors are hesitant to invest in Sri Lanka due to its bankruptcy and sovereign debt default.

Sri Lanka is still recovering from an unprecedented economic crisis which has compelled the island nation to declare bankruptcy with sovereign debt default.

President Wickremesinhe during a forum on Saturday said his initiatives would help government in advanced countries not to use tax money of its own people for climate related disasters in other countries and instead, private sector investors could help by investing in renewable energy initiatives.

President Wickremesinghe’s government has been in the process of implementing some tough policies it committed to the International Monetary Fund (IMF) to stabilize the country and ensure sustainability in its borrowing.

Sri Lanka is yet to finalize the debt restructuring fully as it still has to negotiate on repayment schedule of commercial and sovereign bond borrowing.

The OCC and Sri Lanka had agreed on the main parameters of a debt treatment consistent with those of the Extended Fund Facility (EFF) arrangement between Sri Lanka and the IMF.

The members of the Paris Club which are part of the Official Creditor Committee are representatives of countries with eligible claims on Sri Lanka: Australia, Austria, Belgium, Canada, Denmark, France, Germany, Japan, Korea, the Netherlands, Russia, Spain, Sweden, the United Kingdom, the United States of America.

The OCC has said it was expecting other bilateral creditors to consent to sharing, in a transparent manner, the information necessary for the OCC to evaluate comparability of treatment regarding their own bilateral agreement.

The OCC also has said it expects that the Sri Lankan authorities will continue to engage with their private creditors to find as soon as possible an agreement on terms at least as favourable as the terms offered by the OCC. (DUBAI/Dec 3/2023)

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Sri Lanka alcohol regulations may be spurring moonshine: Minister

ECONOMYNEXT – Sri Lanka’s alcohol regulations may be reducing access to legal products and driving illegal moonshine sector, State Minister for Finance Ranjith Siyambalapitiya said amid plans to change opening times of retail outlets.

Sri Lanka is currently discussing changing the opening times of bars (retail alcohol outlets), he said.

Sri Lanka’s excise laws may be contributing to the growth of illegal products, Minister Siyambalapitiya was quoted as saying at the annual meeting of Sri Lanka’s excise officers.

Over 20 years legal alcohol sales have grown 50 percent but illegal products are estimated to have grown 500 percent, he said.

It is not clear where the 500 percent estimate came from.

In Kandy there was a bar for every 6,000 persons but in Mullativu there was one for only 990,000 persons and people had to travel 80 kilometres to get to a legal outlet, Minister Siyambalapitiya had said.

However Sri Lanka has a widespread moonshine or ‘kasippu’ industry driven by high taxes on legal products.

The widely used ‘gal’ or special arrack is now around 3,500 rupees and may go up further with a hike in value added tax. About 2000 rupees of the sale price is taxes.

After a currency collapse and tax hikes legal alcohol sales have fallen, leading to local sugar companies burying ethanol, according to statements made in parliament.

An uneven distribution of bars may also be driving people towards alcohol.

Alcohol sales is controlled on the grounds that it is an addictive product which can lead to poverty, ill-health, bad behaviour and criminal activities, though advocates of high taxes ignore the poverty angle.

High taxes are promoted by temperance movements some of whom have called for outright prohibition in the last century.

Temperance movements spread among evangelical groups in the West and were also embraced by nationalists/moralists and independence movements in colonial authorities.

Prohibition in the US however led to more criminal activity as an organized crime took to bootlegging. (Colombo/Dec03/2023)

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