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Saturday May 18th, 2024

Sri Lanka central bank to move to a floating rate, end foreign reserve collection: report

ECONOMYNEXT – Sri Lanka intends to move towards a fully floating exchange rate and the central bank will no longer have to collect foreign reserves, Central Bank Governor Nandalal Weerasinghe was quoted as saying in a report.

Sri Lanka would like to see reserves around three months of imports, but not large volumes as recommended by the International Monetary Fund, Governor Weerasinghe was quoted as saying by Bloomberg Newswires in an interview.

Sri Lanka intends to move towards a fully floating exchange rate, Governor Weerasinghe was quoted as saying in the report.

There was no indication in the report when free floating would start, which would lead to the end of deliberate reserve collections, but for the duration of the IMF program, Sri Lanka has to collect reserves according to the targets, including to repay its own past loans to the central bank.

Industrialized countries, led by the US started to floated their currencies after the break up of the Bretton Woods program in 1971. Many of the countries are now folded into the Euro region.

Developing countries do not usually clean float ending currency troubles.

Former members of the British Empire, Canada, Australia or New Zealand no longer collect reserves as they do not intervene in forex markets and engage in offsetting money market transactions, allowing inflows of foreign exchange to match outflows at all times.

A fully floating exchange rate would allow the central bank to operate a true inflation targeting regime without creating currency crises, analysts say. New Zealand is credited with inventing inflation targeting.

Central banks with fully floating exchange rates do not provide reserves for private sector imports and therefore do not have to sterilize (or neutralize) foreign reserve sales with new injections of bank reserves making it impossible to either lose reserves or run balance of payments deficits.

Hard pegs operate on the same principle where interventions are unsterilized, also conserving foreign reserves by not injecting domestic currency reserves which would allow banks to give credit without deposits.

Both are stable single-anchor, self-correcting regimes where exchange and money policies do not conflict to create external instability.

However, floating exchange rates have tended to create banking crises (like the Housing Bubble), due to a positive inflation target, especially if core inflation is targetted where a commodity bubble is initially ignored, and the ready availability of standing facilities, according to some classical economists.

Sri Lanka now has a ‘flexible exchange rate’ which critics say is the most dangerous ad hoc monetary regime cooked up by Western inflationists and peddled to countries with unstable central banks since the IMF’s ‘Second Amendment’ left members without a credible monetary anchor.

Ad hoc inflationist regimes since 1978 which have failed in the past included targeting money supply while intervening in forex markets, steadily depreciating according to an econometric real effective exchange rate basket (basket band crawl policy).

To collect excessive foreign reserves, domestic investment has to be curtailed to capture inflows from the current or financial account, through a higher interest rate than required to run a clean float or a hard peg.

Collecting reserves is the same as repaying debt. Collecting large volumes of reserves in a short time could reduce the ‘relief’ Sri Lanka is supposed to get by debt restructuring, analysts have warned.

READ MORE

Sri Lanka to lend US$2.5bn to US and top-rated borrowers in 2023 under IMF deal: analysis

But Sri Lanka’s central bank also has to collect reserves to end a negative net foreign assets position and fix its balance sheet for which a balance of payments surplus has to be operated with deflationary open market operations.

A clean float however may make it more difficult to link to global supply chains, as East Asia did with its largely fixed exchange rates, firms will be under more pressure to boost productivity, though poverty reduction may be faster, analysts say.

Western central banks started to have BOP troubles in peacetime after open market operations using government securities were formalized by the Federal Reserve on April 13, 1923 giving birth to a bureaucratic policy rate and the eventual torpedoing of the self-correcting gold standard.

The bureaucratic policy rate triggered the roaring 20s bubble, Great Depression and currency crises during peacetime, as well as the eventual collapse of of the Bretton Woods system, analysts have said.

It is not clear when the belief that reserves of a government central bank can be used for private imports mainstreamed, but the Anglo-American Bretton Woods system and the IMF itself set up on false doctrine permitting capital controls and lending of reserves to BOP deficit countries, German-speaking classical economists who helped maintain monetary stability, have pointed out.

READ MORE Sri Lanka use of reserves for imports is a deadly false choice: Bellwether

The Great Depression triggered Keynesianism and the belief, especially in the US after World War II ended, that printing money contributes to growth by denying monetary stability, resulting in an employment mandate (employment-inflation trade-off/Phillips Curve) and what later became potential output targeting (macro-economic policy).

The idea first brought by Scottish Mercantilist John Law, was defeated in his time leading to a long period of monetary stability of the Sterling, the pre-eminent global currency of the period (and also peace under Pax Britannica) of more than a century until the start of World War I and the setting up of the Fed.  (Colombo/Nov21-Updated/2023 – Story updated to make clear that there are no plans to free float in the near term, which would lead to the ending of deliberate reserve building.)

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Sri Lanka suffers over $138mn foreign outflow from govt bonds in 2024 after rate cuts

ECONOMYNEXT – Foreign investors have dumped 41.6 billion-rupee ($138.6 million) worth of Sri Lanka government securities in the first 20 weeks of 2024, the central bank data showed, after reduction in the key policy interest rates.

The foreign holding in Sri Lanka’s treasury bills and treasury bonds fell to 75.9 billion rupees on the week ended on Friday (17), May 2024, from 117.4 billion rupees on the week ended on December 29.

The central bank rate has reduced the key policy rates by 50 basis points so far in 2024, extending the rates cut by 700 basis points since June last year.

The rupee appreciated 9.1 percent in the first four months, but the gain failed to attract foreign investors amid a dragged debt restructuring negotiation with external private creditors.

Currency dealers said lackluster demand for dollars due to dampened imports with heavy controls, boom in both tourism revenue and remittances have helped to increase the dollar liquidity in the market, leading to the appreciation of the local currency.

The dealers said foreign investors can earn capital gain if they had bought government securities before the appreciation and now the offshore investors might be selling their bonds.

“They are also discouraged by policy rate cut because that will reduce their returns from the rupee bond investments,” a currency dealer said.

The yield in 12-month T-bills has fallen 336 basis points in the first four months of this year, the central bank data showed.

The central bank also reduced the Statutory Reserve Ratio (SRR) of commercial banks by 200 basis points in August last year to boost liquidity in the market with an aim to reduce market interest rates.

Under tough International Monetary Fund (IMF) conditions for its $3 billion loan program, the central bank raised key monetary policy rates in 2022 and last year to bring down inflation which hit over 70 percent in 2022. The inflation has fallen to the lower single digit now.

The rupee has appreciated to around 300 against the US dollar this week from around 330 level early in November. The local currency was at 365 rupees against the US dollar in early 2022. Depreciation causes capital loss for foreign investors. (Colombo/May 18/2024)

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Sri Lanka’s ‘Sancharaka Udawa’ tourist fair seeks to involve universities

ECONOMYNEXT – Sri Lanka’s ‘Sancharaka Udawa’ tourism fair kicked off this week to promote interaction between industry stakeholders and relevant Government bodies, including the Tourist Police, and also universities.

“Several universities, including Colombo, Uva Wellasa, Kelaniya, Sabaragamuwa and Rajarata were given free stalls to facilitate student interaction with industry professionals,” Chairman of the Sancharaka Udawa Organising Committee, Charith De De Alwis said in a statement.

The event takes place today (18) at the BMICH and houses stalls for hoteliers, tour and transport services, with a goal of attracting 10,000 visitors.

Organized by the Sri Lanka Association of Inbound Tour Operators (SLAITO) and the Sri Lanka Tourism Promotion Bureau (SLTPB), the 11th edition of Sancharaka Udawa offers a platform for both B2B and B2C sectors.

“Sancharaka Udawa houses over 170 exhibitors and a footfall of more than 10,000 visitors,” De Alwis said.

This year’s edition will include participants from outbound tourism sectors to facilitate capacity building. The event provides networking opportunities for industry newcomers and veterans.

“The networking platform offers opportunity for small and medium-sized service providers integrating them into the broader tourism landscape. The anticipated outcome is a substantial increase in bookings particularly for regional small-scale tourism service providers.” (Colombo/May18/2024)

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Sri Lanka’s CEB sells LTL shares to West Coast IPP for Rs26bn

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Board has sold shares of an affiliate to West Coast Power Company Limited, an independent power producer giving profits of 25.9 billion rupees in the March 2024 quarter, interim accounts showed.

The sale has been carried out as a transfer.

“Twenty-eight percent (28-pct) of share ownership of CEB within LTL Holding’s equity capital has been transferred to West Coast Power Company Ltd for a total consideration of Rs 26 billion as part of a partial settlement of outstanding dues…” the March interim accounts said.

“This transaction resulted in a net gain of Rs25.9 billion rupees which has been recognized and reflected in the ‘Gain from Share Disposal’ in the individual financial statement in CEB.”

LTL Holdings is a former transformer making unit of the CEB set up with ABB where the foreign holding was sold to its management.

The firm has since set up several IPPs.

West Coast Power operates a 300MW combined cycle IPP in Kerawalapitiya promoted by LTL group liked firms in which both the Treasury and Employees Provident Fund also have shares.

Its operational and maintenance contract is with Lakdhanavi, another private IPP. The firm has been paying dividends.

The capital gain from the transfer of shares helped the CEB post profits to 84 billion rupees for the March 2024 quarter.

CEB reported gross profits of 62.7 billion rupees from energy sales and 30.6 billion rupees in other income and gains in the March 2024 quarter. Other income was only 3.1 billion rupees in last year. (Colombo/May18/2024)

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