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Tuesday January 31st, 2023

Sri Lanka central bank ‘unprints’ money

ECONOMYNEXT – Sri Lanka’s central bank has sold down its Treasury bills stock for the second week, taking its holdings of Treasury bills purchased to trigger monetary instability in March and April to 296 billion rupees on Friday from 303 billion rupees a day earlier, official data show.

The week earlier the central bank also sold down its Treasury bill stock taking the stock down by about 8 billion rupees to from 311 billion rupees.

Over the past two weeks the central bank had sold down about 14 billion rupees of Treasury bills and withdrawing liquidity from money markets potentially saving about 75 million US dollars in forex reserves that would otherwise have been lost.

A soft-pegged central bank can withdraw excess liquidity either by selling domestic securities (Treasuries or its own sterilization securities) or defending the peg with dollar reserves (an unsterilized dollar sale) to reduce forex shortages.

When domestic credit is strong, a soft-pegged central bank will however print more money to target a short term rate after selling dollars (sterilized forex sales) re-inflating reserve money to the previous level, resisting correction in the credit system.

Data showed that in the current bout of monetary instability the central bank has sold about 1.3 billion US dollars unsterilized mopping up part of the 400 billion excess liquidity injected to inflate reserve money, since February.

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In 2018 Sri Lanka’s central bank triggered monetary instability by injecting liquidity to target a call money rate below the ceiling policy rate, without any fiscal dominance or political pressure, analysts have showed.

Analysts also warned in November and December 2019 monetary instability as well as credit downgrades was likely as the credit system recovered unless there was monetary reform.

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Last week the central bank conducted the Treasuries auction before a policy corridor was cut by 100 basis points to 4.50 percent (floor) and 5.50 percent (ceiling).

Before the rate cut amid excess liquidity injected earlier the overnight interbank rate was already touching 5.50 percent. After the cut the overnight rate again fell to 4.50 percent.

In May the central bank had bought 61.5 million dollars in interbank forex markets amid private credit in April and lockdown which hit consumption as well as import controls, and in June 69 million dollars were bought and 9.25 million dollars were sold.

In May private credit picked up from April lows data showed.

Before the rate cut the central bank had allowed some term reverse repo deals without rolling them over, withdrawing more liquidity and potentially saving forex reserves.

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An overnight rate hitting the floor of the corridor generally points to weak domestic credit, though now large amounts of the excess liquidity had come from domestic asset purchases (printing money) to pay state salaries and meet expenses as well as cuts in statutory reserve ratios.

Excess liquidity hit a high of 224 billion rupees on June 17 with a reserve ratio cut. Reserve ratio cuts themselves structurally lower interest rates by reducing inefficiencies in the banking system.

Excess liquidity which fell to 160 billion rupees on Thursday rose to 166 billion rupees on Friday despite the bill sell-down.

The central bank is also re-financing loans from commercial banks creating more money, but by selling down the Treasury bills stock it can neutralize part of the negative effects and reserve losses.

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Liquidity had also been created with dollar rupee swaps with commercial banks.

Classical economic analysts point out that the Bank of England during the ERM crisis and the East Asian central banks like the Bank of Thailand during the crisis also gave ammunition (domestic currency) to speculators through such deals.

In general when a auctions of domestic government bonds (or roll-overs of sterilization securities) fail and the central bank purchase part of all of the securities to inflate the reserve money supply, a country will run into forex shortages and could also default on foreign debt.

Transfer Problem

Classical economists have tried to explain to Mercantilists and neo-mercantilists in the Keynesian tradition in particular that balance of payments troubles comes from inflating reserve money and credit and not debt repayment or imports.

The mis-understanding is generally referred to as the ‘transfer problem‘.

Until it is understood, balance of payments problems as well as import controls, import substitution, price controls and rent seeking will persist in a country as policies are directed to ‘save foreign exchange’ instead of stopping the injections of domestic currency.

“The truth is that the maintenance of monetary stability and of a sound currency system has nothing whatever to do with the balance of payments or of trade,” explained Austrian economist Ludwig von Mises, who tried in vain to show that John Maynard Keynes was wrong in the so-called ‘transfer problem’ in relation to German war reparations.

“If a country neither issues additional quantities of paper money nor expands credit, it will not have any monetary troubles,”

“An excess of exports is not a prerequisite for the payment of reparations. The causation, rather, is the other way round. The fact that a nation makes such payments has the tendency to create such an excess of exports.

“There is no such thing as a ‘transfer’ problem. If the German Government collects the amount needed for the payments (in Reichmarks) by taxing its citizens, every German taxpayer must correspondingly reduce his consumption either of German or of imported products.

“Thus collecting at home the amount of Reichmarks required for the payment automatically provides the quantity of foreign exchange needed for the transfer.”

While the pre-war Weimar Republic collapsed with monetary instability, the Federal Republic of Germany which operated on Austrian classical principles (Ordoliberal), started with central bank reform and repaid all pre-war and post war debt and also paid reparations including to Israel which did not exist before the war.

“Stability may not be everything,” one time West German Economic Minister Karl Schiller said. “But without stability everything is nothing.” (Colombo/July13/2020)

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Sri Lanka shares down for 2nd day as tax hike, delay in Chinese debt assurance weigh

ECONOMYNEXT – Sri Lanka’s shares edged down on Tuesday as worries over delay in financial assurances from China which is mandatory for a $2.9 billion dollar IMF loan and rise in protests against tax hike kept investors in check, analysts said.

The main All Share Price Index (ASPI) edged down by 0.28 percent or 24.62 points to 8,865.05. It fell for the second session after hitting more than three-month high.

“The market is looking for more macro cues because of faster Chinese debt assurance was expected. The market is also hit by fall in corporate earnings due to high taxes,” an analyst said.

China has given an initial response on debt re-structuring to Sri Lanka though analysts familiar with the process say it is not a ‘hard assurance’ sufficient for the IMF program to go through.

The International Monetary Fund is working with China on extending maturities of Chinese loans to defaulted countries like Sri Lanka, as there is resistance to hair-cuts, Managing Director Kristalina Georgieva told reporters on January 14.
The earnings for first quarter are expected to be negative for many corporates with higher taxes and rising costs. However, investors had not expected earnings to be low in the December quarter because of year end pick ups on heavy counters, the analyst said.
Earnings in the second quarter of 2023 are expected to be more positive with the anticipation of IMF loan and possible reduction in the market interest rates as the tax revenue has started to generate funds.

However, the central bank said the IMF deal is likely in the first quarter or in the first month of the second quarter.

The most liquid index S&P SL20 dropped by 0.64 percent or 17.74 points to 2,764.51 points.

The central bank has said it could cut interest rates in future when the country sees fall in inflation, which has already started decelerating.

The market saw a turnover of 1.7 billion rupees, slightly lower than the month’s daily average of 1.8 billion rupees and while being significantly lower than 2022’s daily average turnover of 2.9 billion rupees.

The bourse saw a net foreign inflow (NFI) of 93 million rupees extending the net offshore buying to 413 million rupees so far this year.

Top losers were LOLC, Royal Ceramics Limited and Hayleys. (Colombo/Jan31/2023)

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Sri Lanka exports fall in December as global recession weighs

ECONOMYNEXT – Sri Lanka’s merchandise exports earnings fell 9.7 percent in December year-on-year as the island nation saw a drop in buying from its key export destinations which are facing a looming recession after the Russia-Ukraine war.

The earnings from the merchandise exports recorded $1.04 billion  in December 2022 compared to the same month in the previous year as per the data released by the Sri Lanka Customs.

“This was mainly due to the decrease in export earnings from Apparel & Textiles, Tea, Rubber based Products, and Coconut based Products, Food & Beverages, Spices & Essential Oils and Fisheries products,” the Export Development Board (EDB) said in a statement.

“The reason for this decline was due to the ongoing recession in major markets due to rising cost of production, energy etc. Imports declined sharply due to inflation and demand for goods and services are reduced.”

However, Sri Lanka saw a record export earning of $13.1 billion in 2022 due to increased demand in the key exports throughout the year

Earnings from all major product sectors except Electrical & Electronic components as well as Diamonds, Gems & Jewellery fell in December.

Exports of Apparel & Textiles decreased by 9.6 percent to $480.3 million in December 2022.  Export earnings from Tea fell by 3 percent to $107.3 million, Rubber and Rubber Finished products dropped 20.3 percent to $74.5 million,

However, export earnings from the Electrical & Electronics Components increased by 16.18 percent to $42.9 million in December 2022, while Diamond, Gems & Jewelry jumped 35.7 percent to $30.8 million. (Colombo/Jan31/2023)

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Sri Lanka records over 6,000 dengue cases in first three weeks of January

ECONOMYNEXT – Sri Lanka recorded over than 6,000 dengue cases in the first three weeks of January 2023 after a spell of heavy monsoon rain though a drop in cases is likely from February, officials said.

Health officials identified 6,204 dengue patients by January 22, up from 5,793 recorded in the corresponding period last year.

“A rise in cases can be observed in the November-January period with the heavy rain due to the northeast monsoon,” an official from the National Dengue Control Unit told EconomyNext.

Of all reported cases, 46.3 percent were from the Western Province, official reports showed.

Akuressa, Batticaloa, Eravur, Trincomalee, Madampe, Badulla, Eheliyagoda, Kegalle, Kalmunai North and Alayadivembu MOH areas were identified as high-risk areas for dengue during the third week of January by the health officials.

“We are expecting a decline in dengue cases soon. The Western province is always in the top position with the highest number of dengue cases. Apart from that, we are seeing a higher number of cases during this period in areas like Puttalam, Jaffna districts. A certain number of cases have also been recorded in the Kandy district,” the official said.

“Usually the cases peak in December, but they decline by February. This year, too, we are facing this scenario. There is an increase of dengue during the months of November, December and January”.

Due to the economic situation in the country, the Public Health Inspectors (PHIs) in an earlier report said, diesel and pesticides are not being provided by the ministry.

However, rejecting the allegation, the official from the NDCU said the government has provided enough funds for get the necessary pesticides but it is being used according to a scientific method to avoid building a resistance in the dengue mosquito.

“The recommendation is to do the fogging if there is a dengue outbreak or if there are few patients reported from the same locality.

“If you use this pesticide haphazardly, the mosquitos will develop resistance against it,” the official said, adding that there are adequate stocks of the chemical available. (Colombo/ Jan 31/2023)

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