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Thursday December 1st, 2022

Sri Lanka continues monetary financing of imports, pegging after ‘running out’ of reserves

ECONOMYNEXT – Sri Lanka’s central bank has spent 222.73 million US dollars defending a peg and engaging in monetary financing of imports in June 2022, three months after apparently ‘running out’ of reserves, official data show.

Sri Lanka defaulted in April 2012 after two years of money printing to suppress interest rates combined with tax cuts in the worst currency crisis triggered by the central bank in its history.

At the time officials said the country had run out of reserves.

In March the rupee collapsed from 200 to 360 to the US after a botched attempt at floating (suspending convertibility) with a surrender rule (forced dollar sales to the central bank) and too low policy rates to curtail credit.

However the central bank continued to intervene in forex markets in both sides of a peg (now around 360 to the US dollar). When interventions are made with borrowed ACU dollars from India the central bank gets deeper into debt.

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In June the central bank had bought 68 million dollars from banks, which are experiencing severe forex shortages due to a dysfunctional peg, down from 76.6 million US dollars a month earlier, putting pressure on the peg.

The central bank then sold 222.74 million dollars to defend the peg, engaging in monetary financing of imports.

The central bank gets deferred payments from the Reserve Bank of India and spends them on monetary financing of imports getting deeper into debt.

After giving dollars for imports, a pegged central bank then sterilizes the intervention injecting new money to maintain a policy rate and prevent reserve money from shrinking, effectively monetary financing imports by replacing lost rupee reserves in banks.

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Sri Lanka imports surge to US$2.2bn in Dec 2021 after reserves sales

However June reserve money growth slowed amid high interest rates, and is appearing to be shrinking in July as the economy is smashed by high interest rates and forex shortages.

In Sri Lanka there is a strong belief among economists who have rejected classical theory and also the business community that reserves should be used to finance imports and help the country live beyond its means due to the rejection of classical economics.

There were widespread calls for monetary financing of imports in Sri Lanka despite the country running low in early 2021 and imports having shot up over 2.0 billion US dollars by December after three months of sterilized interventions between 300 to 400 million US dollars a month.

Interventions are sterilized with the acquisition of government securities in banks, not private securities unlike in the days of the classical greats when central banks operated a floating policy rate against bankers acceptances, and it appears as budget financing to later observers. (Sri Lanka, world’s poor suffers from Fed’s accidental discovery)

After printing money to create forex shortages Sri Lanka’s economists in authority also have a habit of importing fuel on credit, further boosting imports and getting state enterprises in to debt.

However after a default in April 2012 the time honoured tactic of indebting the CPC is no longer possible and oil imports have been settled quickly or pre-paid like any other import. However attempts are still being made to consume on borrowed money through credit line.

Sri Lanka also tried to get 6.0 billion US dollars of ‘bridging finance’ for imports and other spending in 2022 after defaulting in April 2012.

Since defaulting in April and running out of reserves, 337 million dollars had been spent on interventions with energy sector officials in particular pressing the central bank for money to import oil via pegging (weak side convertibility).

Clean floating central bank do not give a cent for imports.

Economists in authority Sri Lanka got the ability to create currency crises on August 28, 1950 with the creation of a money printing soft-peg after abolishing a hard peg that had kept the country stable for almost 70 years.

Analysts had warned that contradictory policy and a botched float would lead to continued monetary instability and high interest rates with damaging effects on the banking system unless a working monetary regime is established. (Colombo/July18/2022)

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Sri Lanka China-backed port to welcome second cruise ship

ECONOMYNEXT – Sri Lanka’s China-backed Hambantota Port said it was getting ready to welcome MV Azamara Quest, a cruise ship, as another passenger vessel departed.

Mein Schiff 5, operated by TUI had departed Hambantota International Port for Pulau Penang Island, Malaysia on November.

“As well as being her maiden call at the port, Mein Schiff 5 is the first passenger cruise ship to call at the port since the pandemic began,” said Johnson Liu, CEO of Hambantota International Port Group (HIPG) said in a statement.

“It was undoubtedly a great boost for the tourist economy in the south when the vessel called at the Hambantota International Port.”

Mein Schiff 5’s passengers had also visited the Bundala National Park, Hambantota Botanical Gardens, Galle and Kataragama.

Passengers had explored Hambantota by tuk-tuk, while others had enjoyed the beaches in the Shangri La Hotel, the port said.

MV Azamara Quest will arrive in Hambanota on on December 05. (Colombo/Dec01/2022)

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Sri Lanka’s shares gain in mid market trade

EXONOMYNEXT- Sri Lanka’s shares gained in mid market trade on Thursday (1), pushed up by strong positive sentiments on interest rates easing in line with inflation and speculation on government to hold talks with multilateral creditors ADB and World Bank for a possible loan facility.

Market has continued to gain for the past four sessions.

“Shares were moving on positive strong sentiments flowing in from yesterday (30), we are seeing a rally in the hotels, while the retail favorites such as LIOC and Expolanka,” analysts said.

Positive investor sentiments have been established, from positive comments from the Governor of the Central Bank over market rates eventually seeing an ease despite the fears of a domestic debt restructuring as inflation falls, increased liquidity in dollar markets, and the inter-bank liquidity improves.

Analysts further stated that, Treasury related stocks are also activated due to downward movements in yield.

All Share Price Index (ASPI) gained by 1.4 percent or 123.41 points to 8,774.64, while the most liquid share gained by 1.31% or 35.68 points to 2,765.

The market generated a turnover of 1.6 billion rupees at 1130 hours. (Colombo/Dec1/2022)

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Sri Lanka electricity losses from overpriced fuel, no tariff hike considered: regulator

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Board’s high operating costs are partly due to excessive prices paid for fuel and no tariff hike is being considered, Chairman of the Public Utilities Commission of Sri Lanka, Janaka Ratnayake said.

The CEB itself does not buy fuel but depends on state-run Ceylon Petroleum Corporation and Lanka Coal, another state firm to buy fuel. Both firms are periodically caught in procurement scandals.

“They are paying about 385 plus rupees per litre for furnace oil,” Ratnayaka told EconomyNext.

“That is too much. From the global market we can buy it to much lower price. It can be imported below 200 rupees,”

“I ask the government to take the necessary steps to create a system to import furnace oil, like they did for fuel, to be imported at the lower price levels. If that happens, we can go without going for a price hike.”

Sri Lanka’s CEB generally gets furnace oil and residual oil from the domestic refinery and usually do not import furnace oil.

The refinery however is not regularly operating due to inability to get crude amidst the worst currency crisis in the history of the island’s intermediate regime central bank.

Ratnayake had earlier brought to light import costs of the CPC.

Pushing for operations efficiency of the CEB is a role of the regulator. Regulating costs based on global benchmark prices to push for procurement efficiencies is a standard practice. However the PUCSL is not the official regulator of the petroleum sector.

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Sri Lanka power tariff revisions sought in Jan and July: Minister

Power and Energy Minister Kanchana Wijesekera told parliament that cabinet approval was sought to twice yearly tariff hikes in January and July of each year.

No Electricity tariff hikes are being considered yet, Ratnayake said.

Wijesekera blamed the regulator as well as successive administrations for not regularly revising power prices and pushing the sector into crisis.

In Sri Lanka activists had also blocked cheap coal power. (Colombo/Dec01/2022)

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