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Friday December 9th, 2022

Sri Lanka controls imports in ‘Nixon-shock’ move to protect soft-pegged rupee

ECONOMYNEXT – Sri Lanka slapped a series of import restrictions on vehicles, consumer durables and perfumes in a Nixon-shock style move as the island’s notoriously mis-managed unstable soft-peg came under pressure from excess liquidity and later sterilized interventions.

The finance ministry said importers of all vehicles other than buses, lorries (trucks) and ambulances have to keep a 200 percent cash margin to open letters of credit (double the value of a vehicle), up from a recently raised 100 percent.

The loan to value ratio for hybrid cars had been raised so that banks could now only give half the loan, rather than an earlier 70 percent.

A 100 percent margin has been slapped on the import of Refrigerators, Air Conditioners, Televisions, Perfumes, Telephones including Mobile phones, washing machines, footwear and tyres.

"The Government in order to ease the pressure on the Sri Lankan rupee has decided to take the following measures temporarily effective from midnight today Saturday (29), the statement said.

"The government will continuously monitor the exchange rate fluctuations and will take appropriate action accordingly."

Sri Lanka’s rupee came under pressure initially from unsterilized excess liquidity built up by the central bank in July which was not followed up with unsterilized sales.

But in the last week of September massive liquidity shortages developed from intervention in the interbank market and elsewhere, which have been sterilized with 123 billion rupees of printed money, indicating a forex reserve loss of over 700 million dollars. A float is required to break the cycle of interventions and liquidity injections (sterilized forex sales)

Analysts had warned that Sri Lanka’s rupee would come under pressure due to the tendency of the central bank to cut rates as the economy recovered despite operating a de facto soft-peg. (Sri Lanka is recovering, Central Bank threat looms: Bellwether)

The statement echoed the words of President Nixon, who floated the US dollar, after it came under pressure from attempts to boost growth by on the basis of an output gap, despite operating a soft-peg with gold.

"Let me lay to rest the bugaboo of what is called devaluation," President Nixon said at the time shortly before convertibility was suspended to float the dollar.

"If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less.

"But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.

"The effect of this action, in other words, will be to stabilize the dollar"

Analysts had warned two years ago that the administration’s free trade agenda was under threat from the soft peg. (Sri Lanka central bank has to be restrained for free trade to succeed: Bellwether)

The credibility of the soft-peg was initially hit by contradictory policy (running a ‘flexible exchange rate’ with unsterilized excess liquidity) in July and August, despite the finance ministry making difficult reforms, in the form of tax hikes and market pricing fuel.

Imports are a key source of tax revenues and cars bring over 100 percent in taxes compared to any other import. Restriction on cars will further hit taxes.

The central bank has printed over 120 billion rupees over the past two weeks to sterilize interventions made in several ways.

Analysts have proposed several ways to overhaul the operating procedures of the central bank so that contradictions in its de facto dual anchor monetary regime (soft-peg) is eliminated (What Sri Lanka can do to improve the credibility of its soft-dollar peg: Bellwether). ( (Colombo/Sept29/2018)

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Sri Lanka bond yields end higher, kerb dollar Rs370/371

ECONOMYNEXT – Sri Lanka bonds yields ended up and the T-bills eased on active trade on Friday, dealers said.

The US dollar was 370/371 rupees in the kerb.

“The bond rates went up, however more interest was seen in the short term bills by the investors” dealers said.

A bond maturing on 01.05.2024 closed at 31.90/32.20 percent on Friday, up from 31.25/70 percent at Thursday’s close.

A bond maturing on 15.05.2026 closed at 30.30/31.30 percent steady from 30.30/31.00 percent.

The three-month T-bills closed at 30.75/31.30 percent, down from 32.00/32.25 percent.

The Central Bank’s guidance peg for interbank transactions was at 363.18 rupees against the US dollar unchanged.

Commercial banks offered dollars for telegraphic transfers between 371.78 and 372.00 for small transactions, data showed.

Buying rates are between 361.78 – 362.00 rupees. (Colombo/Dec 09/2022)

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Foreign minister, US ambassador discuss future assistance to crisis-hit Sri Lanka

ECONOMYNEXT — In a meeting in Colombo, Sri Lanka Foreign Minister Ali Sabry and US Ambassador to Sri Lanka Julie Chung discussed ways in which the United States can continue to support Sri Lanka going forward, the Ambassador said.

Chung tweeted Friday December 09 afternoon that the two officials had reflected on the “twists and turns” of 2022, at the meeting.

Minister Sabry was recently in Washington D.C. where he US Secretary of State Antony Blinken.

A foreign ministry statement said the two officials held productive discussions at the Department of State on December 02 on further elevating bilateral relations in diverse spheres, including the 75th anniversary of diplomatic relations which will be marked in 2023.

Incidentally, Sri Lanka also celebrates the 75th anniversary of its independence from the British in 2023, and President Ranil Wickremesinghe has given himself and all parties that represent parliament a deadline to find a permanent solution to Sri Lanka’s decades-long ethnic issue.

The US has been vocal about Sri Lanka addressing concerns about its human rights record since the end of the civil war in 2009 and was a sponsor of the latest resolution on Sri Lanka passed by the United Nations Human Rights Council. Unlike previous resolutions, this year’s iteration makes specific reference to the country’s prevailing currency crisis and calls for investigations on corruption allegations.

In the lead up to the UNHRC sessions in Geneva, Minister Sabry Sri Lanka’s government under then new president Wickremesinghe does not want any confrontation with any international partner but will oppose any anti-constitutional move forced upon the country.

On the eve of the sessions on October 06, Sabry said countries such as the United States and the United Kingdom, who led the UNHRC core group on Sri Lanka, are greatly influenced by domestic-level lobbying by pressure groups from the Sri Lankan Tamil diaspora.

These pronouncements notwithstanding, the Wickremesnghe government has been making inroads to the West as well as India and Japan, eager to obtain their assistance in seeing Sri Lanka through the ongoing crisis.

The island nation has entered into a preliminary agreement with the International Monetary Fund (IMF) for an extended fund facility of 2.9 billion dollars to be disbursed over a period of four years, subject to a successful debt restructure programme and structural reforms.

Much depends on whether or not China agrees to restructure Sri Lanka’s 7.4 billion dollar outstanding debt to the emerging superpower. Beijing’s apparent hesitance to go for a swift restructure prompted Tamil National Alliance MP Shanakiyan Rasamanickam to warn of possible “go home, China” protests in Colombo, similar to the wave of protests that forced the exit of former pro-China President Gotabaya Rajapaksa.

The TNA will be a key player in upcoming talks with the Wickremesinghe government on a solution to Sri Lanka’s ethnic issue. (Colombo/Dec09/2022)

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India smogs out Sri Lanka’s China tower observers


ECONOMYNEXT – Sri Lanka’s Chinese-built Lotus Tower has halved visitors to its observation deck an official said as dirty air flowing from India triggered air quality warnings and schools in the capital closed.

“Masks are mandatory at the observation deck and roughly around 50 to 60 can go up to the observation deck at a time, time limits have not been altered and still persists at 20 minutes for observation,” the official told EconomyNext.

Prior to the smog, 120 observers were permitted at once to the deck.

However, even after limitations the Lotus Tower has continued to draw visitors, and revenues are coming in, the official said.

The tower built with a Chinese loan by the cash rich Telecom Regulatory Commission has been described by critics as a white elephant that eats the money earned from telecom operators mainly as spectrum fees.

Sri Lanka’s National Building Research Organization (NBRO) said India air heavily polluted with particulate matter was flowing across the island into a depression in the South West Bengal Bay. (Colombo/Dec09/2022)



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