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Sunday December 10th, 2023

Sri Lanka directed credit plans in the oven

ECONOMYNEXT – Sri Lanka’s main monetary policy tool to promote growth are low-interest rates and liquidity in the banking system and directions will be issued soon to direct credit to priority sectors, Central Bank Governor W D Lakshman said.

Sri Lanka was taking action to boost investment in several sectors and dismantle barriers in a bid to push growth up towards 5.5 to 6.0 per cent in 2020, after an estimated 3.9 per cent contraction in 2020.

“Other conditions are created to promote investment,” Governor Lakshman said. “The main monetary policy instrument is the low-interest rate regime and the market liquidity for banks that is providing and also requesting banks to increase their lending for productive activities.”

The Monetary Board at a meeting in March had wanted credit to be channelled to sectors that they thought could generate high growth and those they viewed had potential but were still underfunded.

“Mechanisms to promote this are being examined by the Monetary Board and action will be taken soon in order to implement some of the decisions we will be making,” Governor Lakshman told reporters after keeping the policy corridor unchanged in March 2021.

Sri Lanka has printed unprecedented volumes of money in 2020 to prevent rates from going up after a tax cut and Coronavirus pandemic high state revenues and triggered a 2.3 billion US dollar balance of payments deficit as foreign reserves absorbed the liquidity shock in a pegged exchange rate regime.

“Reflecting the transmission of monetary easing measures taken by the Central Bank in the recent past, both market deposit and lending rates have declined substantially towards establishing a single-digit interest rate structure,” the Monetary Board said in its March policy review.

“Many market interest rates have declined to their historic lows.”

By March the central bank’s Treasury bill stock had topped 800 billion rupees from 69 billion rupees when the money printing bout began.

Money had also been injected through the central bank re-financed loan scheme in 2020.

However, Sri Lanka has been injecting liquidity in multiple forms since August 2019 reversing earlier prudent policy analysts have pointed out, though weak private credit and higher tax rates moderated monetary instability.

Foreign investors who had been exiting rupee bonds amid a Real Effective Exchange Rate Regime still held over 140 billion rupees of rupee bonds at the time.

Directed lending schemes have been a key feature of Soviet Gosplans, and also Nehru’s five-year plans modelled on them which led to the Hindu rate of growth, monetary instability and foreign exchange controls.

“Economic development is not merely a matter of credit creation or deficit financing,” Indian classical economist B R Shenoy warned (A NOTE OF DISSENT ON THE MEMORANDUM OF THE

“As no plan can be bigger or bolder than the available resources, the size of the investment programme should be reviewed periodically to ensure that it keeps within the limits of savings.

“If such a review should reveal a shortage of resources it would be shortsighted to fill the gap by credit creation or deficit financing as this will be self-defeating.”

He advised government-private borrowings to be limited to the actual savings and cash balances generated by the banking system.

In addition to inflating the money supply and triggering external deficits and domestic inflation when loans are given at low rates, many pet projects favoured by bureaucrats and interventionists or other businesses seem to be viable.

When rates are lowered by the rate-setting committees at central banks such as the Federal Reserve also projects are funded which collapse when rates are normalized.

In the US, large volumes of housing loans promoted by the ‘affordable housing’ rule Department of Housing and Urban Development and lowered underwriting standards were for low-income borrowers had worsened the fallout of a ‘mother of liquidity bubbles’ fired by the Fed, some critics have said.

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ADB USD200mn loan for Sri Lanka economic stabilization efforts

ECONOMYNEXT – The Asian Development Bank (ADB) has approved a US 200 million dollar concessional loan to Sri Lanka to help stabilize the country’s finance sector.

The Financial Sector Stability and Reforms Program comprises two subprograms of IS 200 million dollars each, according to a statement by the ADB.

“The program’s overarching development objective is fully aligned with the country’s strategy of maintaining finance sector stability, while ensuring that banks are well-positioned for eventual recovery,” ADB Country Director for Sri Lanka Takafumi Kadono was quoted as saying in the statement.

“The expected development outcome is a stable financial system providing access to affordable finance for businesses in various sectors of the economy.”

The ADB statement continues:

“Subprogram 1 targets short-term stabilization and crisis management measures that were implemented in 2023, while subprogram 2 is planned to be implemented in 2024 and focuses on structural reforms and long-term actions to restore growth in the banking sector.

The program will help strengthen the stability and governance of the country’s banking sector; improve the banking sector’s asset quality; and deepen sustainable and inclusive finance, particularly for women-led micro, small, and medium-sized enterprises.

According to the International Monetary Fund’s (IMF) latest review, Sri Lanka’s economy is showing tentative signs of stabilization, although a full economic recovery is not yet assured.

The program is a follow-on assistance from ADB’s crisis response under the special policy-based loan that was approved for Sri Lanka in May 2023.

It is aligned with the fourth pillar of the IMF’s Extended Fund Facility provided to Sri Lanka to help the country regain financial stability.

It is also in line with the government’s reform agenda, including strengthening the operational independence of the Central Bank of Sri Lanka (CBSL) and its designation as the country’s macroprudential authority.

In designing this subprogram 1 loan, ADB has maintained close coordination and collaboration with the IMF to design targeted regulatory reforms for the banking sector—including the asset quality review—and with the World Bank on strengthening the deposit insurance scheme.

“The loan is accompanied by a $1 million grant from ADB’s Technical Assistance Special Fund to provide advisory, knowledge, and institutional capacity building for Sri Lanka’s Ministry of Finance and CBSL.”

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Sri Lank in blackout as power grid hit by cascading failure

ECONOMYNEXT – Sri Lanka suffered a blackout as Saturday evening as the state-run Ceylon Electricity Board grid was hit by a cascading power failure.

The cascading failure is believed to have been triggered by the failure of the Kothmale-Biyagama transmission line.

“The Ceylon Electricity Board wishes to inform our customers that due to the failure of Kotmale – Biyagama main transmission line, an island wide power failure has occurred,” CEB Spokesman Noel Priyantha said.

“Step by step restorations are underway and it may take few hours to completely restore the power supply.”

With hydro plants running flat out, a outage of the line tends to create a big imbalance in the demand and supply, leading to tripping of more lines and generators.

Lines can trip due to lightening strikes, or equipment failures.

Sri Lanka last suffered a cascading failure in December 2021, due to the failure of the same transmission line.

RelatedSri Lanka power blackout as grid hit by cascading failure

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Sri Lanka to host regional Food and Agriculture Organization conference

ECONOMYNEXT – Sri Lanka will host the 37th session of the Asia Pacific Regional Conference (APRC) of the United Nations Food and Agriculture Organization (FAO), from February 19-22, 2024 in Colombo.

The Conference will bring together agriculture ministers and officials from 46 countries across the region to discuss challenges in food and agriculture.

“The 37th APRC will provide a vital platform for regional collaboration, benefitting the agricultural landscape, fisheries sector and environment of Sri Lanka,” Minister Mahinda Amaraweera said at a press briefing on Friday (8) to announce the conference.

FAO has had an active presence in Sri Lanka for over 40 years. “FAO has supported the country in the implementation of Good Agricultural Practices (GAP), and the development of the fisheries sector for growth and climate resilience,” Vimlendra Sharan, FAO Representative for Sri Lanka and the Maldives said.

“The APRC conference will be an opportunity to highlight the innovative approaches introduced in partnership with the government.”

By hosting APRC, Sri Lanka hopes to demonstrate the country’s dedication to the growth of sustainable agriculture, and showcase its commitment to sustainable agricultural development.

The APRC agenda will include a forum on agritourism, especially requested by the Sri Lankan government.

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