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Tuesday June 25th, 2024

Sri Lanka downgraded to World Bank lower middle income country as per capita income falls

ECONOMYNEXT – Sri Lanka has been re-classified as a lower middle income country by the World Bank as per capita income dropped amid real effective exchange rate and flexible inflation targeting which brought currency collapses and growth rates below inflation.

Sri Lanka’s per capita gross national product (GNP) dropped over 200 dollars from 3,968 dollars in 2018 to 3,741 dollars in 2019, while per capita gross domestic (GDP) product dropped from 4,079 dollars to 3,852 dollars following a currency crisis triggered which brought stagflation.

Monetary Instability

Sri Lanka has been following a combination of Real Effective Exchange Rate (REER) targeting involving deliberate devaluation of the currency run ahead of inflation, generating fresh inflation in the process and ‘flexible’ inflation targeting with consumer price target high enough to trigger involuntary currency collapses.

Monetary instability had worsened in peacetime, with currency crises coming with smaller gaps, compared to the latter part of the island’s long-running civil war with policy becoming more discretionary and pro-cyclical.

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Sri Lanka in stagflation after flexible exchange rate collapse

In 2018 a pro-cyclical rate cut in April was followed by liquidity injections, which was combined with a so-called buffer strategy for bond sales, involving overdrawing state banks re-financed with lender of last resort money, just as the credit system was recovering from a 2015/2016 crisis.

Sri Lanka’s per capita GNP also dropped from 3,969 US dollars in 2017 to 3,968 dollars in 2018 following a 2015/2016 currency collapse which was also triggered by pro-cyclical rate cuts and liquidity injections amid a sudden expansion of the budget deficit in 2015.

The last administration gave the central bank full independence to target the REER and also engage in pro-cyclical rate cuts, though there have been calls to reform the central bank, restrain its domestic operations, curb discretionary policy in a bid to bring monetary stability and sustained growth.

In 2020, however the central bank had come under pressure to print more money, and it has lost forex reserves. But private credit had slowed by April 2020, amid Coronavirus lockdowns. Sweeping import controls have also been brought after money printing.

Adjusted Threshold

The World Bank adjusts per capita Gross National Income using a so-called Atlas Method which seeks to smooth the effects of currency volatility and inflation.

The World Bank calculated Sri Lanka’s gross national income in 2019 to have fallen to 4,020 dollars from 4,060 dollars in 2018, under the Atlas Method.

The lender’s threshold for upper middle income countries also moved up to 4,026 dollars in 2019 from 3,996 dollars in 2018, which it said was due to inflation of special drawing rights, a composite denominator currency devised by the International Monetary Fund.

The classification is done every year at the beginning of July.

With per capita income rising Sri Lanka graduated out of World Bank’s cheapest loans from the International Development Association window in 2017.

However other countries which have seen GDP contract has ‘reverse graduated’.

Fellow Travellers

Indonesia and Philippines which also had bad central banks with depreciating currencies have ‘reverse graduated’ into IDA and graduated again. They are among the worst performers in the ASEAN.

The Philippines’s central bank was set up by John Exter, an American, with similar extensive discretionary powers as Sri Lanka’s central bank. The country haas experienced severe monetary instability and export of labour to the Middle East and or East Asian countries with greater monetary stability.

Related

Sri Lanka risks instability, stagflation by being in unstable soft-peg group: Bellwether

Meanwhile Nepal, where the Nepal Rastra Bank follows less discretionary policy but is pegged to the Reserve Bank of India, whose policy had also worsened in recent years, rose to a lower middle income country from a low income country.

Indonesia became an upper middle income country again with per capita income of 4,060 US dollars.

Other countries that regressed with Sri Lanka include Sudan, whose per capital GNI fell from 1,560 dollars to 590 dollars.

“For Sudan, the GNI series for 2009-2018 has been revised as a result of revisions to the exchange rates,” the World Bank said.

The Sudan pound has collapsed from 18,000 in 2018 to 55,000 this year.

Algeria also regressed from 3,970 US dollars in 2019 from 4,060 in 2018. (Colombo/July02/2020)

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Sri Lanka to sign Paris Club debt deals as fresh ISB talks to also start

ECONOMYNEXT – Sri Lanka will sign agreements on restructured debt with Paris Club creditors Wednesday, Cabinet spokesman Minister Bandula Gunawardana said as sources said talks with private creditors are also due to start later in the week.

The relevant senior officials and State Minister Shehan Semasinghe has already left the country to sign the agreements, Minister Gunawardana said.

Sri Lanka has held detailed negotiations with bilateral creditors ever since a sovereign default in 2022 and President Ranil Wickremesinghe has personally met leaders of friendly countries to expedite the restructuring, he said.

The finalizing of the restructure was a ‘great victory’ for Sri Lanka he said.

Details will be revealed to parliament by President Wickremesinghe and an address to the nation on Wednesday he said.

Discussion with private bondholders are also taking place separately, he said.

Face to face talks with bond holders are likely to start Thursday, sources said.

Investors in a steering committee representing key bondholders have halted trading and are in a ‘restricted’ period Bloomberg Newswires reported.

Sri Lanka is attempting to restructure 12.5 billion dollars of sovereign bonds and about 1.7 billion dollars of past due interest following the declaration of an external default in 2022.

Private investors are seeking some so-called macro-linked bonds whose final haircut is linked to dollar GDP as well as some standard or ‘plain vanilla’ bonds with an upfront haircut.

The style of bonds have not been used in sovereign restructurings before. In the latest round of talks more plain vanilla bonds may be discussed, sources aware of the thinking of some bond investors said.

The ISB holders have proposed a 28 percent haircut and a 1.8 percent consent fee. The macro-linked bonds would have principle re-stated up to 92 percent of the original depending on the evolution of gross domestic product.

Sri Lanka is restructuring debt using an IMF debt sustainability model applied to middle income countries with market access as opposed to debt sustainability model used in countries like Ghana applicable to low income countries requiring deeper haircuts on both domestic and foreign debt.

Hair cuts may also depend on the maturity of bonds and the coupon interest.

Ghana has higher levels of commercial debt having started to access capital markets from around 2007.

Ghana also has a bad central bank like Sri Lanka and has gone to the International Monetary Fund 18 times.

The country is also operating flexible inflation targeting (inflation targeting without a clean float), which critics say is the latest spurious monetary regime peddled to hapless unstable countries without a doctrinal foundation in sound money.

Having done broad domestic debt restructuring as well as continued currency volatility both interest rates and inflation remains above 20 percent.

Ghana’s central bank has a worse monetary anchor (8 percent inflation plus 2 percent) compared to 5 percent plus two in Sri Lanka and runs into currency trouble despite being an oil producer like Iran, Venezuela and neighboring Nigeria.

Nigeria has an inflation target of 6-9 percent but ends up with around 20 plus inflation and currency trouble.

Sri Lanka has undershot its inflation target since reaching monetary stability in September 2022 and has appreciated the currency, amid deflationary policy giving a strong foundation for economic activity to resume. (Colombo/June26/2024)

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Sri Lanka to seek investors for 200MW BOOT power plant

EONOMYNEXT – Sri Lanka’s cabinet has given approval to seek investors for a 200 MegaWatt independent power plant on a build-own-operate-and-transfer (BOOT) basis, a government statement said.

The internal combustion power plant will be capable of running on natural gas and is part of the Long-Term Generation Expansion of state-run Ceylon Electricity Board.

The investor will get as 20-year power purchase agreement.

Land next to the ‘Sobhadanavi’ combined cycle plant will be made available for the developer.

According to the generation plan, the 200MW IC plant is expected to come on stream by 2026.

In 2026, a 115 MW gas turbine, a CEB owned diesel plants of 68 MW and 72 MW are due to be retired. (Colombo/June25/2026)

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Sri Lanka rupee closes steady at 305.25/35 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed fairly flat at 305.25/35 to the US dollar on Tuesday, down from 305.20/30 to the US dollar on Monday, dealers said, while bond yields up.

A bond maturing on 01.06.2026 closed at 10.75/11.05 percent.

A bond maturing on 15.12.2026 closed at 10.65/11.05 percent, up from 10.45/85 percent.

A bond maturing on 15.10.2027 closed at 10.65/11.10 percent.

A bond maturing on 15.03.2028 closed at 11.20/11.50 percent.

A bond maturing on 15.09.2029 closed at 12.10/15 percent, up from 12.05/17 percent.

A bond maturing on 01.12.2031 closed at 12.10/20 percent, up from 12.08/15 percent.
(Colombo/Jun25/2024)

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