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Sunday February 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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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 could get US$500mn from ADB in 2024

ECONOMYNEXT – Sri Lanka could receive 500 million US dollars in support from the Asian Development Bank in 2024 based on the progress of policy reforms, Country Director of the Manila-based lender, Takafumi Kadono said.

The ADB expect to go to its Board around March or April with a 100 million US dollar power sector loan subject to the cabinet of ministers of approving a revised electricity reform bill.

A 100 million dollar loan to support SMEs could also be approved in the early part of the year. Sri Lanka is setting up a credit guarantee agency to support credit for small firms.

A 200 million dollar credit for financial sector was also slated for the year. The ADB gave the first tranche of the financial sector policy loan late last year.

A $100mn for the water sector could also be approved later in the year.

Sri Lanka could get around 200 to 300 million US dollars a year at the lowest rate, or concessional ordinary capital resources (COL) rate of 2 percent.

The balance of would come at the ordinary capital resource rate linked to SOFR.

The ADB has also started work on a ‘Country Partnership Strategy’ for Sri Lanka covering the 2024-2028 period, Kadodo said. (Colombo/Feb25/2024)

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Sri Lanka’s multi-aligned foreign policy based on friendship: Min

ECONOMYNEXT – Sri Lanka’s multi-aligned foreign policy is based on friendship to all and enmity to none, its Minister of Foreign Affairs has said.

“Non-alignment means not becoming a bystander. Non-alignment means you are not forced or coerced into a camp to take sovereign decisions… you make your own choices. Whether it is commercial, security, regional or otherwise,” M U M Ali Sabry said on X (twitter).

“I have repeatedly stressed that sovereignty is the right to have your own opinion on what’s right and wrong, and to stand by your principles. Our multi-aligned foreign policy is based on friendship to all and enmity to none,” Sabry was quoting from his speech at the Lakshman Kadirgamar Institute of International Relations and Strategic Studies (LKI) Foreign Policy Forum, on the theme ‘Reassessing Non-Alignment in a Polarised World’.

Sri Lanka is one of the founding members of the Non-Aligned Movement.

The strategically located island has been increasingly walking a fine line between opposing global factions as it seeks to come out of a financial crisis. (Colombo/Feb24/2024)

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Sri Lanka’s Commercial Bank Dec net down on tax provisions

ECONOMYNEXT – Sri Lanka’s Commercial Bank of Ceylon reported profits of 6.9 billion rupees from the December 2023 quarter down 21 percent, despite an improvement in net interest income and lower provisions, amid a change in tax provisions.

Pre-tax profits were 8.89 billion rupees up from 2.4 billion rupees. There was a 6.4 billion tax reversal last year compared to a 1.7 billion rupee tax charge this year.

Commercial Bank reported earnings of 5.26 rupees for the quarter. For the year to December 2023 earnings were 16.07 rupees per share on total profits of 21.1 billion rupees, down 11.3 percent.

Net fee and commission income was down 1.2 percent to 6.1 billion rupees.

Net interest income went up 16.8 percent to 25.5 billion rupees, with interest income rising marginally by 1.3 percent to 73.0 billion rupees and interest expense falling 5.45 percent to 47.5 billion rupees.

Loans and advances to customers grew 4.06 percent to 1.17 billion rupees in the year to December. Debt and other financial instruments fell 10.5 percent to 649 billion rupees.

Financial assets measured and fair value through other comprehensive income was at 287 billion rupees, up from 117 billion rupees.

Impairment charges were 13.1 billion rupees, down from 19.6 billion rupees last year.

Gross assets were up 6.45 percent to 2.36 billion rupees. Net assets were up 5.51 percent to 214 billion rupees. (Colombo/Feb24/2024)

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