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Tuesday April 23rd, 2024

Sri Lanka economic tsunami disproportionately hitting poor: Eran

ECONOMYNEXT – Sri Lanka is caught in an economic tsunami which is disproportionately hitting the poor, opposition legislator and former state minister Eran Wickramaratne said.

“Seventeen years ago, tens of thousands of people lost their lives to the Indian Ocean tsunami,” Wickremeratne said.

“Today we are hit by an economic tsunami.”

Sri Lanka is now seeing the first wave of the tsunami and unless corrective action is taken, worst outcomes are in store, he said.

“The poor are getting disproportionately hit from this tsunami,” Wickramaratne said. “Prices are rising and there are shortages.”

Poor people had to stop working to stay in queues losing wages. In addition being forced to pay high prices, they also had to lose incomes.

Sri Lanka has a soft-pegged central bank which prints money to keep rates down and frequently breaks the peg.

The resulting currency crisis, throws out incumbent governments and make people migrate to countries with strong currencies and monetary stability that grow steadily and create jobs.

Meanwhile Wickramaratne said it was not correct to blame the economic ills on Covid.

Many countries have had been hit by Covid but did not face the same problems as Sri Lanka, he said.

So far the remedies proposed had not worked and increasing controls had led to other fallout, he said.

Controls on the dollar flows are likely to lead to under-invoicing, he said.

Meanwhile foreign workers are sending money through unofficial channels.

“There is no point in blaming them,” Wickremeratne said. “A young lady will go to the Middle East and work in a relatively unprotected environment with great difficutly and remit 100 or 200 dollars for their parents, children or grand parents.

“She gets 200 or 210 rupees. She goes to the market and finds she can get about 250. She is rational and she will try to get the best rate for the family.”

Sri Lanka cut taxes and printed money from December 2019 in a ‘stimulus’ bid and also printed money. Since December about 1.6 trillion had been printed which had led to a steep increase in reserve money over the past year.

The rest has been exchanged to dollars, creating a foreign reserve loss (balance of payments deficit).

Analysts have said Sri Lanka has to hike rates and float the rupee to stop the currency crisis. In November, reserve losses came mainly from sterilized forex sales and the interbank market is now kept short.

The current monetary instability was triggered with excess liqudity as much as 200 billion rupees at one time under so-called Modern Monetary Theory.

Economists have called for changes to the central bank law to block the agency from printing money and operating monetary regimes involving conflicting money and policies which leads to currency collapses and BOP deficits.

Currency pegs break due to liquidity injections, coming from blatant deficit financing or money printed to keep overnight or longer term rates down (open market operations). (Colombo/Dec26/2021)

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Sri Lanka single borrower limits cut to 25-pct of bank capital, SOEs also included

ECONOMYNEXT – Sri Lanka’s central bank has issued directions limiting loans to a singe borrower or a group of connected customers to 25 percent of Tier I capital, with state enterprises which turned out to be the biggest borrowers, also included.

In a 2007 direction, banks were allowed to give loans up to 30 percent of capital for a single customer and 33 percent for a group but the rules were widely violated in the case of state enterprises, which were used as off-budget vehicles to give energy and other subsidies.

Banks will have to limit exposures to 25 percent starting from January 2026.

According to transitional provisions published in the direction seems to indicate that some banks may have single borrower exposures of 85 percent or more.

They will be required to bring exposures down to 60 percent by 2027 and 25 percent by 2028.

Download the direction from here Sri-Lanka-single-borrow-limit-direction-2024

Energy utilities were made to borrow from state banks to run off-budget subsidies under plan avoid a price formula during the Rajapaksa regimes.

Sri Lanka’s state banks ended up with large debts to Ceylon Petroleum Corporation partly due to flexible inflation targeting (printing money to cut rates as soon as inflation fall triggering forex shortages) even when fuel was market priced in 2018, analysts have shown.

When rates were cut with inflationary open market operations, triggering forex shortages, CPC was barred from buying dollars and forced to get suppliers’ credit denominated in dollars.

The suppliers’ credits were later converted to dollar loans from state bank loans, usually after the currency collapsed from the inflationary rate cuts or inflationary open market operations to sterilize interventions or both, analysts have shown.

The CPC loans have since been taken over by the government.

Banks have also funded roads and other state projects.

“Licensed banks shall gradually reduce the exposures to Public Corporations to meet the maximum limit,” by December 2030 according to the direction.

“Public corporation shall mean any corporation, board or other body which was or is established by or under any written law other than the Companies Act, with funds or capital wholly or partly provided by the Government.”

Many of the newer state enterprises however have been suddenly set up under the Companies Act, unlike earlier where a specific act was passed by the parliament to set up corporation or a statutory authority.

Borrowings of CPC and CEB eventually hit the financial stability of state banks while actual bad loans were under-reported. Now the bad loans are being covered with a state capital injection.

Under an International Monetary Fund and World Bank backed program, the so-called ‘sovereign bank nexus’ is being severed to protect the banking system.

Government securities, central bank sterilization securities, loans guaranteed by multilateral lenders or high rated foreign banks are excluded. (Colombo/Apr23/2024)

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Sri Lanka exceeds tax revenue target by 6% in first quarter

ECONOMYNEXT – Sri Lanka’s revenue collecting bodies have outperformed and exceeded tax revenue target by 6 percent for the first quarter ended on March 31, State Revenue Minister Ranjith Siyambalapitiya said.

“After many years of difficult challenges, it has been possible to exceed the expected state revenue in the first quarter of 2024,” he said in a statement.

The government expects a revenue collection of 4,106 billion rupees in 2024.

“The reason for the economic crisis in the past period was the reduction in the level of government revenue. Considering the achievement of higher than the target in the first quarter of this year and the revenue pattern, the 2024 will become a year in which the revenue targets can be achieved,” he said.

The three tax revenue collecting bodies – Sri Lankan Customs, Excise Department, and Inland Revenue Department have collected 834 billion Sri Lanka rupees in the first quarter.

“It is a 6% higher than the expected revenue target of 787 billion rupees,” Siyambalapitiya said.

He said the Inland Revenue Department exceeded its target by 13 percent to 430 billion rupees compared to the target of 381 billion rupees in the first quarter of 2024.

He also said Customs Department has managed to reach the target of 353 billion rupees and the Excise Department has also achieved 96% of the revenue requests and earned 51 billion rupees in the first quarter.

The island nation has raised Value Added Tax (VAT), imposed new taxes, and increased personal income taxes to boost the revenue under an International Monetary Fund-backed reforms in return of a $3 billion External Fund Facility.

People have started to grumble over the government’s higher taxes without reducing some of the state expenditures. The government has been in the process to privatize some key state-owned enterprises. However, that process faced delays amid gradually rising protests against the move. (Colombo/April 22/2024)

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Air Asia, SriLanka’s FITS, Hayleys bid for SriLankan Airlines

ECONOMYNEXT – Malaysia’s AirAsia group, FITS Aviattion of Sri Lanka and Hayleys are among bidders for state-run SriLankan Airlines, a statement from the State-owned Enterprises Restructuring Unit said.

Dharshaan Elite Investment Holding (Pvt) Ltd, . Sherisha Technologies Private Limited and Treasure Republic Guardians Limited are the other bidders.

The responses will be evaluated to choose qualified investors.

International Finance Corporation, as Transaction Advisors for the divestiture of SriLankan Airlines Limited, will continue to advise the government, the statement said. (Colombo/April22/2024)

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