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Tuesday December 5th, 2023

Sri Lanka exporters concerned over mandatory dollar conversion

ECONOMYNEXT – Some Sri Lanka exporter have expressed concern over a mandatory dollar conversion rule imposed amid unprecedented money printing that under modern monetary theory, that created foreign exchange shortages and reserves losses.

Sri Lanka ordered exporters to bring back export proceeds within 180 days and convert 25 percent of the proceeds into rupees, using provisions of the central bank law.

While some exporters had domestic expenses including salaries and overheads of over 25 percent some in highly efficient sectors with thin margins had problems.

Some labour intensive apparel exporters and those with domestic raw material purchases had domestic costs above 25 percent.

The unprecedented money printing pushed up domestic dollar yields over rupees, and turned forward premiums negative.

By keeping rupee interest rates down, the soft-pegged agency incentivized exporters to borrow rupees and loan dollars at high rates.

In the absence of money printing, exporter rupee borrowings should have crowded out some other credit, but when credit is taken from printed excess liquidity, the peg is pressured.

However among the hardest hit by the conversion are those firms that had dollar loans to settle, not those who had borrowed rupees.

“All companies borrow in US dollars and the remittance that company must be used to pay back those loans and that portion can be larger than 25 percent,” an exporter explained.

“There was no consultation done with the industry officials.”

In the cost structure, some firms had domestic purchases of raw materials above the gross profit level and staff costs and overheads below the GP level.

However what came as depreciation is actually financed by dollar loans in some cases.

Authorities have called exporters for a meeting to discuss their concerns.

The Board of Investment had earlier called for quarterly report on foreign exchange remittance from companies, trying to pressure companies, exporters said.

They had been given the reports but a mis-understanding still seemed to exist, an exporter said.

“Imposing a draconian rule, forcing exporters to convert their proceeds creates an unfriendly situation and this doesn’t motivate them,” another exporter explained.

“At the end of the when you are doing things like this it shows that situation is desperate, we have a serious balance of payment issue.

“This is not a question about if somebody will be impacted or not it is about being draconian and forcing them to do it. This is not the way you encourage your exporters.”


Sri Lanka orders exporters to convert 25-pct of forex earnings

Sri Lanka banks to surrender 12-5-pct of export receipts to central bank

Some exporters that produced intermediate goods also got some revenues domestically and only a part of their produce was exported directly.

Analysts and economists have pointed out that the only lasting solution to ending foreign exchange shortages is to reform the central bank to restrains its open market operations through an inflation target below 2 percent or close it in favour of a currency board or dollarization.

Sri Lanka’s forex shortages and monetary instability started after a soft-pegged central bank was set up in 1950/51 by the US Federal Reserve in the style of several in Latin America and Asia inspired by Argentina central bank creator Raul Prebisch, which led to import substitution, revolution and sovereign default.

Sri Lanka’s central bank printed money in 2021 despite having a soft-peg that had made the agency a top client of the International Monetary Fund in the past.

In the past when money printing led to a steady fall in reserves rates had been raised and the currency floated, despite monetary policy statements in the run-up giving various excuses as to why money should be printed to keep rates down including that ‘inflation was low’.

Rates then go up suddenly and precipitately on account of the imbalance that had been built up through open market operations/call money rate targeting or outright monetization (failed bill auctions).

Analysts have called for central bank reform or the abolition of the agency into a currency board so that it can no longer print money, depreciate the currency, trigger monetary instability and drive the country closer to sovereign default and become a frequent client of the IMF.


How Sri Lanka, Latin America was busted by Fed money doctors creating strongmen, anti-Americanism: Bellwether

Some of the so-called Triffin-Prebisch central banks had gone bankrupt partly due to swap contracts (Philippines-John Exter), or excessive domestic issued that had led to zeroes being struck off notes and new money issued under a new law (Korea-Arthur Bloomfield 1953) while others had gone bankrupt and led to the dollarization (Ecuador – Gomez Morin 1937/Robert Triffin 1948) of those countries.

In 2018, when policy similar to Modern Monetary Theory was used to ‘target an output gap’ analysts had warned that dollarization may come, unless such interventionism was abandoned.

RelatedSri Lanka and Ecuador; a cautionary tale of the Rupee and Sucre: Bellwether


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Sri Lanka rupee closes stronger at 327.40/90 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 327.40/90 to the US dollar on Tuesday, from 328.10/30 the previous day, dealers said.

Bond yields were stable.

A bond maturing on 01.06.2025 closed at 13.60/70 percent from 13.70/14.00 percent.

A bond maturing on 01.08.2026 closed at 13.90/14.00 percent from 13.90/14.10 percent.

A bond maturing on 15.01.2027 closed at 14.00/15 percent from 14.00/14.10 percent.

A bond maturing on 01.07.2028 closed at 14.10/20 percent from 14.20/35 percent.

A bond maturing on 15.05.2030 closed at 14.20/35 percent, from 14.25/45 percent.

A bond maturing on 01.07.2032 closed at 14.10/35 percent, from 14.05/40 percent. (Colombo/Dec5/2023)

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Sri Lanka stocks close down as investor sentiment dips

ECONOMYNEXT – The Colombo Stock Exchange closed down on Tuesday, CSE data showed.

The All Share Price Index was down 0.40 percent, or 43.50 points, at 10,700.09.

The S&P SL20 index was up 0.43 percent, or 13.32 points, at 3,054.41.

Turnover was at 711 million. The capital goods sector contributed 172 million, the food, beverage and tobacco sector contributed 140 million, and banks 113 million of this.

Top positive contributors to the ASPI in the day were John Keells Holdings Plc (up at 193.00), Richard Pieris And Company Plc (up at 19.80), and Nation Lanka Finance Plc, (up at 0.40).

Negative contributors were Commercial Bank of Ceylon Plc (down at 89.70), Sampath Bank Plc (down at 71.00), and Central Finance Company Plc, (down at 106.00). (Colombo/Dec5/2023).

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Sri Lanka plans to reduce number of school grades from 13 to 12

ECONOMYNEXT – The Ministry of Education proposes to reduce the number of school grades from 13 to 12, according to a government information department statement.

“Every child will be given the opportunity to finish school in 17 years through the proposed new education reforms,” education officials were quoted as saying after a discussion on budget allocations.

Under the proposed system, pre-school education will be at the age of 4 years, the primary section between grades 1-5, junior section between grades 6-8, and senior section between grades 9-12.

The General Certificate of Education Ordinary Level Exam (GCE O/L) is proposed to be conducted in grade 10, and the Advanced Level Examination in grade 12.

It has also been decided to reduce the number of mandatory subjects at the GCE O/L Exam from 9 to 7.

Three new subjects, information and communication technology (ICT), technical and professional skills, and religion and values will be made mandatory and included in those 7 subjects. (Colombo/Dec5/2023)

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