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Thursday March 23rd, 2023

Sri Lanka exporters foxed as severe monetary instability hits Pakistan

NEGATIVE RESERVES: SBP’s net foreign assets are now negative like in Sri Lanka due to spending borrowed reserves to redeem printed money.

ECONOMYNEXT – Sri Lanka exports to Pakistan are forced to pull back as monetary instability in Pakistan worsened making it difficult to make payments or open letters of credit, shippers in Colombo said.

The State Bank of Pakistan has triggered forex shortages in the style of Sri Lanka in the course of printing money to chase an inflation target and two Zimbabwe-style Coronavirus central bank re-finance funds.

Some Sri Lanka exporters have long-standing relationships with buyers in Pakistan and try to help as much as they can.

“I sent a shipment to Pakistan on a letter of credit but I was warned that the payment may not come on the due date,” a rubber exporter based in Colombo said.

“I sent the containers anyway.”

Pakistan’s media reports said 9,000 containers were stuck in port pending foreign exchange. Reports said banks had stopped opening new letters of credit above 1,500 US dollars in a repeat of what happened in Sri Lanka.

Related Sri Lanka rupee, forex markets in pickle as LC rationing froths

A Sri Lanka exporter said his buyer had asked for 90 day usance (open account with 3 months credit) due to forex problems.

“I simply cannot afford to give such a facility,” he said. “If I could I would have helped. We are also in difficulties now.”

Sri Lanka experienced similar troubles in 2022 until newly appointed central bank Governor Nandalal Weerasinghe hiked rates and phased out money printing.

There are also Sri Lanka style import controls. Wide parallel exchange rates are seen with remittance through official channels falling.

The diverted unofficial remittances however will continue to finance essential imports (as deemed by free citizens) for which letters of credits are not given through official channels.

Related Sri Lanka remittances up after tight money kills parallel FX gap, Pakistan down

In Bangladesh which is also hit by monetary instability as credit picked up last year and fixed policy rates were enforced with printed money there is an official parallel exchange rate for remittances (a kind of a crude float that avoids sterilization).

Legislators in both countries have given economic bureaucrats and interventionists, powers to control economic freedoms of the people instead bringing laws to curb the domestic operations of the central banks and blocking officials from printing money to enforce non – market interest rates.

Pakistan ran into a foreign exchange crisis despite an International Monetary Fund agreement as private credit recovered strongly after a coronavirus crisis.

The State bank of Pakistan has started two re-finance funds (printed money) in the period despite operating a reserve collecting peg. Sri Lanka deliberately crippled Treasuries auctions for stimulus, after cutting taxes despite operating a reserve collecting central bank.

Pakistan is also operating an impossible trinity monetary regime trying to generate inflation of 5-7 percent a year despite operating a reserve collecting peg. In January inflation hit 27.5 percent as the currency gave way under liquidity injections.

Sri Lanka hand printed money against the balance of payments to generate inflation of 4-6 percent (roughly 5 percent) despite operating a reserve collecting peg and ran into currency crises even when taxes were hiked and fuel was market priced.

Pakistan’s foreign exchange reserve dwindled rapidly over 2022 as credit picked up leading a progressive depreciation and losses in energy utilities as currency depreciation pushed up costs.

An IMF team is in Pakistan to complete a review and strike a new staff level agreement.

The State Bank of Pakistan floated the rupee last week to end sterilized interventions and stop the drain of foreign reserves after they fell to low levels.

The State Bank of Pakistan’s claims against depository corporations rose 107 percent to 6.8 trillion rupees in the year to December 2022.

SBP’s foreign reserves fell to 5.5 billion US dollars at the end of December 2022 from 18.5 billion rupees in the same period.

By January 27 reserves were down to 3.08 billion dollars and there are fears of sovereign default.

There has been a spate of sovereign defaults of countries with reserve collecting central banks (externally anchored credit systems) which are printing money to target inflation (a domestic anchor) which have got market access within the last decade or so.

The Pakistan rupee fell to 277 to the US dollar in February 07 from 229 on the last week of January in a bid to end dual anchor conflicts by suspending convertibility, which is generally called a float.

Sri Lanka’s rupee collapsed from 200 to 370 to the US dollar in March in a botched attempt to float with surrender requirement (a ‘strong side’ convertibility undertaking that forces the currency down) in place.

Pakistan and Sri Lanka rupees are both derived from the Indian rupee at 4.76 to the US dollar which started to collapse in the second half of the 20th century amid activist monetary policy.

Sri Lanka has faced extreme monetary instability under so-called flexible inflation targeting with output gap targeting (stimulus) running into serial currency crises and external default as interventions are sterilized to maintain a fixed policy rate.

There have been calls in Sri Lanka to end the independence given to officials to suppress interest rates and trigger external instability through high levels of inflation targeting or flexible policy and force the monetary authority to strict rules bound by law.(Colombo/Feb08/2023)

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Sri Lanka establishes committee to investigate aircraft incidents

An aircraft lands at the Jaffna International Airport, which was opened in October 2019 and promises to push the tourism frontiers in Jaffna.

ECONOMYNEXT: Sri Lanka’s has established an expert committee under the state-run Civil Aviation Authority to investigate aircraft accidents and to implement precautionary methods in the Sri Lankan airspace, an Official said.

“Even if it is only one flight, there is a chance an accident may occur,” Civil Aviation Authority of Sri Lanka, Director General, P. A. Jayakantha said.

“This particular committee is there to investigate aircraft accidents and act as a mechanism to take over if something goes wrong”.

Sri Lanka has encountered around 2,700 minor aircraft accidents and incidents mostly on the ground in the 19 years through 2021, the CAA annual reports showed.

The new committee will analyze the past accidents and take precautionary measures while also conducting investigations and provide independent reports in the future, Jayakantha said.

The team is provided with required training and qualifications by the CAA along with an International organization, free of charge.

“Internationally also it is a requirement to have a team to investigate the aircraft accidents,” Jayakantha added.

“For a long time we have not fulfilled this requirement and that is why we established this team with the cabinet approval. Moreover, recently, Sri Lanka’s two aircrafts, one training aircraft and a commercial aircraft met an accident”

The committee will be on active duty, until the Accident Investigation Act is passed and a proper Aircraft Accident and Incident Investigation Bureau is established. (Colombo/ Mar23/2023)

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Sri Lanka bond yields steady, Rupee 319/325 at close

ECONOMYNEXT – Sri Lanka’s treasury bond yields closed steady on Thursday while rupee closed weaker, dealers said.

A 01.07.2025 bond closed at 30.60/31.00 percent on Tuesday, down from 30.25/75 percent on Wednesday.

A 15.09.2027 bond closed at 27.80/28.10 percent, steady from 27.90/28.00 percent from Wednesday.

Sri Lanka rupee closed at 319/325 against the US dollar depreciating from 318/320 from a day earlier. (Colombo/ March23/2023)

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Sri Lanka shares dive to two-week low on local debt restructuring fears

ECONOMYNEXT – The Sri Lanka market fell for a fourth session to a two-week low on Thursday, led by financials, as worries over domestic debt restructuring continued after the IMF loan was approved earlier this week resulting in investors adopting a wait-and-see approach until further clarity was provided, analysts said.

The main All Share Price Index (ASPI) closed down 1.38 percent or 131.07 points to 9,395.98, lowest since March 02.

Analysts said, majority of the banks have been on slower investment trends on fears of domestic debt restructuring after the IMF approval and waiting for more clarity on the local debt restructuring.

“The market is on muted sentiments despite the IMF loan being approved and is going through a period of consolidation,” Ranjan Ranatunga of First Capital Holdings said.

The market saw a net foreign outflow of 298 million rupees and the total offshore inflows recorded so far in 2023 to 3.3 billion rupees.

The most liquid index, S&P SL20, closed 1.64 percent, or 45.33 points, down at 2,722.94.

The market saw a turnover of 3.4 billion rupees on Thursday, above this year’s daily average of 1.8 billion rupees.

This is the highest turnover generated since March 08, which is when the market was driven off of positive sentiments from International Monetary Fund deal hope after Chinese assurances.

Top contributors to revenue was Agalawatte Plantations, on off board transactions of a stake change, contributing revenue of 1.6 billion rupees, Ranatunga said.

Top contributors to revenue industry wise was Food and Beverage and Telecommunications.

Sri Lanka Telecom has been seeing positive uptrends as the Secretary to the Treasury has informed the Board of Directors of Sri Lanka Telecom PLC (SLT) and Lanka Hospitals PLC that the Cabinet of Ministers has granted approval in principle for the divestment of the stakes held by the Treasury Secretary in the two companies.

Top losers were Sampath Bank, Hatton National Bank and Commercial Bank.

Sri Lanka is looking at options to re-structure domestic debt, or local law local currency debt (LLLC), without harming the banking sector and announce them the International Monetary Fund said in a report.

Banks have been witnessing profit taking and selling pressures after continuous uptrends prior to the IMF loan had been approved.

Analysts said, selling pressures is expected to ease as the IMF hopes to reduce inflationary pressures which will in turn lead to reductions in interest rates. (Colombo/Mar23/2023)

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