An Echelon Media Company
Thursday April 18th, 2024

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)

Leave a Comment

Your email address will not be published. Required fields are marked *

Leave a Comment

Leave a Comment

Cancel reply

Your email address will not be published. Required fields are marked *

Sri Lanka’s discussions with bondholders constructive: State finance minister

ECONOMYNEXT – Sri Lankan authorities continue to engage all debt restructuring negotiations in good faith, within principles of equitable treatment among creditors, and with maximum transparency within the norms of such negotiations, State Minister of Finance, Shehan Semasinghe has said.

“It is standard practice, when a representative group of bondholders is formed, to entertain confidential discussions with such group and its appointed advisors. In the case of Sri Lanka, the Ad Hoc Group of Bondholders represents holders controlling more than 50% of the bonds, which make them a privileged interlocutor for Sri Lanka,” Semasinghe said on X (twitter).

“It is well understood that given the price sensitive nature of the negotiations, and according to market regulations, discussions with the Group and its advisors are to be conducted under non-disclosure agreements. This evidently restricts the ability of the Government to unilaterally report about the substance of the discussions.

“The cleansing statement, which was issued on the 16th of April, at the conclusion of this first round of confidential discussions with members of the Group, aims at informing the Sri Lankan people, market participants and other stakeholders to this debt restructuring exercise, about the progress in negotiations. It provides the highest possible level of transparency within the internationally accepted practices in such circumstances.

“As informed in this statement, confidential discussions held in recent weeks with bondholders’ representatives proved constructive, building on the restructuring proposals presented by both parties. During the talks both sides successfully bridged a number of technical issues enabling important progress to be made. Sri Lanka articulated key remaining concerns that need to be addressed in a satisfactory manner.

“The next steps would entail further consultation with the IMF staff regarding assessments of the compatibility of the latest proposals with program parameters. Following these consultations, we hope to continue discussions with the bondholders with a view to reaching common ground ahead of the IMF board consideration of the second review of Sri Lanka’s EFF program.”

Continue Reading

Sri Lanka rupee weakens at 301.00/302.05 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 301.00/302.05 to the US dollar in the spot forex market on Tuesday, from 299.00/10 on Tuesday, dealers said. Bond yields were broadly steady.

A bond maturing on 15.12.2026 closed stable at 11.30/35 percent.

A bond maturing on 15.09.2027 closed at 11.90/12.05 percent up from 11.95/12.00 percent.

A bond maturing on 15.12.2028 closed at 12.10/20 percent down from 12.10/15 percent.

A bond maturing on 15.07.2029 closed at 12.25/40 percent.

A bond maturing on 15.03.2031 closed at 12.30/50 percent. (Colombo/Apr17/2024)

Continue Reading

Sri Lanka Treasury Bill yields down across maturities

ECONOMYNEXT – Sri Lanka’s Treasuries yields were down across maturities at Wednesday’s auction with the 3-month yield moving down 7 basis points to 10.03 percent, data from the state debt office showed.

The debt office sold all 30 billion rupees of 3-month bills offered.

The 6-month yield fell 5 basis points to 10.22 percent, with 25 billion rupees of bills offered and 29.98 billion rupees sold.

The 12-month yield dropped 4 basis points to 10.23 percent with 18.01 billion rupees of bills sold after offering 23 billion rupees. (Colombo/Apr17/2024)

Continue Reading