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Thursday June 20th, 2024

Sri Lanka fiscal stimulus to close output gap

ECONOMYNEXT – Sri Lanka’s sweeping tax cuts are a fiscal stimulus that will close a “persistent output gap”, seen in recent years and transfer cash to private hands from unproductive state spending, the government has said.

“The switching of resources from unproductive public expenditure to the private firms and individuals will be growth friendly in a context where there has been a persistent output gap,” the Finance Ministry said.

“Higher growth will have a positive impact on the overall debt dynamics of the country as well.”

That a lower tax take will boost economic activity with private individuals making the best decisions is well accepted classical economic principle, rather than bureaucrats who play with other people’s money to boost salaries, subsidies or expand the public sector.

Sri Lanka was given clues to calculate a so-called potential output by the International Monetary Fund, which now seems to serving one de facto target or goal in a ‘flexible’ inflation targeting framework and the fiscal stimulus.

Under flexible inflation targeting a mis-mash of targets are chased by the central bank, critics have said.

Under the current IMF program the exchange rate is targeted to prevent appreciation and collect forex reserves and the rupee is encouraged to fall under a downward only DMC (disorderly market conditions) rule forming de facto – if highly variable – external anchor.

Outside the program the Real Effective Exchange Rate Index was also targeted to depreciate the rupee even domestic credit was weak particularly in 2017.

Sri Lanka was first saying that potential output of the country was 5.75 percent, using econometrics.

In February 2019, Central Bank Governor Indrajit Coomaraswamy said the potential out was lowered to 5.0 percent.

In 2018 April 2018 Sri Lanka cut rates and injected tens of billions of rupees of excess liquidity to money markets when 12-month inflation was 4.2 percent and so-called core-inflation was 6.1 percent in March.

It is not clear whether money was injected to target an output gap rather than inflation. In July/August money was also printed through the acquisition of dollars and rupee/dollar swaps.

In November 2018, when the external anchor came under pressure, from the monetary stimulus worsened by a confidence shock from a political crisis, rates were hiked when inflation had fallen to 3.3 percent and core inflation had fallen to 4.6 percent, apparently under ‘flexible’ inflation targeting.

Some classical economists have pointed out that the ‘Great Inflation’ of the 1970s and the collapse of the US dollar in 1971-73 was a result trying to target an output gap, ignoring that monetary nature of inflation (monetary policy neglect hypothesis) and focusing on incomes policy (wage spiral inflation) due to a belief in cost-push inflation.

Others such as Athanasios Orphanides, Simon van Norden have shown that it is difficult to estimate outut gaps in real time (also known as the output gap mismeasurement hypothesis), showing the deadly nature of econometrics. (Colombo/Dec22/2019)

 

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Sri Lanka shares debt management experience at global forum

ECONOMYNEXT – Sri Lanka has shared its experiences at a forum on debt management to “provide lessons for others”, State Minister of Finance Shehan Semasinghe has said.

Semasinghe spoke on “The Role of Debt Management in Navigating Crises” at the 14th Debt Management Facility (DMF) Stakeholders’ Forum, in Livingstone, Zambia.

“I shared the experiences of Sri Lanka which can provide valuable lessons for others and explored the critical elements of capacity building and sound institutional practices in managing debt, particularly in the context of economic challenges,” Semasinghe said on X (twitter).

“Sri Lanka’s experience demonstrates that effective debt management is not just about managing numbers but also about building robust institutions and capacities.”

The journey underscores the importance of transparent, accountable governance and the need for international support and cooperation in times of crisis, he said.

“Sri Lanka prioritized addressing gaps in public debt management by drafting a consolidated Public Debt Management Act, ensuring clarity and legal robustness and establishing a centralized Public Debt Management Office with operational autonomy.

“The role of debt management in navigating crises is multifaceted and critical. Further, by investing in capacity building, adhering to sound institutional practices, and strategically managing debt restructuring and liability operations, countries can better withstand economic shocks and pave the way for sustainable recovery.”

Developing countries face severe debt distress as they are more vulnerable to external shocks, Semasinghe said, and “managing global debt requires coordinated international efforts on debt restructuring where necessary, timely fiscal policy adaptation and help sustainable economic growth.”

The state minister also pointed out the financial impact of climate change was an emerging challenge, as countries need investment to mitigate and adapt to climate impacts, “especially through non-debt creating inflows, which would require private capital mobilization.” (Colombo/Jun20/2024)

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Sri Lanka rupee closes stronger at 305.10/30 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed stronger ahead of the long weekend at 305.10/30 to the US dollar on Thursday, up from 305.40/55 to the US dollar Wednesday, dealers said, while some bond yields edged up.

A bond maturing on 15.12.2026 closed at 10.45/80 percent, up from 10.35/75 percent.

A bond maturing on 01.07.2028 closed at 11.20/45 percent.

A bond maturing on 15.09.2029 closed at 12.00/15 percent, up from 11.95/12.35 percent.

A bond maturing on 01.12.2031 closed at 12.05/25 percent.
(Colombo/Jun20/2024)

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Sri Lanka stocks close up, JKH trade pushes turnover

ECONOMYNEXT – The Colombo Stock Exchange closed up on Thursday, data on its site showed.

The broader All Share Index closed up 0.19 percent, or 23.11 points, at 12,249; while the more liquid S&P SL20 Index closed up 0.15 percent, or 5.33 points, at 3,610.

Turnover was 2 billion. Nearly half of this (Rs980mn) came from a crossing on John Keells Holdings Plc. The share closed down at 202.00.

“There were several crossings today which pushed turnover,” market participants said.

“Institutions and high net-worth activity drove the market, while the retail investors we feel are still about uncertain and adopting a wait-and-see approach.”

Melstacorp Plc was among the companies that saw active volumes (Rs194mn) in the day. The share closed up at 87.10.

Top contributors to the index included TeeJay Lanka Plc (up at 41.70), Sampath Bank Plc (up at 79.50), Hatton National Bank Plc (down at 201.00). Hayleys Plc (up at 105.00) and its subsidiary Hayleys Fabric Plc (up at 46.60) were also positive contributors. (Colombo/Jun20/2024)

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