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Friday June 2nd, 2023

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 to ramp up weekend fuel deliveries after petrol price cut

More deaths reported at Sri Lanka fuel queues

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Petroleum Corporation will be operating on the weekend to complete all fuel deliveries to end vehicle queues forming outside fuel stations after the price revision earlier in the week, Energy Minister Kanchana Wijesekera said.

“Instructions have been given to CPC and Ceylon Petroleum Storage Terminals to continue fuel deliveries on Saturday and Sunday this week to supply sufficient stocks to all fuel stations,” Minister Wijesekera said in a TWITTER.COM MESSAGE

“To reduce expenses on overtime, CPC and CPSTL have not been operating on Sundays and public holidays in the last 4 months,” Wijesekera said.

“Non-placement of orders by fuel stations from last Saturday, anticipating a price reduction, not maintaining minimum stocks, immediate increase in demand by consumers after the price revision, and quota increase have created shortages in the fuel stations.”

The Minister in April 2023 said all fuel stations would be required to maintain a minimum of 50 percent of stock tank capacity.

“I have asked CPC to review and suspend the license of fuel stations that had not maintained minimum stocks.” (Colombo/ June 02/ 2023)

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Sri Lanka bonds yield up at close, rupee at 291.75/292.50 against the US dollar

ECONOMYNEXT – Sri Lanka’s bonds closed steady on Friday, dealers said, following the central bank’s decision to cut its main policy rate by 250 basis points.

The Spot US dollar closed at 291.75/292.50 rupees, dealers said.

The rupee opened at 290.25/75 to the US dollar Thursday and closed at 292.50/295.50 to the US dollar.

A bond maturing on 15.09.2027 closed at 24.70/90 percent up from 24.50/90 percent a day earlier, dealers said.

A bond maturing on 15.05.2026 closed at 25.75/26.25 percent up from 25.00/26.00 percent a day earlier.

A bond maturing on 01.05.2025 closed at 27.00/30 percent, up from 26.30/27.00 per cent at last close.

A bond maturing on 01.07.2032 closed at 20.25/21.00 percent, up from 20.00/40 per cent at last close.
(Colombo/ June 02/2023)

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Sri Lanka’s shares edge up on positive macroeconomic sentiments

ECONOMYNEXT – Sri Lanka’s shares closed higher in trade on Friday, over positive macro-sentiments encouraging investors to redeem their interest towards buying, an analyst said.

The main All Share Price Index was up 0.72 percent or 62.19 points to 8,753.80,  while the most liquid index S&P SL20 was up 0.68 percent or 16.87 points to 2,487.29.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

Prior to the Monetary Policy investors were quite optimistic that inflation is to lower and interest rates will decrease and since exp, an analyst said.

Sri Lanka Central Bank is waiting for the government proposal on the domestic debt restructuring (DDR), the central bank governor Nandalal Weerasinghe said amid uncertainty over DDR and speculations over instability in the banking sector.

“On debt restructuring, the borrower is the ministry of finance’s treasury. Certainly we will announce what the strategy will be. We are waiting for a government proposal,” Weerasinghe said.

Sri Lanka’s investors are waiting on assurances to be made on debt restructuring and optimization, Central Bank Governor Nandalal Weerasinghe said, “It is up to the government to clear the uncertainty, because from our side we have done that part.”

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

The speculation of DDR has hit the market and the risk premium has kept the market lending rates well above the central bank’s policy rates. The government has yet to present its plans on DDR.

Weerasinghe said the central bank has done its best to reduce the risk premium through bringing down the market lending rates while keeping the policy rates unchanged.

Sri Lanka’s President Ranil Wickremesinghe has discussed progress of International Monetary Fund program and debt restructuring during a visit of Deputy Managing Director Kenji Okamura, statement said.

“The discussion primarily focused on the progress of the IMF program between Sri Lanka and the IMF,” a statement from President’s office said.

“Attention was also paid to the on-going debt restructuring negotiations.”

However Officials from IMF have said Sri Lanka has to focus on expanding taxes.

“We discussed the importance of fiscal measures, in particular revenue measures, for a return to macroeconomic stability,” Deputy Managing Director Kenji Okamura said in a statement.

The finance ministry this week issued rules requiring everyone above 18 year of age to register to pay income tax.

“I was encouraged by the authorities’ commitment to negotiate a debt strategy in a timely and transparent manner.

The market generated a revenue of 738 million rupees, while the daily average was 1 billion rupees.

Top gainers in trade were Vallibel One, LOLC Finance and Browns Investment. (Colombo/June02/2023)

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