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Friday December 9th, 2022

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 bond yields end higher, kerb dollar Rs370/371

ECONOMYNEXT – Sri Lanka bonds yields ended up and the T-bills eased on active trade on Friday, dealers said.

The US dollar was 370/371 rupees in the kerb.

“The bond rates went up, however more interest was seen in the short term bills by the investors” dealers said.

A bond maturing on 01.05.2024 closed at 31.90/32.20 percent on Friday, up from 31.25/70 percent at Thursday’s close.

A bond maturing on 15.05.2026 closed at 30.30/31.30 percent steady from 30.30/31.00 percent.

The three-month T-bills closed at 30.75/31.30 percent, down from 32.00/32.25 percent.

The Central Bank’s guidance peg for interbank transactions was at 363.18 rupees against the US dollar unchanged.

Commercial banks offered dollars for telegraphic transfers between 371.78 and 372.00 for small transactions, data showed.

Buying rates are between 361.78 – 362.00 rupees. (Colombo/Dec 09/2022)

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Foreign minister, US ambassador discuss future assistance to crisis-hit Sri Lanka

ECONOMYNEXT — In a meeting in Colombo, Sri Lanka Foreign Minister Ali Sabry and US Ambassador to Sri Lanka Julie Chung discussed ways in which the United States can continue to support Sri Lanka going forward, the Ambassador said.

Chung tweeted Friday December 09 afternoon that the two officials had reflected on the “twists and turns” of 2022, at the meeting.

Minister Sabry was recently in Washington D.C. where he US Secretary of State Antony Blinken.

A foreign ministry statement said the two officials held productive discussions at the Department of State on December 02 on further elevating bilateral relations in diverse spheres, including the 75th anniversary of diplomatic relations which will be marked in 2023.

Incidentally, Sri Lanka also celebrates the 75th anniversary of its independence from the British in 2023, and President Ranil Wickremesinghe has given himself and all parties that represent parliament a deadline to find a permanent solution to Sri Lanka’s decades-long ethnic issue.

The US has been vocal about Sri Lanka addressing concerns about its human rights record since the end of the civil war in 2009 and was a sponsor of the latest resolution on Sri Lanka passed by the United Nations Human Rights Council. Unlike previous resolutions, this year’s iteration makes specific reference to the country’s prevailing currency crisis and calls for investigations on corruption allegations.

In the lead up to the UNHRC sessions in Geneva, Minister Sabry Sri Lanka’s government under then new president Wickremesinghe does not want any confrontation with any international partner but will oppose any anti-constitutional move forced upon the country.

On the eve of the sessions on October 06, Sabry said countries such as the United States and the United Kingdom, who led the UNHRC core group on Sri Lanka, are greatly influenced by domestic-level lobbying by pressure groups from the Sri Lankan Tamil diaspora.

These pronouncements notwithstanding, the Wickremesnghe government has been making inroads to the West as well as India and Japan, eager to obtain their assistance in seeing Sri Lanka through the ongoing crisis.

The island nation has entered into a preliminary agreement with the International Monetary Fund (IMF) for an extended fund facility of 2.9 billion dollars to be disbursed over a period of four years, subject to a successful debt restructure programme and structural reforms.

Much depends on whether or not China agrees to restructure Sri Lanka’s 7.4 billion dollar outstanding debt to the emerging superpower. Beijing’s apparent hesitance to go for a swift restructure prompted Tamil National Alliance MP Shanakiyan Rasamanickam to warn of possible “go home, China” protests in Colombo, similar to the wave of protests that forced the exit of former pro-China President Gotabaya Rajapaksa.

The TNA will be a key player in upcoming talks with the Wickremesinghe government on a solution to Sri Lanka’s ethnic issue. (Colombo/Dec09/2022)

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India smogs out Sri Lanka’s China tower observers

 

ECONOMYNEXT – Sri Lanka’s Chinese-built Lotus Tower has halved visitors to its observation deck an official said as dirty air flowing from India triggered air quality warnings and schools in the capital closed.

“Masks are mandatory at the observation deck and roughly around 50 to 60 can go up to the observation deck at a time, time limits have not been altered and still persists at 20 minutes for observation,” the official told EconomyNext.

Prior to the smog, 120 observers were permitted at once to the deck.

However, even after limitations the Lotus Tower has continued to draw visitors, and revenues are coming in, the official said.

The tower built with a Chinese loan by the cash rich Telecom Regulatory Commission has been described by critics as a white elephant that eats the money earned from telecom operators mainly as spectrum fees.

Sri Lanka’s National Building Research Organization (NBRO) said India air heavily polluted with particulate matter was flowing across the island into a depression in the South West Bengal Bay. (Colombo/Dec09/2022)

 

 

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