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Friday June 2nd, 2023

Sri Lanka foreign reserves drop to US$2.83bn after bond repayment, liquidity injections

ECONOMYNEXT – Sri Lanka’s gross official reserves dropped to 2,833.5 million US dollars in July 2021, from 4,060 million in June after a billion US dollar bond and some other accounts were repaid in July, official data show.

Sri Lanka has been injecting unprecedented volumes of liquidity into banks as excess rupee reserves triggering a balance of payments deficit under so-called ‘Modern Monetary Theory’ (an extreme form of ‘stimulus’ after cutting taxes in a fiscal ‘stimulus’, triggering a run on reserves and credit downgrades.

The reserves are the lowest since July 2009, when the country had just finished a war and was rebuilding reserves. At the time monetary policy was tight and prevented a monetary meltdown amid the collapse of the Federal Reserve housing bubble.

In 2021 liquidity has also boosted imports, despite controls on items like vehicles, which bring the highest level of taxes, dollar for dollar, hurting tax revenues, triggering more money printing and reserve losses.

Sri Lanka is heavily steeped in Mercantilism and the link between credit, liquidity and monetary instability is not understood.

It is also the practice of Mercantilists to measure forex reserves in terms of imports, through trade bills need not be paid with reserves as long as liquidity is not injected in to commercial banks.

Sri Lanka’s gross forex reserves were 2.6 months of imports measured as the average of past 12 months in June 2020.

Though July import data is not released, but if imports are below the June level of 1.65 billion dollars and reach at least the February level of 1.52 billion dollars reserves are now around 1.8 months of past imports.


Sri Lanka June 2021 imports, trade deficit hit 3-year high as injections defeat controls

With the Peoples Bank of China swap, which can be drawn down and used to pay for Chinese imports, forex resources are about 2.8 months of imports.

State Minister for Money and Capital Market Nivard Cabraal has said that the reserve fall in July would be temporary.


Sri Lanka reserve fall after bond payment will be temporary: Minister Cabraal

The International Monetary Fund is expected to disburse around 800 million dollars in special drawing rights in August 2020, and the central bank is also negotiating a 250 million US dollar swap with Bangladesh Bank which has been approved in principle subject to a sovereign guarantee.

Central Bank Governor W D Lakshman had said that a 400 million US dollar swap is also expected from India.

However swaps indebt the central bank and analysts had warned that if liquidity is continued to be injected the monetary authority will end with negative foreign assets.


Sri Lanka raises de facto one year policy rate by 05bp

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Last week some corrective action was taken in the form of a 05 basis point hike in the 12-month ceiling rate for Treasury bills, through which debt is monetized and liquidity is injected to trigger a run on forex reserves. (Colombo/Aug14/2021)

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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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