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Friday June 14th, 2024

Sri Lanka gives tax-payer guarantee to central bank’s US$2.45bn India debt

ECONOMYNEXT – Sri Lanka tax payers have underwritten 2,451.43 million dollars of borrowings taken by the central bank from India through a Treasury guarantee, official data shows, sharply increasing the obligations of the state.

The guarantee was originally issued on 17 October 2023 to the Reserve Bank of India for 2,601 million dollars and will be effective till 17 October 2024.

Remaining borrowings under Sri Lanka’s Treasury guarantees mostly to state enterprises climbed to 1,931 billion rupees by end December 2023, from 1,050 billion in September at the conversion rate used in a debt update.

Issued Treasury guarantees were 2,387 billion rupees by December from 1,527 billion in September.

Sri Lanka’s IMF program initially had a Treasury guarantee ceiling of 1,700 as an indicative target, which was raised to 2,100 in the last review.

Borrowed ‘Reserves’

Sri Lanka’s central bank borrowed dollars from the Reserve Bank of India through a swap and also by running arrears on dollars owed through the Asian Clearing Union for private imports.

A central bank with a policy rate that sells dollars to maintain the exchange rate, immediately prints money to offset the sale (sterilizes the intervention) to mis-target rates, worsening a currency crisis and allowing banks to give credit without deposits.

The exercise is carried out by macro-economists running soft-pegs or flexible exchange rates in the belief that monetary reserves can be used for private sector imports.

The belief seems to have emerged among Western inflationist academics after the 1920s in line with the invention of open market operations by the Fed and by Keynes’ belief in the spurious ‘transfer problem’, analysts say.

Neither clean floats nor hard pegs (currency boards) use reserves for imports or for any other purpose.

Macro-economic Policy Inflationism

Central bank swaps were invented by the ‘independent’ US Federal Reserve in the 1960s as money was printed to operate ‘macro-economic policy’ (potential output targeting in another name), because the agency did not want to give gold reserves to foreign central banks which were not printing money and wanted to redeem overproduced Fed notes.

There was a surge of forex borrowings by the Fed through swaps when money was printed ahead of the collapse of the Bretton Woods, when it eventually floated (suspended convertibility).

Swaps allowed inflationist central bankers not only run down reserves backing the note issue to target or mis-target the policy rate, but get into debt to continue to mis-target the rate and print more domestic money into banks to sterilize the reserve sales, critics say.

Sri Lanka’s central bank still has negative foreign assets as a result of borrowings from the IMF, Swaps, and ACU arrears being effectively used to mis-target rates via sterilized dollar sales.

However, as a result of re-financing credit, the central bank’s foreign debt from swaps or ACU arrears is effectively backed by (already issued) Treasury securities bought outright or taken as collateral for any liquidity injected into banks.

When the borrowed dollars are run down, and more money printed to mis-target the policy rate, the central bank ends up with an open position on dollars, which triggers a loss when the currency collapses due to earlier mis-targeted rates and sterilized interventions.

Unaccountable

The ‘independent’ Fed has also come under fire for mis-using swaps to bailout Mexico, outside the control of the Congress in the mid 1990s when the Bank of Mexico mis-targeted rates, undermined its peg and drove the country towards default, despite the politicians operating good fiscal metrics.

Critics have slammed Fed’s swaps with other counterparts without congressional approval for being extra legal and also democratically unsanctioned foreign policy as well as for being yet another action for which central banks are not accountable.

Critics have questioned the concept of giving independence to an agency that engages in macro-economic policy and prints money to trigger high inflation in the belief that it can spur growth, but ultimately triggers monetary instability or asset price bubbles.

From mid-2022, after India cut the ACU tap, Sri Lanka’s central bank was able to end inflationary policy, and regain monetary stability.

Since then, rates have come down amid stability, a slowdown in domestic credit and confidence from deflationary policy despite reserves being collected.

Domestic credit also fell due to taxes reducing non-interest borrowings, SOE price corrections, and a slowdown in private credit. (Colombo/Mar19/2024)

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Sri Lanka opposition leader proposes Grama Rajya system in addition to 13A

Opposition leader Sajith Premadasa (r) – File photo

ECONOMYNEXT — Sri Lanka opposition leader Sajith Premadasa has proposed devolving power to the village level through a Grama Rajya system in addition to implementing the 13th amendment to the constitution.

Speaking at an event in Jaffna on on Wednesday June 12, Premadasa said all provinces will benefit from the 13th amendment.

“Whatever one’s ethnicity, religion, status or region, this country has citizens of equal level. They’re all Sri Lankan citizens.

“There is no division or grouping.  As we give you and every other province what you should be given through the 13th amendment, we must implement a Grama Rajya system,” Premadasa said, addressing a crowd of school children and other attendees.

Premadasa’s assurance of implementing the 13th amendment has already drawn some protest in the south.

A collective of civil society organisations held a protest outside the office of the leader of the opposition in Colombo on Thursday June 12.

Calling itself the ‘Coalition Against Partition of Sri Lanka’, the group carrying national flags marched up to the opposition leader’s office Thursday June 13 morning and demonstrated against the full implementation of the 13th amendment.

“We arrived here today to hand over a missive against devolving police powers, land powers and judicial powers. If Mr Premadasa is inside, come outside,” Jamuni Kamantha Thushara, Chairman of the Citizen’s Movement Against Fraud, Corruption, and Waste, was seen declaring at the site.

“First of all, tell us what we stand to achieve by dividing and giving away the north and east,” said another protestor, warning against bringing the 13th amendment “anywhere here (paththa palaathe)”.

A police officer at the scene the protestors that a secretary to the opposition leader was ready to accept their letter.

“In Kilonochchi, he says the 13th amendment will be implemented. The votes in the north are going to be decisive this election. To win those votes, President Ranil Wickremesinghe, Sajith and Anura Kumara Dissanayake all say they will implement the 13th. We will not allow this country to be divided into nine pieces,” said Thushara.

Ven Balangoda Kassapa Thero, who was arrested on June 06 during a protest against the new Electricity Act, was also seen at Thursday’s protest. The Buddhist monk requested for a debate with Premadasa on the matter of the 13th amendment. (Colombo/Jun12/2024)

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Sri Lanka rupee closes flat at 303.85/95 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed broadly flat at 303.85/95 to the US dollar on Thursday, from 303.80/304.00 to the dollar the previous day, dealers said. Bond yields were down.

A bond maturing on 15.12.2026 closed at 10.00/30 percent, down from 10.20/40 percent.

A bond maturing on 15.10.2027 closed at 10.60/75 percent.

A bond maturing on 01.07.2028 closed at 11.00/15 percent, down from 11.15/40 percent.

A bond maturing on 15.09.2029 closed at 11.80/85 percent.

A bond maturing on 15.05.2030 closed at 11.85/12.05 percent, down from 11.90/12.05 percent.

A bond maturing on 01.10.2032 closed stable at 11.95/12.15 percent. (Colombo/Jun13/2024)

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Sri Lanka sells Rs295bn in 2027 to 2031 bonds

ECONOMYNEXT – Sri Lanka has sold 295 billion rupees in 2027, 2029 and 2031 bonds, data from the state debt office showed.

The debt office sold an offered 60 billion rupees of 15 October 2027 at an average yield of 10.30 percent.

All offered 125 billion rupees of 15 September 2029 bonds were sold at 11.00 percent.

All 110 billion rupees offered of 01 December 2031 bonds were sold at 12.00 percent. (Colombo/May13/2024)

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