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Friday July 12th, 2024

Sri Lanka gross foreign reserves rise to 3.5 year high in April

ECONOMYNEXT – Sri Lanka’s gross official reserves rose by 478 million US dollars in April 2024 to 5,438 million US dollars, official data shows, as the central bank continued broadly deflationary policy.

Deflationary policy (net sell downs of central bank-held domestic securities) at a market-appropriate interest rate allows a balance of payments surplus to develop.

The rupee sharply appreciated in March and early April, leading to importer bill delays and heavy reserve collections.

Some pressure came in the latter half of the month largely due to oversold position and the central bank used moral suasion and some dollar sales to keep the exchange rate stable.

Sri Lanka’s private credit is still weak, allowing reserves to be collected and the external sector to be kept stable easily.

The gross reserves also includes fiscal balances from loans. The central bank also has 3.2 billion US dollars in swaps outstanding, which exposes the monetary authority to exchange rate risk and large losses when rates are cut with inflationary open market operations (flexible inflation targeting).

However the central bank is steadily settling other loans, including to the IMF and India, which is improving the net foreign assets position of the monetary authority and net international reserve position overall.

Though China has given a swap, the People’s Bank of China put a rule saying it cannot be used if reserves fell below three months of imports, protecting Sri Lanka from further losses and the effective refinancing of private sector imports at the expense of negative reserves of the monetary authority and exposing the agency to forex losses.

Sri Lanka’s net international reserves improved radically to only a negative 404 million US dollars by end December 2023 from minus 3,229 million dollars in 2022, sharply over-performing the IMF target of a negative 1,592 million dollars, by not cutting rates hastily and boosting confidence.

Despite reserves collections, despite higher real rates, the economy has started to recover strongly amid currency and monetary stability. Steep short term appreciations are also not a sign of stability, analysts say.

Since the end of the war Sri Lanka’s monetary system had tended to unravel as soon as private credit recovered, as rates were cut with inflationary policy (reverse repo injections/standing facilities), leading to missed IMF reserve targets and currency depreciation.

Amid flexible inflation targeting (targeting high levels of inflation without a clean floating rate amid reserve targets), potential output targeting (printing money for growth), Sri Lanka ran into currency crises and output collapses.

Budgets and debt deteriorated after each stabilization episode after flexible inflation targeting/potential output targeting.

Eventually growth fell to levels seen in war time, amid back-to-back IMF programs (based on the same monetary doctrine), and the country defaulted.

At the moment the central bank is providing monetary stability, and interest rates are slightly higher than required to keep the external sector in balance (leading to reserve accumulation) and growth is recovering due to monetary stability provided.

However, allowing steep short term currency appreciation made possible by policy also leads to speculative behaviour (importer cover delays, negative NOPs) as the future value of money is in doubt, analysts say.

Sri Lanka’s external sector has tended to unravel post-war as soon as rates are cut with inflationary policy (reverse repo injections/non-penalty rate standing facilities) as credit demand recovers from the previous currency crisis.

In the past, May has been a month that led to currency pressure after April excess liquidity. (Colombo/May07/2024)

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Sri Lanka appoints new Attorney General

ECONOMYNEXT – Sri Lanka’s President Ranil Wickremesinghe has appointed K A Parinda Ranasinghe PC as Attorney General.

He was appointed in terms of Article 61E (b) of the Constitution of Sri Lanka, the president’s media division said.

The new AG received the appointment from President Wickremesinghe at the Presidential Secretariat on Friday.

He fills the post after the retirement of former Attorney General Sanjay Rajaratnam. (Colombo/Jul12/2024)

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Sri Lanka rupee closes stronger at 301.70/302.00 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed stronger at 301.70/302.00 to the US dollar on Friday, from 302.80/303.00 to the US dollar on Thursday, dealers said, while bond yields were up.

A bond maturing on 15.12.2026 closed at 10.90/11.00 percent, up from 10.85/95 percent.

A bond maturing on 15.12.2027 closed at 11.75/80 percent, up from 11.80/88 percent.

A bond maturing on 01.05.2028 closed at 11.90/12.00 percent.

A bond maturing on 15.09.2029 closed at 12.10/30 percent, up from 12.15/25 percent. (Colombo/Jul12/2024)

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Sri Lanka stocks close up, muted activity

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

The broader All Share Index closed up 0.35 percent, or 41.71 points, at 11,843; while the more liquid S&P SL20 Index closed up 0.56 percent, or 19.20 points, at 3,454.

Turnover was low at 653 million.

“The market picked up a bit from yesterday but it’s still below the psychological 12,000 mark,” Softlogic Stockbrokers said.

“Local retail participation drove the market predominantly.”

John Keells Holdings Plc brought in Rs109mn to the turnover, and the share closed flat at 194.50.

Melstacorp Plc contributed in Rs104mn to the turnover, and the share closed flat at 85.00.

Sentiment around the banking counters was mostly negative. Sampath Bank Plc closed down at 77.00, closed flat at 101.25, and Hatton National Bank Plc closed flat at 195.25.

The top contributors to the ASPI were Commercial Bank of Ceylon Plc (up at 103.50), Bukit Darah Plc (up at 397.00), and Hayleys Plc (up at 101.00).

Foreign participation remained low as well. There was a higher net foreign outflow of 101 million.

“Foreign selling was seen on John Keells Holdings, and banking counters; Hatton National Bank Plc (down at 195.00), Pan Asia Banking Corporation Plc (down at 20.70), and Commercial Bank of Ceylon Plc.

There was selective foreing interest on the diversified financials sector, particularly in companies that had vehicle leasing portfolios. “We think this might be due to the news of the vehicle import ban possibly ending.”

LOLC Holdings Plc closed up at 440.50, People’s Leasing and Finance Plc closed up at 12.20.

Softlogic Holdings Plc which announced the date of its rights issue, closed up at 8.50. (Colombo/Jul12/2024)

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