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Friday February 23rd, 2024

Sri Lanka injects Rs130bn outright amid high private sector sterilization

ECONOMYNEXT – Sri Lanka’s central bank has permanently injected about 130 billion rupees into the banking system by purchasing Treasury securities, data show, shortly after Governor Nandalal Weerasinghe said an overnight short will be reduced.

The central bank’s disclosed outright Treasury securities stock went up to 2,580.6 billion rupees on November 15 from 2,440 billion rupees a day earlier.

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However overnight lending to banks through a standing facility at 15.50 fell to 154 billion rupees from 248 billion rupees leaving net credit into the banking system unchanged.

Sri Lanka’s intermediate regime central bank in triggering the worst currency crisis in its history did not inject cash into the banking system outright to sterilize interventions as it had done in the past.

Fictitious Capital

As a result, banks had to borrow large volumes through the overnight window. In theory such an action should make banks restrict credit and stop the balance of payments crisis.

It is not clear whether Sri Lanka’s central bank has counterparty limits when injecting short term liquidity into banks.

In the 19th century when central banks were not allowed to create currency crises and hurt the poor as now, British classical economists like David Ricardo called such injections that trigger imbalances ‘fictitious capital’.

But after the Fed created the Great Depression, and the rise of Keynesianism, central banks were able to inject ‘fictitious’ capital, trigger mal-investment, balance of payments crises and high inflation, with impunity.

The permanent 130 billion rupees is injected when Sri Lanka’s market rates around 30 percent and private credit is negative.

Private Sector Sterilization

Many cautious banks, especially foreign banks are no longer lending to either domestic banks in the interbank market, to customers or the government.

As a result about 344 billion rupees – capable of creating forex pressure around 500 million US dollars if loaned to customers – are parked in the central bank.

Such cash which are not loaned due to risk perceptions are sometime called ‘private sector sterilization’.

The term ‘liquidity trap’ also describes a similar situation.

In the Great Depression many customers wjho withdrew cash from US banks are said to have and buried them in proverbial coffee cans.

In the past liquidity shortages created by central bank sales of dollars to finance imports and filled overnight have been cleared by cash from dollar purchases after confidence in the currency was restored following a float.

Sri Lanka’s central bank no longer has reserves or a capacity to borrow to sell dollars to create what is called a ‘balance of payments deficit’, but through injections of cash it can still push the currency down if banks are willing to give credit.

Then central bank has used several tools to inject cash and make banks given loans without deposits, these include overnight injections, term injections, outright purchases of bonds (to mis-target bond yields).

A key tool is to rejects bid for bill auctions and buy up maturing bonds from past deficits (monetize the gross domestic financing requirement) all of which are then blamed on the current ‘budget deficit’.

In the current currency crisis, which ended in a sovereign default, price controls were placed on Treasuries auctions. The legality of the moves are unclear.

However the consequences of mis-targeting of rates violates section 5 (a) of the bank’s constitution which requires the Monetary Board to maintain ‘economic and price stability’.

If sufficient mal-investments had been created and the consumption collapse is big enough to trigger large volumes of bad loans the actions may also violate Section 5 (b) of maintaining ‘financial system stability’.

Classical economists have and analysts suggested that the power to manipulate rates through liquidity injections be taken away so that the exchange rate is fixed and the country will have East Asia style stability to grow and draw foreign investment.

The central bank has acquired a portfolio of 2.5 trillion securities outright in the course of financing the private sector (by sterilizing imports and rejecting bids to roll-over old bills) and the government as well as to offset reserve appropriations for debt repayment. (Colombo/Nov16/2022)

(Colombo/Nov16/2022)

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Sri Lankans may need to wait for Monetary Board meeting minutes despite new Act

ECONOMYNEXT – Sri Lankans may have to wait more time to read the meeting minutes of the Central Bank’s Monetary Board, a top official said, despite a new act that has made the central bank to be more transparent and accountable for its decisions.

Many central banks including the United States’ Federal Reserve, India’s Reserve Bank, and Bank of Mexico release the minutes of their monetary policy meeting to ensure transparency.

The new Central Bank Act passed by the Parliament in line with the guidance by the International Monetary Fund (IMF) includes measures for Sri Lanka’s central bank to be more transparent and accountable.

These measures include releasing the Monetary Policy Report every six months and the first such report was released on February 15.

However, the central bank has not taken a decision to release the minutes of the Monetary Board meetings on the monetary policy.

“Going forward, one day this could happen,” Chandranath Amarasekara, Assistant Governor at the Central Bank told reporters on Wednesday (21) at a media briefing.

“Right now, we have just started working on the new Central Bank Act. We are not there yet. There is no such decision on releasing minutes yet.”

The central bank in the past printed billions of rupees to keep the market interest rates artificially low and provide cheap funding for successive governments to propel a debt-driven economy.

It’s decision, however, led Sri Lanka into an unprecedented economic crisis in 2022 with sovereign debt default.

It also propped up the rupee currency artificially in the past to maintain a stable exchange rate at the expense of billions of US dollars. The move also contributed for the economic crisis and later the central bank was forced to allow over 60 percent depreciation in the rupee in March 2022.

However, none of the top central bank officials was held responsible for wrong decisions to hold interest rates artificially low with money printing and propping up the rupee. (Colombo/Feb 23/2024)

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Amid mass migration, Sri Lanka to recruit volunteers as English teachers

ECONOMYNEXT- Sri Lanka is planning to appoint foreign and expatriate volunteers to teach English for Sri Lanka students, the Ministry of Higher Education said, amid thousand of teachers migrating to other countries after the island nation’s unprecedented economic crisis.

Over five thousand teachers have left the country with the Education Ministry permission using the government’s circular of temporarily leaving state jobs while tens of thousands of teachers have left the country without informing the relevant authorities, Education Ministry officials say.

That had led to an acute teacher shortage in the country.

Suren Raghavan, the State Minister for Higher Education said the shortage has aggravated because most of the graduates who have an English degree become writers and join the private sector due to higher salary.

“They do not join government schools. This is a problem all over the country which is why we need to have an online system,” Raghavan told EconomyNext.

Separately he said on Thursday at a press conference that he had spoken to Canadian and Australian High Commissions to get the assistance of where their English teachers who have experience in teaching English as a second language in South Asia.

He also said that there is a number of teachers in the Unite Kingdom have shown interest in teaching English and they have experience in teaching in other Asian countries such as Burma and India while the teaching would be done free of charge.

The new move also comes at a time when the country’s English literacy rate is on the decline, according to the Minister.

President Ranil Wickramasinghe announced the English-for-all initiative three months ago with plans to improve English literacy at school and university level. (Colombo/Feb 23/2024)

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Sri Lanka tea production up 1.4-pct in Jan 2024, exports up 6.8-pct

ECONOMYNEXT – Sri Lanka’s tea production was up 1.4 percent to 18.73 million kilograms in January 2024, with high growns falling and low and mid growns rising, industry data shows.

High grown tea in January 2024 was 3.56 million kilograms, down from 3.36 million, medium growns were 2.6, up from 2.5 million kilograms and low growns were 12.56 million, up from 12.32 million kilograms last year.

Exports, including re-exports were up 6.88 percent to 18.76 million kilograms, industry data published by Ceylon Tea Brokers show.

Export earnings were reported at 102 million US dollars, up from 99.5 million dollars last year. The average FOB price was 5.45 US dollars a kilo down from 5.67 dollars last year.

Tea in bulk was 8.5 million kilograms valued at 12.79 billion rupees, tea in packets was 7.8 million kilograms valued at 13.1 billion rupees and tea in bags was 1.8 million kilos, valued at 5.06 billion rupees.

The top buyer was Iraq with 2.5 million kilos, up from 2.1 million last year followed by the UAE with 1.99 kilos, up from 1.86 million last year.

Russia bought 1.98 million kilos, down from 2.0 last year, Turkey bought 1.72 million kilos, from 2.3 million last year, while Iran bought 1.32 million, up from 614 million last year. (Colombo/Feb23/2024)

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