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Saturday December 3rd, 2022

Sri Lanka keeps overnight policy rates unchanged, market rates move up

MORE REALISTIC: Market rates have been moving up since price controls were lifted

ECONOMYNEXT – Sri Lanka’s central bank has kept its policy rate unchanged at 6.0 percent while market rates have started to move up in line with budget deficit and private credit, though bond and forex markets are still not fully functional.

Sri Lanka’s is facing severe external difficulties after more than a year of liquidity injections by the central bank from de facto policy rates opened through price controlled auction yields across the yield curve.

Meanwhile inflation is also moving up, partly due to a commodity bubble fired by the Federal Reserve. Sri Lanka does not have an independently floating exchange rate to ward off Fed inflation.

But its soft-peg has depreciated amid money printing, amplifying the effect.

During the year to September 2021 the rupee has fallen from around 186 to 203 to the US dollar, indicating that the currency has inflated around 9.1 percent against the US dollar, though there is no official spot rate to compare.

Some importers however are paying higher rates.

“Inflation accelerated in recent months due to high food inflation and some acceleration in non-food inflation,” the central bank said.

“The surge in global commodity prices prompted the Government to remove maximum retail prices on several essential commodities.

“Along with resultant upward adjustments in other market prices, this is likely to cause headline inflation to deviate somewhat from the targeted levels in the near term.”

The central bank claimed the rising commodity price was “supply side”.

Agriculture sector officials however are warning of supply shocks from a fertilizer ban.

Central bank kept money markets flushed with excess liquidity until August 13, pumping hundreds of billions of rupees through failed bond auctions as money flowed out as reserve losses.

Though rates have moved up, following the lifting of price controls, bond auctions are still not fully successful though the volumes printed are smaller than earlier.

At current rates savers are also getting interested in three month bills and some money has started to shift from fixed deposits.

The central bank has also been buying bonds into its balance sheet, which analysts say is a questionable activity given its monetary law.

When money is printed and the credibility of the dollar peg is undermined, the government cannot generate dollars to repay debt and as the excess rupees drive excess imports, there are also forex shortages for current imports.

The Central Bank said it “continued to intervene in the foreign exchange market to provide liquidity for essential imports, including fuel.”

The central bank said it expects the external sector to strengthen with inflows. However analysts say successful bond auctions are vital to stem the excess rupees, which creates a dollar shortages.

All Sri Lanka’s money supply measures are growing at double or triple digits. Reserve money or the monetary base is up 23 percent by August despite reserve ratio cuts, M1 up 28 percent, M2 is up 19.8 percent.

Central bank credit to government (printed money) which includes the result of reserve appropriations was up 187 percent by August, credit to government from commercial banks were up 25 percent.

The full statement is reproduced below:

The Central Bank of Sri Lanka maintains policy interest rates at their current levels

The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 13 October 2021, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 5.00 per cent and 6.00 per cent, respectively.

The Board arrived at this decision after carefully considering the macroeconomic conditions and expected developments on the domestic and global fronts. The Board reiterated its commitment to maintaining inflation at the targeted levels over the medium term with appropriate measures, while supporting the economy to reach its potential in the period ahead.

The global economy continues to recover

The global economic recovery is expected to continue despite large disparities across countries. As per the World Economic Outlook (WEO) of the International Monetary Fund (IMF) released on 12 October 2021, the global economy is projected to grow by 5.9 per cent in 2021 and 4.9 per cent in 2022. Economic prospects remain divergent across countries, mainly due to disparities in access to COVID-19 vaccines and policy support. Consumer price inflation in most countries increased significantly, reflecting the impact of pandemic related supply-demand mismatches and the surge in commodity prices, compared to their low base from a year ago.

The Sri Lankan economy is making headway, despite the pandemic related disruptions

As per the estimates of the Department of Census and Statistics (DCS), the Sri Lankan economy witnessed a strong recovery during the second quarter of 2021, recording a real growth of 12.3 per cent, year-on-year, following the growth of 4.3 per cent, year-on-year, in the first quarter of 2021. With the gradual return to normalcy after phasing out the COVID-19 related lockdown measures, alongside the successful rolling out of the COVID-19 vaccination programme and growth supportive policy measures, the momentum of economic activity is expected to sustain in the period ahead.

Available indicators and projections suggest that the real economy would grow by around 5 per cent in 2021, and gradually traverse to a high and sustained growth trajectory over the medium term, following near-term stabilisation measures that are being put in place by the Government and the Central Bank.

The planned coordinated efforts by the Government and the Central Bank are expected to strengthen the external sector in the period ahead

Earnings from exports marked a notable improvement and recorded over US dollars 1 billion for the third consecutive month in August 2021. Expenditure on imports has also increased, partly reflecting the surge in global commodity prices, resulting in an expansion in the trade deficit during the eight months ending August 2021, over the corresponding period of last year. Outlook for tourism improved with the easing of travel restrictions globally and the successful vaccination drive domestically.

Despite the moderation of workers’ remittances observed in recent months, a rebound is expected in the period ahead with the improved growth outlook for major foreign employment source countries and greater stability in the domestic foreign exchange market.

The realisation of foreign investments in the real sector and the timely adoption of remedial measures by the Central Bank as enunciated in ‘The Six-month Road Map for Ensuring Macroeconomic and Financial System Stability’ are gradually easing pressures in the domestic foreign exchange market.

Furthermore, the Central Bank continued to intervene in the foreign exchange market to provide liquidity for essential imports, including fuel. The depreciation of the Sri Lankan rupee against the US dollar is recorded at 6.8 per cent thus far in 2021. The Sri Lankan rupee remains largely undervalued as reflected by the real effective exchange rate (REER) indices.

In the meantime, gross official reserves were estimated at US dollars 2.6 billion by end September 2021. This, however, does not include the bilateral currency swap facility with the People’s Bank of China (PBoC) of CNY 10 billion (equivalent to approximately US dollars 1.5 billion). Gross official reserves are expected to improve with the measures that are being pursued by the Government and the Central Bank to attract fresh foreign exchange inflows, as outlined in the Six-month Road Map, thereby reinforcing the stability of the external sector in the period ahead.

Market interest rates have adjusted upwards in response to the tightening of monetary and liquidity conditions, while credit and monetary expansion remained elevated

In response to the tightening of monetary policy in August 2021, most market deposit and lending rates have adjusted upwards. Further, yields on government securities witnessed a sharp upward adjustment with the removal of maximum yield rates for acceptance at primary auctions.

Following these upward adjustments, greater stability is expected in market interest rates in the period ahead. Reflecting the increased demand for credit amidst the low interest rate environment, credit extended to the private sector expanded as envisaged during the eight months ending August 2021. The momentum of credit expansion is expected to continue during the remainder of the year, with the recovery in economic activity and continued efforts to channel credit flows to productive and needy sectors of the economy. Meanwhile, credit obtained by the public sector from the banking system, particularly net credit to the Government, also increased notably during the eight months ending August 2021. With increased domestic credit, the growth of broad money (M2b) continued to remain elevated.

Some inflationary pressures are observed, particularly due to emerging global price developments

Inflation accelerated in recent months due to high food inflation and some acceleration in non-food inflation. The surge in global commodity prices prompted the Government to remove maximum retail prices on several essential commodities. Along with resultant upward adjustments in other market prices, this is likely to cause headline inflation to deviate somewhat from the targeted levels in the near term.

While such supply side developments in the near term do not warrant monetary policy tightening, measures already taken by the Central Bank in relation to interest rates and market liquidity would help stabilise demand pressures over the medium term.

Policy rates are maintained at current levels

In consideration of the current and expected macroeconomic developments as highlighted above, the Monetary Board was of the view that the current level of policy interest rates is appropriate. The Central Bank will continue to monitor domestic and global macroeconomic and financial market developments and stand ready to take appropriate measures, as and when necessary, with the aim of maintaining inflation in the desired range under the flexible inflation targeting framework in the medium term, while supporting and sustaining the economic recovery.

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Sri Lanka teachers struggle to abide by saree ‘law’

ECONOMYNEXT – Sri Lanka’s school teachers are struggling to continue the service with the ongoing high inflation destroying their salaries and with on ongoing battle to wear more affordable clothing than the traditional saree while.

With the country is going through its worst currency crisis in the history of its central bank, teachers say the rapid inflation in the country has forced them to go with more affordable clothing than the traditional attire of saree.

Price Shock

“Wearing sarees are a big cost, you need to iron and we have electricity tariffs, textile industry is collapsing and in turn prices are increasing” AM Chandani, an Advanced Level teacher for Mathematics told EconomyNext.

The traditional saree, is considered as the appropriate attire for all female teachers in the country, even though it has not been officially declared under any law. Students wear frocks.

Teachers says while sarees do bring a level of respect and formality, they don’t determine productivity and the quality to education.

“Quality of education is measured through the syllabus and depends on the skills of the educator, but not on what the teacher is wearing, why is education determined by a saree?” Chandani says.

“Saree prices have risen by nearly 50 percent, electricity prices had risen by 75 percent, transportation costs are also increasing and on top of that food inflation is also present in Sri Lanka. How do you expect one to save in a condition like this?”

Pontificating Ministers

At least two ministers wearing Western jacket and tie have pontificated on teachers’ dress.

“The minister for education and other ministers are busy making proclamations on what teachers should wear to school,” Sujata Gamage & Tara de Mel Co-coordinators, Education Forum Sri Lanka said in a statement.

“There is no indication that they have consulted the main stakeholders in this case, the teachers.

There is already a guideline on attire for teachers in Section 5.1.b of Circular 2012/3 on “Code of Ethics and General Rules on the Ethical Conduct of Teachers”. Specifically, teachers are required to:

“Dress in culturally appropriate, clean, smart, and well-tailored clothing, maintaining decency and modesty, at all times.”

“Insisting that the saree is the only appropriate attire, especially at this time when the teachers are struggling to provide for their families, get to work on time, and teach kids who are very likely to come undernourished or hungry, would be inconsiderate.”

“In addition, it would be a violation of their fundamental rights and a violation of the Constitution where the transfer and disciplinary control of all educational personnel is vested with the provinces.”

Sri Lankan teachers’ salaries were increase in January 2022, after the teachers went on a continuous protest, where an allowance of 5,000 rupees was approved by the Cabinet.

Cost of Working

The electricity tariff was increased last August in order to mitigate the continuous losses made by the state-run Ceylon Electricity Board after the rupee collapse from 200 to 360 to the US dollar after macro-economists printed money to target an output gap.

Fuel, taxi and bus fares and food prices also went up with economists printing money.

Sr Lanka’s Ceylon Teachers Union (Check the exact name) said, on average, teachers get paid from 50,000 to 80,000 a month and, the union plans to go into discussions about the education system, rising cost of education as well as the salary offered to teachers.

“Teacher’s salaries are disappearing because the cost of living has risen… and the cost of working is also increasing such as buying of sarees and transport, this will cause an explosion in the education sector” Joseph Stalin, the teachers Union secretary told EconomyNext.

Meanwhile, Minister of Education Susil Premajayantha told parliament on December 01, that relief would be aided to teachers that are unable to afford sarees after media reports showed that teachers found it financially difficult. 

“Even if the government doesn’t approve allocations, I will make sure that aid is being provided to teachers finding it difficult to afford school attire,” Premajayantha said. (Colombo/Dec02/2022)

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Sri Lanka shares ends five week high on easing rate expectations

ECONOMYNEXT – Sri Lanka shares gained for the sixth session on Friday closing on positive sentiments due to expectations of easing market interest rates and generated the highest turnover in two months, brokers said.

The main All Share Price Index (ASPI) closed 0.61 percent or 65.94 points higher at 8,769.73, the highest index gain since October 27.

The market witnessed a turnover of 4 billion rupees, higher than this year’s daily average turnover of 3 billion rupees. This is the highest turnover generated since September 27.

The market saw a foreign inflow of 1 billion rupees, the highest inflow since September 27. The total net foreign inflow stood at 20.2 billion rupees so far for this year.

“Most of the treasury counters gained today with the speculation for interest rates to ease with the inflation therefore treasury shares gained,” a market analyst said.

Analysts said Lanka IOC gained with the government keeping the fuel prices unchanged while global prices fell.

Former Central Bank Governor Indrajit Coomaraswamy said in a forum on Monday that the government is in discussions with Asian Development Bank (ADB) and World Bank to get loans of 1.9 billion US dollars after a reform program with the International Monetary Fund is approved.

A policy loan now being discussed with the World Bank may bring around 700 million US dollars, Coomaraswamy told a business forum organized by CT CLSA Securities, a Colombo-based brokerage.

The Asian Development Bank may also give around 1.2 billion US dollars most of which will be budget support, he said.

In the last few sessions market gained after the Central bank governor said market rates should eventually ease despite the fears of a domestic debt restructuring as inflation falls, increased liquidity in dollar markets, and the inter-bank liquidity improves.

In the past sessions, the index continued to fall on the speculation of a local debt restructuring although no proper decision has been taken so far.

The more liquid index S&P SL20 closed 1.27 percent or 34.86 points higher at 2,774.60.

So far in December ASPI gained 1.3 percent.

The ASPI gained 0.5 percent in November after losing 13.4 percent in October.

It has lost 28.2 percent year-to-date after being one of the world’s best stock markets with an 80 percent return last year when large volumes of money were printed.

Sampath Bank pushed the index up to close at 10.8 percent to 39.9 rupees.

Other top gainers were Lanka IOC gained 6.2 percent to close at 206.8 rupees and Commercial Bank gained 1.8 percent to close at 51 rupees. (Colombo/Dec02/2022)

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Sri Lanka State Tourism Minister backs night life with with 24*7 operation of wine stores

ECONOMYNEXT – Sri Lanka’s State Tourism Minister Diana Gamage wants the island nation’s wine stores to opened all the time if the country wants to boost tourism.

Gamage has been vocal on opening up night time life to attract more tourists and boost foreign exchange revenue for the country to move out of the crisis.

“When tourists come, if all they have to do is roam around and go to sleep at 10 pm every night in front of their hotel room TV, then we will not be able to earn dollars from them,” Gamage told the parliament during the Committee Stage debate of Tourism Ministry.

“The issue with our country is, there is no place to go after 10 pm. This is a paradise. I do not know whether anyone knows the meaning of a paradise.”

“We have to keep this place open 24/7. I have spoken it about many time. Liquor is the highest tax earner in the country. In this paradise, we are closing bars after 11pm. Foreigners in hotels can’t get any alcohol if they need. Because all the places are close. We need to keep this country open 24 hours. Like Singapore and other countries. People must have to have entertainment.”

Gamage’s proposals for night life have been frowned at by some religious leaders citing that the move is against Sri Lanka’s rich and ancient culture.

“I talk about the night life, and when I talked about that earlier many criticized it and saw it as a big sin. That is ones who are incapable of understanding it,” she said.

“What we call night life is actually is a night economy. All the countries in the world have developed because of night economy. These countries get 70 percent of their income from the nigh economy. They only get 30 percent during the day time.”

“We have to develop a night economy in this country. That will earn 70 percent of the income. Only that can develop this country.”

“We can do that. And also our museum, that closes at 5 pm. In other museums earn most during night. It must be opened 24/7.  This night economy is essential for a country’s economy. People must have places t spend their money.” (Colombo/Dec02/2022)

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