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Friday March 31st, 2023

Sri Lanka misses 2019 budget deficit, forex reserve targets in IMF program

ECONOMYNEXT – Sri Lanka has missed the budget deficit and foreign reserves targets in a deal with the International Monetary Fund where in built money and foreign exchange policies triggered a currency collapse and an output shock, which hit state revenues.

“Preliminary data indicate that the primary surplus target under the program supported by the Extended Fund Facility (EFF) was missed by a sizable margin in 2019 with a recorded deficit of 0.3 percent of GDP, due to weak revenue performance and expenditure overruns,” IMF mission chief Manuela Goretti said in a statement.

Sri Lanka’s 2019 budget deficit is now estimated by the IMF at 6.2 percent of GDP up from a revised 5.7 percent. A budget presented to parliament originally planned a deficit of 4.4 percent of GDP.

Sri Lanka’s currency collapsed from 153 to 182 to the US dollar in 2018, whilst being under an IMF program by printing money to target a call money rate, sterilize maturing legacy swaps and to also target a perceived ‘output gap’.

The call money rate was targeted to generate inflation of around 5 percent (a domestic anchor), under a ‘flexible’ inflation targeting which gave wide discretion for authorities to cut rates while inflation was climbing or falling.

At the same time the central was expected to target an exchange rate to build forex reserves (a loose external anchor), creating a policy contradiction (a dual anchor conflict) or a soft-pegged exchange rate regime, which automatically leads to a currency collapse.

Sri Lanka was also more explicitly targeting a real effective exchange rate keeping the peg deliberately weak (a strong side convertibility undertaking), analysts have said.

Money was printed to generate excess liquidity in 2018 both through open market operations and new short term dollar rupee swaps, triggering runs on the currency peg.

The corrective measures to stop a meltdown led to a credit contraction and import collapse, generating an output shock and a downturn in revenues.

The December inflation target, a ‘performance criteria’ under the program was met with 4.8 percent rate.

Around July 2019 Sri Lanka also started fresh injection of money and then engaged in a so-called ‘operation twist’ buying long term bonds in the central bank balance sheet, while selling short term securities, though private credit was weak.

Unless liquidity is withdrawn on a net basis, the central bank’s net foreign assets (monetary reserves) do not go up.

Net foreign reserves also fell 100 million dollars short of the December target, the IMF said.

“Net International Reserves fell short of the end-December target under the EFF-supported program in 2019 by about $100 million amid market pressures after the Presidential elections and announced tax cuts,” the IMF said.

“However, conditions have since stabilized. Renewed efforts are needed to rebuild reserve buffers to safeguard resilience to shocks, under a flexible exchange rate.”

Sri Lanka also missed the structural benchmarks such as electricity pricing and fixing SriLankan Airlines.

In addition, other actions planned during the program including a ‘flexible inflation targeting’ law was also not enacted.

The new administration has indicated that it is not keen to pursue the law.

“Approval of the new Central Bank Law in line with international best practices is a critical step to further strengthen the independence and governance of the CBSL and support the adoption of flexible inflation targeting,” Goretti said.

The revenue of the three year program was due to take place in April, with final December data and indicative March targets.

However there was no mention in the statement that Sri Lanka has requested any waivers.

The new administration has slashed taxes and said they are not in agreement with the so-called ‘revenue based fiscal consolidation’ which added a series of new witholding taxes, carbon and sugar taxes and also raised rates of direct tax. (Colombo/Feb08/2020 – Update II)

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Sri Lanka tax hike: no response from president, professionals to discuss next steps

GMOA Secretary Haritha Alutghe

ECONOMYNEXT – Sri Lanka’s trade unions and professional associations who have been agitating against an International Monetary Fund (IMF) backed progressive tax hike will meet to discuss further union action after a letter to the president went unanswered.

Government Medical Officers’ Association (GMOA) secretary Dr Haritha Aluthge told reporters on Friday March 31 that the unions will meet as the self-styled Professionals’ Trade Union Alliance (PTUA) collective which have so far been organising strikes and demonstrations demanding a revision of the taxes.

The PTUA has been awaiting a promised meeting with President Ranil Wickremesinghe for some days now. Aluthge previously said on Monday that if the meeting did not materialise, the unions would be compelled to go on strike.

The issue has become stagnant due to government inaction, said Aluthge at Friday’s press conference.

“The PTUA informed the president in writing yesterday for the last time to please understand the gravity of this situation and to immediately give us a meeting and present the government’s interim solution, through which the government can take measures to ease the sense of tension among professionals,” he said.

The purpose of the meeting is to discuss an “interim solution” to the professionals’ grievances over the progressive income tax hike until a reported revision that’s due in six months when the country’s recently approved 17th IMF programme comes up for review.

“Sadly, there has still been no response,” the GMOA official said.

All unions and professional associations will meet Friday evening together with a number of other unions to discuss further action, he added.

The privately-owned English-language weekly newspaper The Sunday Times reported on March 26 that the IMF had indicated the possibility of revising some of the taxes imposed as part of the IMF’s staff-level agreement with Sri Lanka when the programme comes up for review in six months.

According to the newspaper, IMF officials had conveyed this to representatives of trade unions during a virtual roundtable held last Friday March 24. The virtual meeting was held on the initiative of the IMF and was attended by trade unions and professional associations representing the PTUA including the GMOA. (Colombo/Mar31/2023)

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Sri Lankan transport associations cut haulage and transportation fees after fuel price cut

ECONOMYNEXT –  Sri Lanka Association of Container Transporters and fuel bowser owners has decided to reduce the haulage charges and transportation fee, after the government cut the auto diesel prices by 80 rupees, association officials said.

“Due to the recent reduction in Auto Diesel price from March30, 2023, the committee has decided to reduce haulage charges by 7 percent,” association said.

Sri Lanka Private Petroleum Tanker owners has also decided to reduce the transportation fee of fuel by 8 -10 percent from April onwards.

“We will be meeting with the association members and will be deciding on exactly how much we will be reducing,” the General Secretary of the association Nimal Amarasekera told EconomyNext.

“We hope to reduce it by 8-10 percent and will be applied.”

Meanwhile United Lanka Fuel Transport Bowser Owners Association said, the price reduction will be done, and the specific amount will be calculated using the cost per kilometer for a transporting bowser.

“We have different types of bowsers such as 13,200 litre and 19,800 litre likewise,” Association President K.W. Charles told EconomyNext.

“So the cost per kilometer per bowser is different and after we calculate only we can give a specific percentage.

“It will come to effect from this month and the payments for the next month will be based on the new prices.”

Charles said, this is only based on the price reduction of fuel, however several costs as maintenance and spare part costs should also be considered when deciding the transportation cost, which is also being discussed with the Ceylon Petroleum Corporation.

Sri Lanka slashed fuel prices with effect from Wednesday (29) midnight, Power and Energy Minister Kanchana Wijesekera said, after a protest by trade unions of state-run fuel retailer Ceylon Petroleum Corporation (CPC) resulting in queues at filling stations due to supply disruption.

The price of Petrol 92 Octane will be slashed by 15 percent or 60 rupees to 340, Petrol 95 Octane 95 will be reduced by 26.5 percent or 135 rupees to 375, Auto Diesel by 19.8 percent or 80 rupees to 325, and kerosene by 3.3 percent or 10 rupees to 295. (Colombo/ March31/2023)

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Sri Lanka’s shares edge up in mid day trade

Stock Market. Free public domain CC0 image.

ECONOMYNEXT – Sri Lanka’s shares edged up in mid day trade on Friday, Colombo Stock Exchange (CSE) data showed.

All Share Price Index was up 1.09 percent or 100.69 points to 9,329.19, while the most liquid index was up 1.23 percent or 32.86 points to 2,697.12.

The market generated a turnover of 895 million rupees.

Top gainers during mid day trade were Commercial Bank, Hatton National Bank and Expolanka. (Colombo/Mar31/2023)


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