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Tuesday May 30th, 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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India extends under utilized $1 bln credit facility to Sri Lanka by one year 

ECONOMYNEXT – India has extended a $1 billion credit facility to Sri Lanka by another year after the loan that was given to help the crisis-hit island nation to continue import of essentials was not fully utilized in the 12 month period originally agreed, officials said.

Sri Lanka faced with a looming sovereign default signed the credit facility in March 2022 for one year through March 2024. However, the full $1 billion had not been utilized yet.

The Facility has been used for urgent procurement of fuel, medicines, food items and industrial raw materials, as per the requirements and priorities of Sri Lanka.

“The initial agreement was signed in 2022 March and out of the 1000 million US dollars allocated materials were imported for $576.75 mil,” Shehan Semasinghe, State Finance Minister said in his official twitter platform.

“The agreement is extended for the remaining $423.25 mil. We will prioritize the import of essential medicines till March 2024.”

Indian High Commission in Colombo said the State Bank of India (SBI) has extended the tenure of the $1 billion Credit Facility provided to Sri Lanka in response to a request from the Government of Sri Lanka.  (Colombo/May 30/2023)

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Sri Lanka President cleared to discuss cancelled LRT after soured Japan relations

ECONOMYNEXT – Sri Lanka’s Cabinet of Ministers approved a proposal by President Ranil Wickremesinghe discuss resuming a Japan funded. Light Rail Transit (LRT) project cabinet spokesman said, as the island nation is in the process of mending ties with Tokyo.

However, any such deals are likely to take place after the debt restructuring and Sri Lanka starts to repay its foreign loans to come out of default, analysts say.

Former President Gotabaya Rajapaksa unilaterally cancelled the 1.5 billion US dollar LRT and East Container Terminal (ECT) projects in 2021. Japan agreed to fund the LRT project while it was one of the tripartite members of the ECT project along with India and Sri Lanka.

The abrupt cancellation hit the diplomatic ties between the two countries and Sri Lankan government officials have said Japan had given the project to Sri Lanka at a very lower financing cost.

President Wickremesinghe returned from Japan late last week after having met top officials of the Japanese government including its prime minister.

“In recent history, due to the stopping of several agreements and proposals suddenly, President Wickremesinghe went to Japan after creating the background to clear some of the worries we have,” Cabinet Spokesman Bandula Gunawardena told the weekly media briefing.

“Before he went, he got the approval from the cabinet to resume the discussion on the light railway project. He got the approval from the cabinet to get parliament approval for bilateral agreements signed or any other investments project. Any change or cancellation of a project could be done only with the approval of the parliament.”

Japan has backed Sri Lanka under Wickremesinghe’s presidency after the island nation declared sovereign debt default. (Colombo/May 30/2023)

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Sri Lanka to tighten grip on television with broadcast law

ECONOMYNEXT – Sri Lanka has formulated a broadcast authority law to regulate electronic media which will be made public soon, Cabinet spokesman Minister Bandula Gunawardana said.

“The draft prepared by a cabinet subcommittee under Justice Minister Wijedasa Rajapaksa has discussed with various parties will be given to all media institutions and broadcast media,” Gunawardana said.

“We do not have to hide or force anyone. A legal framework that can be acceptable to all for all sectors.”

“In a week or two Minister Wijedasa will discuss with state and private stakeholders.”

At the moment Sri Lanka has issued frequencies without conforming to an “international procedures”, he said.

In Sri Lanka television frequencies are issued under a state television act.

Successive administrations in Sri Lanka has since around 1980 mis-used state television duopoly which including for conducting elections according to critics.

Private television as well a raio emerged around the 1990s and has since over shadowed state media.

There have been calls by ruling party politicians from time to time to control private media. There is now calls to control social media.

At a Committee on Public Accounts meeting of the Department of Government Information, ruling coalition legislators called for regulation of television content. (Colombo/May30/2023)

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