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Sri Lanka money printing, deficits could lead to economic implosion: IMF report

ECONOMYNEXT – Further money printing to finance deficits could lead to monetary instability while trade and private credit could eventually shrink, an International Monetary Fund assessment has warned, as the country reels from tax cuts and liquidity injections made to keep interest rates down.

Sri Lanka had large uncertainties which were tilted to the downside, an IMF public information notice quoting a staff assessment made after annual rticle IV consultations said.

Deficit spending

The budget deficit in 2022 was also expected at 10.7 percent of gross domestic product after an 8.9 percent of GDP deficit in 2021.

Sri Lanka has been printing large volumes of money under the so called Modern Monetary Theory (MMT) to keep rates down and finance the deficit. Deficits were also kept large under an anti-austerity ideology.

Related

Sri Lanka to cut foreign debt, ride Modern Monetary Theory: CB Governor

Money printing however, creates forex shortages as the new money is spent by their recipients (usually state workers and government contractors) and the money ends up as imports.

Former owners of maturing treasury bills which are bought by the central bank and are not rolled over could also end up with printed money as could banks, when reserve sales are sterilised.

Imports soared in 2021 to 20.4 billion US dollars. In January the government announced a billion dollars of handouts including more state salary hikes.

If the budget deficit and money printing (central finance of the deficit) is not contained, the economy could implode with private credit and imports collapsing, the IMF said.

Trade and private credit implosion, monetary instability

“The outlook is subject to large uncertainties with risks tilted to the downside,” an IMF staff assessment said.

“Unless the fiscal and balance-of-payments financing needs are met, the country could experience significant contractions in imports and private credit growth, or monetary instability in case of further central bank financing of fiscal deficits.”

Sri Lanka’s inflation was already at 14.1 percent by January 2021 (risen to 15.1 percent by February after the report).

Parallel exchange rates were around 248 rupees, significantly above the 200 to the US dollar official exchange rate which is undermined by the policy rate.

The policy rate 6.5 percent was far below inflation, which had risen to 15.1 percent since the IMF’s staff report which went to its Executive Directors on February 25.

Sri Lanka’s government debt including treasury guarantees and foreign debt of the central bank had risen to 118.9 percent by end 2021 from 110 percent a year earlier, and 94 percent in 2019, when tax cuts and money printing began.

“Under current policies and the authorities’ commitment to preserve the tax cuts, fiscal deficit is projected to remain large over 2022–26, raising public debt further over the medium term,” the assessment said.

Public debt was unsustainable, and a credible economic programme was needed to address the problem, the IMF said. Unsustainable debt usually also requires debt re-structuring.

Related:

Sri Lanka debt unsustainable, should stop printing money, hike rates, taxes: IMF

Sterilised forex sales

Money is being printed over the past quarter to offset the impact of reserve sales for imports (to sterilise interventions) effectively financing the private banks, with treasury bill auctions mostly successful after price controls on bond auctions were ended.

Sri Lanka has a Latin America style central bank with extensive powers to print money to finance the government, or private sector through re-finance schemes and also open market operations to sterilise reserve sales for imports or any other purpose.

Though forex reserves sales for imports should contract reserve money, push short term rates up, stabilising the exchange rate, the central bank’s commitment to a 6.5 percent policy rate was making it print money to sterilise interventions re-expanding reserve money.

In a quasi-fiscal activity, the central bank was also providing subsidies to remittances amounting to at least 8 rupees per US dollar, further undermining its ability to control reserve money.

The central bank was also engaging in a quasi-fiscal activity giving a premium for foreign remittances coming through the official banking system after parallel exchange rates were triggered by money printing and exchange controls.

Sri Lanka also faced risks of rising bad loans, rising commodity prices, bad harvests, or a COVID-19 spike though the government has taken effective action on that front.

Sri Lanka could grow 2.6 percent in 2022, the IMF said.

The IMF does not usually project what are called ‘disaster scenarios’ but gives advice on how it can be avoided, analysts familiar with the agency’s practices said.

Money printing, taxes

IMF executive directors urged Sri Lanka to stop printing money, hike interest rates and raise taxes and cut spending.

“Directors agreed that a tighter monetary policy stance is needed to contain rising inflationary pressures, while phasing out the central bank’s direct financing of budget deficits,” an Executive Directors assessment said.

“Directors emphasised the need for an ambitious fiscal consolidation that is based on high-quality revenue measures.

“Noting Sri Lanka’s low tax-to-GDP ratio, they saw scope for raising income tax and VAT rates and minimising exemptions, complemented with revenue administration reform.

“Directors encouraged continued improvements to expenditure rationalisation, budget formulation and execution, and the fiscal rule.

“They also encouraged the authorities to reform state-owned enterprises and adopt cost-recovery energy pricing.” (Colombo/Mar04/2022)

Comments (2)

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  1. Edie says:

    There has been NO ONE WITH a ABRAIN RESPONSIBLE TO SECURE DISASTER working at the CENTRAL BANK to prevent the economy down fall.

  2. Dimitri Ganegoda says:

    All the facts are not true.

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Your email address will not be published. Required fields are marked *

  1. Edie says:

    There has been NO ONE WITH a ABRAIN RESPONSIBLE TO SECURE DISASTER working at the CENTRAL BANK to prevent the economy down fall.

  2. Dimitri Ganegoda says:

    All the facts are not true.

Sri Lanka’s ‘Sancharaka Udawa’ tourist fair seeks to involve universities

ECONOMYNEXT – Sri Lanka’s ‘Sancharaka Udawa’ tourism fair kicked off this week to promote interaction between industry stakeholders and relevant Government bodies, including the Tourist Police, and also universities.

“Several universities, including Colombo, Uva Wellasa, Kelaniya, Sabaragamuwa and Rajarata were given free stalls to facilitate student interaction with industry professionals,” Chairman of the Sancharaka Udawa Organising Committee, Charith De De Alwis said in a statement.

The event takes place today (18) at the BMICH and houses stalls for hoteliers, tour and transport services, with a goal of attracting 10,000 visitors.

Organized by the Sri Lanka Association of Inbound Tour Operators (SLAITO) and the Sri Lanka Tourism Promotion Bureau (SLTPB), the 11th edition of Sancharaka Udawa offers a platform for both B2B and B2C sectors.

“Sancharaka Udawa houses over 170 exhibitors and a footfall of more than 10,000 visitors,” De Alwis said.

This year’s edition will include participants from outbound tourism sectors to facilitate capacity building. The event provides networking opportunities for industry newcomers and veterans.

“The networking platform offers opportunity for small and medium-sized service providers integrating them into the broader tourism landscape. The anticipated outcome is a substantial increase in bookings particularly for regional small-scale tourism service providers.” (Colombo/May18/2024)

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Sri Lanka’s CEB sells LTL shares to West Coast IPP for Rs26bn

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Board has sold shares of an affiliate to West Coast Power Company Limited, an independent power producer giving profits of 25.9 billion rupees in the March 2024 quarter, interim accounts showed.

The sale has been carried out as a transfer.

“Twenty-eight percent (28-pct) of share ownership of CEB within LTL Holding’s equity capital has been transferred to West Coast Power Company Ltd for a total consideration of Rs 26 billion as part of a partial settlement of outstanding dues…” the March interim accounts said.

“This transaction resulted in a net gain of Rs25.9 billion rupees which has been recognized and reflected in the ‘Gain from Share Disposal’ in the individual financial statement in CEB.”

LTL Holdings is a former transformer making unit of the CEB set up with ABB where the foreign holding was sold to its management.

The firm has since set up several IPPs.

West Coast Power operates a 300MW combined cycle IPP in Kerawalapitiya promoted by LTL group liked firms in which both the Treasury and Employees Provident Fund also have shares.

Its operational and maintenance contract is with Lakdhanavi, another private IPP. The firm has been paying dividends.

The capital gain from the transfer of shares helped the CEB post profits to 84 billion rupees for the March 2024 quarter.

CEB reported gross profits of 62.7 billion rupees from energy sales and 30.6 billion rupees in other income and gains in the March 2024 quarter. Other income was only 3.1 billion rupees in last year. (Colombo/May18/2024)

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Sri Lanka mulls mandating prices for shopping bags in supermarkets

ECONOMYNEXT – Sri Lanka may end the practice of supermarkets giving free shopping bags, as part of efforts to contain plastic use according to deliberations at a parliamentary committee following a supreme court decision.

Sri Lanka’s courts many years ago barred supermarkets from charging for plastic bags from customers after activists went to court.

However a Supreme Court ruled in March this year to overturn that.

The parliament Sectoral Oversight Committee on Environment, Natural Resources and Sustainable Development said it could not reverse the gazette issued under the Consumer Affairs Authority Act until it had received a copy of the ruling.

The committee said the ruling might prompt shoppers to bring their own bags, which would lead to a reduction in polythene waste.

It may only apply to supermarkets and not to smaller merchants, however. (Colombo/May18/2024)

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