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Friday December 9th, 2022

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 bonds close up and while T-bills ease

ECONOMYNEXT – Sri Lanka bonds yields went up and the T-bills eased on active trade on Friday, dealers said.

“The bond rates went up, however more interest was seen in the short term bills by the investors” dealers said.

A bond maturing on 01.05.2024 closed at 31.90/32.20 percent on Friday, up from 31.25/70 percent at Thursday’s close.

A bond maturing on 15.05.2026 closed at 30.30/31.30 percent steady from 30.30/31.00 percent.

The three-month T-bills closed at 30.75/31.30 percent, down from 32.00/32.25 percent.

The Central Bank’s guidance peg for interbank transactions was at 363.18 rupees against the US dollar unchanged.

Commercial banks offered dollars for telegraphic transfers between 371.78 and 372.00 for small transactions, data showed.

Buying rates are between 361.78 – 362.00 rupees. (Colombo/Dec 09/2022)

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Foreign minister, US ambassador discuss future assistance to crisis-hit Sri Lanka

ECONOMYNEXT — In a meeting in Colombo, Sri Lanka Foreign Minister Ali Sabry and US Ambassador to Sri Lanka Julie Chung discussed ways in which the United States can continue to support Sri Lanka going forward, the Ambassador said.

Chung tweeted Friday December 09 afternoon that the two officials had reflected on the “twists and turns” of 2022, at the meeting.

Minister Sabry was recently in Washington D.C. where he US Secretary of State Antony Blinken.

A foreign ministry statement said the two officials held productive discussions at the Department of State on December 02 on further elevating bilateral relations in diverse spheres, including the 75th anniversary of diplomatic relations which will be marked in 2023.

Incidentally, Sri Lanka also celebrates the 75th anniversary of its independence from the British in 2023, and President Ranil Wickremesinghe has given himself and all parties that represent parliament a deadline to find a permanent solution to Sri Lanka’s decades-long ethnic issue.

The US has been vocal about Sri Lanka addressing concerns about its human rights record since the end of the civil war in 2009 and was a sponsor of the latest resolution on Sri Lanka passed by the United Nations Human Rights Council. Unlike previous resolutions, this year’s iteration makes specific reference to the country’s prevailing currency crisis and calls for investigations on corruption allegations.

In the lead up to the UNHRC sessions in Geneva, Minister Sabry Sri Lanka’s government under then new president Wickremesinghe does not want any confrontation with any international partner but will oppose any anti-constitutional move forced upon the country.

On the eve of the sessions on October 06, Sabry said countries such as the United States and the United Kingdom, who led the UNHRC core group on Sri Lanka, are greatly influenced by domestic-level lobbying by pressure groups from the Sri Lankan Tamil diaspora.

These pronouncements notwithstanding, the Wickremesnghe government has been making inroads to the West as well as India and Japan, eager to obtain their assistance in seeing Sri Lanka through the ongoing crisis.

The island nation has entered into a preliminary agreement with the International Monetary Fund (IMF) for an extended fund facility of 2.9 billion dollars to be disbursed over a period of four years, subject to a successful debt restructure programme and structural reforms.

Much depends on whether or not China agrees to restructure Sri Lanka’s 7.4 billion dollar outstanding debt to the emerging superpower. Beijing’s apparent hesitance to go for a swift restructure prompted Tamil National Alliance MP Shanakiyan Rasamanickam to warn of possible “go home, China” protests in Colombo, similar to the wave of protests that forced the exit of former pro-China President Gotabaya Rajapaksa.

The TNA will be a key player in upcoming talks with the Wickremesinghe government on a solution to Sri Lanka’s ethnic issue. (Colombo/Dec09/2022)

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India smogs out Sri Lanka’s China tower observers

 

ECONOMYNEXT – Sri Lanka’s Chinese-built Lotus Tower has halved visitors to its observation deck an official said as dirty air flowing from India triggered air quality warnings and schools in the capital closed.

“Masks are mandatory at the observation deck and roughly around 50 to 60 can go up to the observation deck at a time, time limits have not been altered and still persists at 20 minutes for observation,” the official told EconomyNext.

Prior to the smog, 120 observers were permitted at once to the deck.

However, even after limitations the Lotus Tower has continued to draw visitors, and revenues are coming in, the official said.

The tower built with a Chinese loan by the cash rich Telecom Regulatory Commission has been described by critics as a white elephant that eats the money earned from telecom operators mainly as spectrum fees.

Sri Lanka’s National Building Research Organization (NBRO) said India air heavily polluted with particulate matter was flowing across the island into a depression in the South West Bengal Bay. (Colombo/Dec09/2022)

 

 

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