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Sri Lanka money printing tops Rs1.2 trillion in 2021

ECONOMYNEXT – Sri Lanka has printed 1.2 trillion rupees in 2021 most of which has flowed out of the country as a balance of payments deficit official data shows on top of 505 billion rupees printed in 2019 mostly to keep interest rates down.

Central bank credit to government grew to 2,093 billion rupees by December 2021 from 868.9 billion rupees a year earlier.

A part of the central bank credit to government including over 200 billion in July 2021 relates to foreign reserves appropriated to repay bonds, which did not create domestic inflation. However they prevented the monetary system from tightening and rates from rising.

In 2020 Sri Lanka printed 505.9 billion rupees based on official data, but the liquidity injected to the banking system was much higher. Money was injected also by a cut in the statutory reserve ratio. In a bizarre move the money was re-printed in September 2021.

BOP hit

In 2020 some of the money was printed to give Covid-19 re-finance.

In the way data is currently calculated in Sri Lanka, printed money remaining as excess liquidity in the system does not get captured as central bank credit until it disappears from the country as a BOP deficit. At the beginning of December 200 billion rupees of excess liquidity remained in the system.

A large part of the money in both years was printed came from yield controls imposed on Treasuries auctions, which caused them to fail and liquidity to be injected.

After August 2021 price controls were lifted and bond auctions were mostly successful.

However since then money is printed mostly to sterilize reserves given for imports. The central bank is also printing money for remittances.

The money boomerangs as import demand when the families of expat workers spend them and more reserves are lost as they new money is exchange for dollars via imports.

In 2021 Sri Lanka was hit by a balance of payments deficit of 2.3 billion rupees as the printed money was exchanged for monetary reserves.

In 2021, the BOP deficit was 3.9 billion US dollars.

Related

Sri Lanka BOP deficit hits record US$3.9bn in 2021 amid money printing

In September 2021, a statutory reserve ratio was hiked and the entire money was printed in a bizarre move.

Inflation

In the two years reserve money has grown 40 percent. Broad money had also grown 40 percent despite weak economic growth, creating conditions for rapid price rises.

While liquidity injections hit the balance of payments fast (4 to 6 weeks) with imported goods coming in to fill domestic demand.

Persistent money printing to keep rates down leads to growth in credit and broad money, triggering domestic inflation.

When rates are kept down artificially, money also go to long term assets, driving up a speculative bubble. People may also buy assets fearing inflation or currency depreciation. Capital flight may also take place.

In most countries broad money growth turns in to domestic inflation after 12 to 24 months. Similar problems had been seen in countries like the US.

In Sri Lanka the broader consumer price index, which also includes services which rises slowly, has risen 17 percent over the two years.

Food prices have risen 40 percent.

Sri Lanka exported and imported goods also rise when the US prints money, driving up commodity prices. Traded goods respond quicker to loose policy.

Related

US inflation likely to stay high in 2022, 2023 even if Fed tightens now: Steve Hanke

Anchor Conflicts

Sri Lanka’s monetary policy deteriorated rapidly after the end of a 30-year war and accelerated after the retirement of Deputy Governor W A Wijewardena, analysts have said.

Sri Lanka stated following ‘flexible’ inflation targeting, a highly discretionary domestic anchor, despite having a foreign reserve collecting highly unstable peg with the US dollar called a ‘flexible’ exchange rate as an external anchor, which are in conflict with each other.

Though Sri Lanka had a Latin America style central bank from 1950 set up by a US money doctor, the island’s commercial borrowings were limited.

After 2015, monetary instability ratcheted as anchor conflicts worsened leading to a rapid rise in commercial debt.

When money is printed (inflationary policy is followed with a peg) foreign reserves cannot be built with current inflows and also the ability to repay maturing debt and interest with current inflows is lost.

In 2015, 2016 and 2018 the country could not repay maturing debt with current inflows as inflationary policy (money printing) was followed under ‘flexible’ inflation targeting coupled with liquidity injected to target call money rate.

Under ‘flexible’ inflation targeting with-reserve-collecting-peg, liquidity injections start about two years after monetary tightening ends a currency crisis claiming that inflation is low (Sept 2014, March 2018 and Feb 2020) which is roughly the time it takes for inflation from the previous money printing bout to dissipate, triggering another crisis.

In 2020 and 2021, though sovereign bonds were repaid, the central bank’s reserves were run down and it has become a large net debtor as fiscal debt was effectively transferred to the monetary authority. (Colombo/Feb14/2022)

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Widespread support for Sri Lanka debt workout, reform progress at IMF/WB meet: Minister

ECONOMYNEXT – There was widespread support for Sri Lanka’s debt restructuring and acknowledgement of progress made under an International Monetary Fund program, at meeting of the fund and World Bank, State Minister for Finance Shehan Semasinghe said.

“The strides made in our economic recovery and financial stability have been acknowledged as significant advancements towards our country’s prosperity by our stakeholders and international partners,” Minister Semasinghe said in an x.com (twitter) post after attending the meetings.

“Further, it was heartening to note the widespread appreciation and support for Sri Lanka’s debt restructuring process.

“We remain steadfast in our commitment to reaching the restructuring targets and confident of smooth progress in the continued good-faith engagements for a speedy debt resolution that will ensure debt sustainability and comparability of debt treatment.”

Sri Lanka ended a first round of talks with sovereign bondholders in March without striking a deal but some agreement on the basis for a deal.

An initial deal with bilateral creditors have been reached, but they may be awaiting a deal with private creditors to sign formal agreements.

International partners have appreciated reforms made under President Ranil Wickremesinghe, Minister Semasinghe said.

“It was great to engage in productive bilateral discussions with all of whom appreciated the recent economic developments, progress in debt restructuring, strengthening of tax administration, and ongoing governance reforms,” he said.

Sri Lanka’s rupee has been allowed to re-appreciate by the central bank amid deflationary monetary policy, bringing tangible benefits to people in the form of lower energy and food prices, unlike in past IMF programs.

Electricity prices were cut as a strengthening currency helped reduce the cost of coal imports.

Related Sri Lanka central bank mainly responsible for electricity price cut

The currency appreciation has also allowed losses to the Employment Provident Fund imposed to be partially recouped, helping old workers near retirement, as well as raising disposable incomes of current wage earners on fixed salaries.

Related Sri Lanka EPF gets US$1.85bn in value back as central bank strengthens rupee

The IMF, which was set up after World War II to end devaluations seen in the 1930s after the Fed’s policy rate infected other key central banks, started to actively encourage depreciation after a change to its founding articles in 1978 (the Second Amendment).

The usefulness of money as a store of value, or a denominator of current and future values then decline, leading to loss of real savings, real wages and increases in social unrest.

Before that, members who devalued more than 10 percent after printing money for growth or any other reason, faced the threat of suspension from the organization as punishment.

Sri Lanka’s rupee has appreciated to around 300 to the US dollar now from 370 after a surrender rule was lifted in March 2023.

But there is no transparency on the basis that economic bureaucrats are allowing the currency to gain against the US dollar (the intervention currency of the central bank).

The rupee is currently under pressure, despite broadly prudent monetary policy, due to an ‘oversold position’ in the market after recent appreciation made importers and banks to run negative open positions as the usefulness of the currency as a denominator of future value declined with sudden strenghtening. (Colombo/Apr21/2024)

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Sri Lanka choices recalled in Vietnam debate on monetary and fiscal options to target output

FIRST SIGNS: Fuel queues and shortages were developing in Vietnam in 2022 with a BOP deficit of $15.6bn in 3Q when rates were hiked to stop inflationary sterilization. Photo/Vietnamnet.vn

ECONOMYNEXT – Vietnam can grow 6.0 percent in 2024, with ‘policy support’ but there is a debate whether it should be done through fiscal (widening deficits/worsening debt or state spending) or monetary means, a top International Monetary Fund official said.

The IMF projects 6.0 percent growth for Vietnam in 2024 “as it rebounds from a challenging 2023,” Krishna Srinivasan, Director of the Asia and Pacific Department told reporters during the Spring Meetings in Washington.

Western Statism

“Now, in the case of Vietnam, I would say that there’s an issue about policy mix, whether you could get more support from the fiscal and rely less on monetary,” Srinivasan said.

“So there is an issue of policy mix which we’re talking, which we’ve been engaging the authorities with.

“I would say that policy support should be more favorable and that should, and along with external demand, help raise growth to 6 percent.”

Sri Lanka used both fiscal and monetary mix to boost growth from December 2019, triggering an external default two and a half years later.

Vietnam’s forex reserves fell below 3 months of imports in 2022 after the State Bank kept policy rates down by inflationary sterilization of forex market interventions.

The currency was then stabilized with rapid fire rate hikes and credit controls to dial back inflationary policy, just as long fuel ques started to form at petrol sheds, with angry riders already hit by rising prices due to Dong weakness. 
The return to market interest rates averted wider social unrest from being triggered by depreciation and further losses at state energy utility EVN, due to fixed prices amid soaring coal prices.

The State Bank of Vietnam later cut rates and relaxed credit controls as the BOP shifted to a surplus.

The government has since cut value added taxes. Public sector salaries are set to rise further this year, possibly as much as 30 percent, after earlier wage restraint. (Related Link: Public employee’s salaries to increase by 30 per cent from July 1: Minister)

State Driven Growth Options

The IMF also said in an Article IV consultation report released in October 2023, that fiscal metrics should be effectively undermined for ‘growth’ but more through income redistribution, and possible support for a fallout from a weak property sector.

Some Vietnamese property companies are reeling from expansion during earlier low rates and Covid-linked construction delays, which could also hit banks.

“Building on successful fiscal consolidation in recent years, there is fiscal space to provide further support,” an IMF Article IV consultation report released in October 2023 said.

“The government could scale up social safety nets that would boost growth and protect the most vulnerable households.

“Given the slowdown and the constraints faced by monetary policy, going forward, fiscal policy can take a leading role in supporting aggregate demand.

“For instance, the government could scale up social safety nets—and consider cash transfers to provide swift relief to poorer households.

“If the current turmoil proves more damaging to the economy and the financial sector, targeted support could be considered, including to help real estate developers restructure.”

Dong on thin ice

In 2023, Vietnam’s balance of payments was only marginally in surplus by 1 to 3 billion dollars a quarter, indicating that credit was still resilient after a successful ‘soft-landing’, and any further shocks from macro-economists can destabilize the external sector easily.

In the fourth quarter of 2024, Vietnam’s BOP was only 2.4 billion dollars in surplus.

Any extra spending or tax cuts which boosts the deficit due to attempts to engage in ‘macro-economic policy’ and expand government borrowings would lead to money printing under a fixed policy rate, reversing gains made by the State Bank over 2023, and pushing the Dong down, analysts say.

Western macro-economists believe that expanding government action (through the Treasury or central banks) to tinker with ‘aggregate demand’ can boost growth numbers instead of giving a chance for people and businesses to engage in real production of goods and services by providing monetary stability.

Collapsing currencies and external imbalances are then blamed on ‘current account deficits’ and ‘structural deficiencies’.

Such Keynesian and post-Keynesian beliefs have worsened since quantitative easing was normalized in the US after the Great Recession and ‘stimulus’ re-captured Western media attention despite the hard lessons of the 1960s and 1970s, critics say.

In Sri Lanka, the IMF taught a central bank that had already busted the currency from 4.70 to 131 to the dollar to calculate ‘potential output’ just as the country was barely recovering from a 30-year civil war.

Sri Lanka defaulted within 7 years of ‘data driven monetary policy’ (flexible inflation targeting with output gap targeting) and three currency crises later in peacetime amid increasingly aggressive macro-economic policy as consecutive stabilization programs reduced growth numbers.

Aggressive Macro-economic Policy

After using higher deficits and inflationary rate cuts in 2015 amid low inflation, inflationary rate cuts despite tax hikes in 2018 (fiscal policy is tight therefore monetary has to be loose mantra), macro-economists took a proverbial Keynesian bull by the horns and cut both taxes and rates from December 2019 saying there was a ‘persistent output gap’.

Related Sri Lanka fiscal stimulus to close output gap

Analysts say there is no real choice between monetary or fiscal deterioration to achieve macroeconomic policy desires of interventionists, in a country with a bureaucratic interest rate.

A policy rate, unless hiked, will automatically result in inflationary monetary operations as domestic credit picks up, irrespective of whether it is driven by private or state credit.

Any so-called ‘fiscal support’ can only be given without harming the exchange rate in a country that has a reserve collecting central bank with a policy rate, by liquidating any sovereign wealth funds or borrowing abroad and pushing up net external debt, analysts say.

By worsening external net debt levels, desires of macro-economists can be satisfied without harming monetary stability and the living standards of the population in general or nutrition of the children of the poorest sections of society by so-called exchange rate flexibility or debasement.

In Sri Lanka, potential output is now written into a brand new IMF-backed monetary law even before the first default workout is complete. Potential output is mentioned in every monetary policy statement, not stability. (Colombo/Apr20/2024)

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Sri Lanka’s Easter Bombings: A Preventable Tragedy

ECONOMYNEXT – Five years on, Sri Lanka’s Easter Sunday bombings has left us with more questions than answers.

Both the Gotabaya Rajapaksa government and now the Ranil Wickremesinghe tenure has been shown up poorly in terms of ensuring the masterminds and those who failed to prevent the bombings are bought to book.

As one sifts through various reports and discussions on the Easter Sunday bombings which took the lives of 315 and injured at least 600, one must, as Sunanda Deshapriya, activist and investigative journalist told a webinar recently, ask whether that tragedy was preventable.

If it was, then why was it not?

The webinar was organised by the Solidarity Movement for Justice and Truth (SMJT).

One interesting fact that investigators discovered, Deshapriya said, was that a phone number used by one of the bombers, was amongst a series used by the infamous ‘Tripoli Brigade’ that is alleged to be behind the Lasantha Wickrematunga murder.

This brings up the question whether the Easter bombers were connected to these covert groups within the Armed Forces which some observers have blamed for a number of violent incidents.

There were other questionable events. In an interview with TNL in 2023 former CID Head, Ravi Seneviratne claimed that though the visit to Vanathavilluwa by his officers investigating the destruction of Buddhist statues in Mawanella, was not public knowledge, the military intelligence had turned up there.
Deshapriya says, “We have to ask who ordered the MI to go there.”

In his interview, Seneviratne also said that Zaharan, the leader of the Thowheed Jamat that carried out the Easter bombings, first came to their attention in January 2019. They received tips of Zaharan’s whereabouts from civilians he said, and those were always that he had been sighted in various locations in the East.

However, following the Easter attacks the CID had realised that while they were looking for Zaharan in the East, he had been moving around in Wattala, Negombo, Mount Lavinia and Panadura. He alleged that while Zaharan seemed to have been secure in these areas, the CID had had no inkling of it.

The CID has informants everywhere, so why were they not aware that Zaharan was living in the Western Province, he asks.

SSP Shani Abeysekara is on the record as saying that the Intelligence operatives had “deliberately mislead the CID.”

Evidence indicates that former head of State Intelligence, DIG Nilantha Jayawardena, had wiped out his phone and laptop prior to handing them over the investigators.

“Why did he do that? When did he do that? What did it contain? There are many secrets about the Easter Sunday attacks that are yet to be revealed,” Deshapriya said.

He also states that “there are also many holes in Azad Maulana’s story on Channel 4.”

Despite these discrepancies, Deshapriya says that the volume of information about Zaharan available to the Security Forces, particularly the intelligence arm was quite substantial.

The bombings and the aftermath, the hysteria around the need to save the country and future generations, the demonization of the Muslim community all pointed to one goal; a regime change. Those fighting these past five years to bring the masterminds to book must also now, determine whether that heinous deed was intentional.

The Parliamentary Select Committee (PSC) and the Commission of Inquiry (COI), both appointed to examine the events leading to the Easter attacks, concluded that if the Indian intelligence reports had been acted on, the bombings on April 21, 2019, could have been avoided, the report noted.

On April 19, the Centre for Society and Religion (CSR) released a report titled, ‘5 Years Since Easter Sunday Attacks: Still Awaiting Justice,” where it says that “various committees were appointed to collect evidence and provide a report of the findings.

‘A Presidential commission, a Presidential committee, and a Parliamentary Select Committee were appointed to investigate the Easter Sunday Attacks. The report produced by the Presidential Committee was not published while the Parliamentary Select Committee’s report was fully published, and the Presidential Commission report was partly published.

On 26th January 2023, the Right to Information Commission directed the Presidential Secretariat to make the presidential committee report public before 9th February 2023 after hearing an appeal filed by CSR. However, none of the major recommendations in the published reports have been implemented to deliver justice for the victims.”

“The reports reveal that authorities had sufficient time and enough intelligence to act on the suspicions and prevent the incident. SIS Director received intelligence reports from India on the 4th and 5th of April 2019 and again two reports on the 20th of April describing the possibility of the attack, naming the suspects, and the urgency of the terror attack.

Additionally, there was a dry run conducted five days before the bombings where a motorcycle was blown up using a remote-controlled device in Zaharan’s home base, and although the SIS learnt of the incident the next day, even after intelligence reports stated that Zaharan was planning a terror attack, proper investigations into this matter did not take place.

The amount of information that was received prior to the attack and the lack of action, investigation, and implementation of safety measures inevitably raised questions as to who was actually behind the attacks” CSR said.

“A less dysfunctional government might have still failed to connect incoming intelligence with the information on Zaharan in Sri Lankan police files, but it would have tried much harder,” it added.
The report goes on to note the lapses made by the Sri Lanka government’s leaders.

“Regardless of the number of intelligence reports both by the U.S and India, that had warned about imminent attacks targeting churches and hotels in Sri Lanka, President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe both acted out of gross ignorance. Even, at the time the unfortunate incident has happened, the executive president Mr. Sirisena was out of the country and returned a considerable time after the incident.”

Fr. De Silva also asks as to how the Police would conduct an impartial inquiry into the role of the various personnel who were holding powerful positions at the time and still continue to do so.

Gen Salley remains as head of Intelligence. The DIG in charge of the area where the Katuwapitiya church is situated in that period was Deshabandu Tennekoon, who is now the Inspector General of Police. DIG Nilantha Jayawardene who was the Intelligence chief is now Senior DIG Administration, a post second only to the IGP.

“In seeking justice how can we engage with these leaders in power who are themselves accused of complicity in these incidents,” asks Fr. De Silva. “We are doubtful we can get justice without a change in the people holding office.”

As election fever hots up, the main opposition political parties are jostling with each other promising to bring the masterminds of the Easter attacks to book, under their regimes. Both the SJB and the JVP led NPP have put out official statements on the course of action they would take if elected to power.

Speaking at a zoom discussion organised by the Australia Sri Lanka Forum for Justice for Easter Victims on April 17, SJB’s Eran Wickremaratne said his party would introduce amendments to existing structures, to create an Independent Public Prosecutors Office to handle such cases.

The SJB plans to establish a permanent office with members of Scotland Yard and the FBI to work alongside local investigators to bring closure to the Easter tragedy, he said.

Meanwhile, the JVP led NPP presented a 7 point plan which would address the inaction of the authorities, and take legal action against all those directly and indirectly involved in the Easter Sunday bombings.
Both political parties have presented their proposals to Malcolm Cardinal Ranjith. Let’s hope they are not mere election promises!

The Easter Sunday victims have been political pawns these past five years, just as the many others who lost family members in the various conflicts the country has been through.
They too, are still awaiting justice.

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