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Tuesday February 27th, 2024

Sri Lanka net forex reserves fall to 33-pct of reserve money

ECONOMYNEXT – Sri Lanka’s net monetary forex reserves had fallen to around 33 percent of the monetary base by April 2021, one of the lowest levels seen in over a decade, as activist monetary policy intensified, official data show.

Net reserves are usually bought against rupee notes (reserve money).

However the central bank has also borrowed ‘reserves’ from the International Monetary Fund and swaps, which are effectively encumbered and cannot be exchanged for rupees.

Under a currency board arrangements net reserves have to be above 100 percent of reserve money (usually 115 percent as a buffer against risks).

After the credit contraction that came after Sri Lanka’s 2011/2012 soft-peg crisis, net foreign assets of the central bank as a share of base money rose to as much as 148 percent of reserve money.

However injections began in September 2014 to keep rates down, quite independent of any budgetary process. In September net foreign reserves as a share of monetary base was as high as 148 percent.

By January 2015, when the so-called ‘Yahapalana’ administration came to office, NFA as a share of base money (reserve backing of the note issue) was already down to 106 percent.

Large volumes of liquidity was then injected to keep call money rates at the bottom of the policy corridor as the budget deteriorated under the ‘100 day program’ of the so-called Yahapalana administration.

The 100 day program was a ‘policy-making by manifesto’ strategy without white papers, green papers or wide discussion.

Monetary policy deteriorated rapidly after that, with call money rate targeting coming into play to trigger the 2018 currency crisis.

Unlike a policy ceiling, at which liquidity shortages take place, squeezing the ability of banks to lend, ‘call-money-rate-targeting’ of the middle of the corridor leads to excess liquidity and a complete loss of control of reserve money, analysts have shown.

Call money rate targeting intensifies dual anchor conflicts involving targeting an external anchor (peg) and inflation (domestic anchor), analysts had pointed out.

In 2018 output gap targeting, a policy that led to the collapse Bretton Woods system, and the end of a gold standard which had operated for around four centuries, was also used and so-called stop-go policy cycles intensified.

The International Monetary Fund also gave technical assistance to Sri Lanka to calculate the output gap, despite the central bank being a top customer which had got into currency crises due to anchor conflicts.

Under a ‘flexible exchange rate’ an unusually unstable soft-peg, the currency collapsed quickly before the expected ‘Barber Boom’ from output gap targeting got properly took hold. A ‘barber boom’ was last seen in 2011.

Sri Lanka got into a currency crisis in 2018 while having a significant loan from the International Monetary Fund.

In 2019, taxes were slashed in another ‘policy-making by manifesto’ operation (echoing Anthony Barber), outdoing the ‘100 day program’.

“Manifesto making is political,” explained Rohan Samarajiva, a regional policy specialist in Arthashastra his column in EconomyNext (Sri Lanka’s misguided state priorities and how to reset them).

“Experts or those who are perceived as experts may be called in to contribute, but the principal criterion is not expertise, but trust.”

“Those who have been involved in manifesto making will testify to the opacity of the process, wherein what is accepted one day can disappear the next and new clauses and conditions can mysteriously appear even after ‘finalization’.”

Forex reserves then deteriorated sharply as rates were cut, reserve ratios were cut as the budget deteriorated.

Analysts have pointed out that Sri Lanka’s monetary policy deteriorated sharply after Deputy Central Bank Governor W A Wijewardena retired from the central bank.


Sri Lanka facing 2021 with reckless MMT, stimulus mania: Bellwether

When foreign reserves fall to very low levels, rates are usually hiked and the exchange rate is floated. By raising taxes and cutting state spending, the rate hikes can be capped to some extent.

Central banks that do nothing may end up in dollarization.

The fall in net reserves comes as policy at the anchor central bank is also deteriorating. Inflation in the US hit 5 percent in May 2021, in line with forecasts made by classical economists.

Analysts had warned that the central bank had to guard against a runaway Federal Reserves.


Sri Lanka’s central bank should guard against bankruptcy as Fed lights commodity fires

Sri Lanka’s first balance of payments crisis in the early 1950s also took place as the Fed printed money to target the yield of ‘Liberty Bonds’.

When oil prices rise Sri Lanka usually tries to fix oil prices losing tax revenues and driving up domestic credit, under a policy popularized by current industries Minister Wimal Weerawansa called ‘removing the World Bank plug’.

The rising domestic credit triggers more money printing under a policy rate targeting exercise (Colombo/June11/2021)

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Sri Lanka parliamentary committee says electricity tariffs should be reduced by 20 pct

ECONOMYNEXT — A parliamentary Sectoral Oversight Committee on Alleviating the Impact of the Economic Crisis has recommended to the Public Utilities Commission of Sri Lanka (PUCSL) that electricity tariffs be reduced by at least 20 percent.

A statement from parliament said on Monday February 26 that, following an analytical review of the figures presented by the Electricity Board, Public Utilities Commission, etc. and taking into consideration all other factors affecting the price of electricity, including considering the opinion given by experts that the existing electricity price can be reduced by about 33%, price of electricity should be reduced by at least 20% in the year 2024 so that the state-run Ceylon Electricity Board (CEB) will not suffer any loss.

PUCSL officials have informed the Committee that by the end of this month, they can submit the necessary recommendations to reduce the electricity bill, according to the statement.

The matter was taken up for discussion when the committee, chaired by MP Gamini Waleboda, met in the Parliament on February 22.

Officials from the Ministry of Industry, Ministry of Finance, Central Bank of Sri Lanka, Public Utilities Commission, Industry Development Board, Enterprise Development Authority, Department of Population and Statistics, Department of Inland Revenue and from government institutions including the Micro, Small and Medium Scale Industries Board and a group of industrialists had also been called for the meeting.

“The Committee gave several directives to the relevant institutions and officials to identify the micro, small and medium scale industries that are directly affected by the economic crisis and to activate the local economy and increase the foreign exchange earnings by reviving the industry sector.

“The Committee pointed out that due to the increase in electricity bills, the number of electricity connection cuts reported across the island has exceeded one million. It was also emphasised that in order to alleviate the pressure on the industry and the society, it should be arranged to provide electricity connections again by charging only 50 percent of the outstanding charges at the initial stage with the concessional basis of payment of outstanding electricity charges on installment basis,” the statement said.

The committee was also of the view to allow the customer to pay the connection fee in installments so as to avoid discouraging new entrepreneurs to start micro, small and financial industries due to high charges for getting fixed electricity connection and instructed to review the new connection fee and work to reduce it as much as possible.

The committee chair has instructed the PUCSL to conduct an audit on the electricity consumption in the public sector as an approach to ensure energy security.

“The Committee recommended to the Ministry of Finance and the Central Bank to start a loan scheme at subsidised interest for the purchase of solar panel systems with a view to promoting solar energy as a source of energy supply to industries. The Ministry of Finance expressed its agreement to provide refinancing facilities subject to a maximum as per the proposal made by the Committee to implement a loan scheme targeting micro, small and medium scale industrialists under subsidized interest rates.

The committee has also recommended that raw materials that must be imported from abroad and impose tax concessions on such raw materials be identified to ensure the supply of raw materials required for the smooth running of micro, small and medium scale industries. Copper, lead, aluminum and other industrial scraps used as raw materials in various domestic industries currently being sold by the CEB to external buyers and other entities should also be issued to micro, small and medium scale industrialists recommended by the Ministry of Industry and the Industrial Development Board, the committee has recommended.

The definition used by the Department of Population and Statistics for micro, small and medium industries and the definition used by other institutions such as the Industrial Development Board and the Central Bank for those industries are different from each other, which is an obstacle in making policy decisions, the committee had noted, directing the Department of Population and Statistics to support to the policymakers by releasing statistical data based on a common definition.

“The committee also recommended that the Credit Information Bureau should take prompt action to remove their credit information from the blacklists so as to facilitate access to credit facilities for micro, small and medium scale industries facing financial crisis to activate their balance sheets and to review all existing laws and procedures for registration of micro, small and medium scale industries as well as to obtain licenses and introduce a simple system.

“The committee informed all the parties to establish a steering Committee headed by the Ministry of Industry to implement the recommendations given by the Committee and to report its progress within a week,” the statement said. (Colombo/Feb27/2024)

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Sri Lanka sets up fund to help children of Gaza

The United Nations Relief and Works Agency for Palestine Refugees in the Near East is mandated to provide education, health, relief and social services, and emergency assistance to refugees. (Pic courtesy UNWRA)

ECONOMYNEXT – Sri Lanka’s cabinet of ministers have approved a proposal by President Ranil Wickremesinghe to set up a fund to help children caught in the war in Gaza, a statement said.

The government will contribute a million US dollars and use funds allocated by state agencies for Ifthar celebrations.

Public contributions are also called.

The Presidential Secretariat is requesting public donations citizens for the “Children of Gaza Fund” to be contributed to account number 7040016 at Bank of Ceylon (7010), Taprobane Branch (747) by 11th April.

Deposit receipts should to be forwarded to 0779730396 via WhatsApp. (Colombo/Feb27/2024)

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Top US official calls for inclusive reforms, deeper defence ties with Sri Lanka

ECONOMYNEXT — United States Deputy Secretary of State for Management and Resources Richard Verma in discussions with Sri Lanka officials had called for inclusive reforms and stronger human rights and also discussed deeper defence and maritime cooperation.

The United States remains committed to the economic growth and prosperity of Sri Lanka, statement from the US Embassy in Colombo quoted the official as telling government, civil society and economic leaders during his February 23-24 visit to Sri Lanka.

“Verma met with President Ranil Wickremesinghe and Foreign Minister Ali Sabry to discuss progress on Sri Lanka’s IMF program, including inclusive economic and governance reforms aimed at keeping Sri Lanka on the path to sustainable economic growth.  Deputy Secretary Verma stressed the vital need to protect human rights and fundamental freedoms, including freedom of expression. They also explored opportunities to deepen defence and maritime cooperation between the United States and Sri Lanka, including strengthening the Sri Lanka Navy’s capabilities to safeguard national security and promote a more stable Indo-Pacific region,” the statement said.

 On February 23, aboard the SLNS Vijayabahu, one of three former U.S. Coast Guard cutters transferred by the United States to Sri Lanka, Deputy Secretary Verma said: “I am pleased to announce that the Department of State has notified Congress of our intent to transfer a fourth medium endurance cutter to Sri Lanka.  The Department obligated $9 million in Foreign Military Financing to support this effort.  We look forward to offering the cutter, pending the completion of Congress’ notification period.  If completed, this transfer would further strengthen defense cooperation between the United States and Sri Lanka.  The ship would increase Sri Lanka’s ability to patrol its Exclusive Economic Zone, monitor its search and rescue area, and provide additional security for ships from all nations that transit the busy sea lanes of the Indian Ocean.” 

 Participating in the announcement at Colombo Port were Sri Lanka State Minister of Defense Premitha Bandara Tennakoon, Commander of the Sri Lanka Navy Vice Admiral Priyantha Perera, and U.S. Ambassador to Sri Lanka Julie Chung, who remarked, according to the statement: “The United States has previously transferred three cutters to the Sri Lankan Navy, which deploys these ships for maritime operations and law enforcement missions, countering human trafficking and drug trafficking, while supporting humanitarian assistance and disaster response efforts. The eventual transfer of a fourth vessel would be just one more point in a long history of cooperation between Sri Lanka and the United States in preserving a free and open Indo-Pacific region.” 

Verma also visited the site of the West Container Terminal (WCT), a deepwater shipping container terminal in the Port of Colombo. The WCT, currently being constructed by Colombo West International Terminal (CWIT) Private Limited with 553 million US dollars in financing from the U.S. International Development Finance Corporation, will provide critical infrastructure for the South Asian region, the embassy said.

“Operating near capacity since 2021, the Port of Colombo’s new addition will be the port’s deepest terminal and aims to boost Colombo’s shipping capacity, expanding its role as a premiere logistics hub connecting major routes and markets, boosting prosperity for Sri Lanka without adding to its sovereign debt,” it said. (Colombo/Feb27/2024)

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