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Thursday April 18th, 2024

Sri Lanka offers foreign exchange carrots amid monetary instability

ECONOMYNEXT – Sri Lanka has proposed a series of incentives to draw in black money, foreign exchange or discourage their outflow in a budget for 2021 without addressing the core cause of a Latin America style pro-cyclical soft-pegged central bank, which can drive a country towards default.

Prime Minister and Finance Minister Mahinda Rajapaksa said he proposed to pay a premium for foreign exchange remittances sent by foreign workers to banks in Sri Lanka, presenting a budget for 2021 to parliament.

“I propose to pay Rs. 2 per dollar above the normal exchange rate for the foreign exchange remittances sent by foreign workers to banks in Sri Lanka,” he said.

Banks generally keep a 4 to 5 rupee spread when dealing with customers. This week banks were buying dollars around 182 rupees and selling around 186.4 with the spot rate around 184/50.

It is not clear where the funds will come to pay the ‘extra’ two rupees. However, if the central bank does not print money, allows short term rates to fluctuate based on liquidity, exchange rates will stabilize and the spread will fall along with interest rates, analysts say.

Prebisch – Triffin

Sri Lanka has severe monetary instability from a central bank which was created in 1950 by a so-called Federal Reserve ‘money doctor’ based on a philosophy propagated by Raul Prebisch, the founder of Argentina’s central bank.

The disastrous central banks were created by the Latin American unit of the Fed under the tutelage of Robert Triffin a Keynesian who admired Prebisch.

Almost all countries with Prebisch-Triffin central banks ran into periodic currency collapses, import-substitution, default, dollarization, re-denomination or permutations of the outcomes.

In March 2020 Sri Lanka’s central bank printed unusually large volumes of money amid a credit surge pro-cyclically cutting rates and drove the rupee towards 200 US dollar, pushing down sovereign bond prices into steep discounts and triggering a credit downgrade.

Import controls and exchange controls followed.

Due to monetary instability, businessmen others also try to take money abroad and keep them denominated in money produced by better central banks or so-called ‘hard currency’ to stop the state from expropriating their value through currency depreciation or a crawling peg.

When private collapsed after April 2020, monetary has been partly counter-cyclical analysts say, but the economy is shackled in import controls.

Related

How Sri Lanka, Latin America was busted by Fed money doctors creating strongmen, anti-Americanism: Bellwether

Sri Lanka central bank should look at credit and liquidity in a new way: Finance Minister

No attempt has been made to reform the central bank.

Prime Minister Rajapaksa called on the central bank to further change monetary policy.

“It is required to reform the banking and financial sectors to ensure availability of credit and financing for the production process and associated transactions,” he told parliament.

“We believe the Central Bank should have a new perspective on the monetary policy regarding money and liquidity management.”

His words are eerily reminiscent of Raul Prebisch.

“The different stages in the production process, from primary production to the sale of the final product in the market, take a certain amount of time,” Prebisch wrote (Five Stages in My Thinking on Development).

“This is where the role of the monetary authority comes in: to supply the larger amount of money needed to pay the growing wage and salary bill.

“This increase in money should be just enough to match the growth of final production owing to the growth of employment.”

More Incentives for foreign exchange

Meanwhile, lures were also offered to businessmen with undeclared funds including money taken breaking foreign exchange controls coming from the soft-peg.

“For the benefit of the country, I request from all entrepreneurs to utilize the funds hidden locally or internationally in order to evade laws relating to taxes and foreign exchange,” Minister Rajapaksa said.

“It is expected to make legal provisions to provide a tax pardon to entrepreneurs thus utilizing funds for any investment facilitated by this budget under the payment of taxes amounting to 1 per cent.”

Tax breaks were also offered to foreign companies and multi-nationals catering to the domestic market.

“I propose to exempt the tax on dividends of foreign companies for three years if such dividends are reinvested on the expansion of their businesses or in the money or stock market or in Sri Lanka International sovereign bonds,” PM Rajapaksa said.

“In order to encourage the exports of multinational companies which are import-based for requirements of the domestic market, it is proposed to reduce the tax imposed on their dividends by 25 per cent in 2021 and 50 per cent in 2023 under the condition that they increase their exports by 30 per cent and 50 per cent in the respective years.

“In order to maintain a similar amount as the import expenditure in foreign exchange in domestic banks, the interest income from such deposits will be exempted from taxes.”

The budget also had a series of import substitution measures.

Thought budget did not have new revenue proposals, maintaining policy stability and reducing regime uncertainty, it also did not have major expenditure proposals such as state salary hikes and many new subsidies. (Colombo/Nov18/2020-sb)

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Sri Lanka’s discussions with bondholders constructive: State finance minister

ECONOMYNEXT – Sri Lankan authorities continue to engage all debt restructuring negotiations in good faith, within principles of equitable treatment among creditors, and with maximum transparency within the norms of such negotiations, State Minister of Finance, Shehan Semasinghe has said.

“It is standard practice, when a representative group of bondholders is formed, to entertain confidential discussions with such group and its appointed advisors. In the case of Sri Lanka, the Ad Hoc Group of Bondholders represents holders controlling more than 50% of the bonds, which make them a privileged interlocutor for Sri Lanka,” Semasinghe said on X (twitter).

“It is well understood that given the price sensitive nature of the negotiations, and according to market regulations, discussions with the Group and its advisors are to be conducted under non-disclosure agreements. This evidently restricts the ability of the Government to unilaterally report about the substance of the discussions.

“The cleansing statement, which was issued on the 16th of April, at the conclusion of this first round of confidential discussions with members of the Group, aims at informing the Sri Lankan people, market participants and other stakeholders to this debt restructuring exercise, about the progress in negotiations. It provides the highest possible level of transparency within the internationally accepted practices in such circumstances.

“As informed in this statement, confidential discussions held in recent weeks with bondholders’ representatives proved constructive, building on the restructuring proposals presented by both parties. During the talks both sides successfully bridged a number of technical issues enabling important progress to be made. Sri Lanka articulated key remaining concerns that need to be addressed in a satisfactory manner.

“The next steps would entail further consultation with the IMF staff regarding assessments of the compatibility of the latest proposals with program parameters. Following these consultations, we hope to continue discussions with the bondholders with a view to reaching common ground ahead of the IMF board consideration of the second review of Sri Lanka’s EFF program.”

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Sri Lanka rupee weakens at 301.00/302.05 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 301.00/302.05 to the US dollar in the spot forex market on Tuesday, from 299.00/10 on Tuesday, dealers said. Bond yields were broadly steady.

A bond maturing on 15.12.2026 closed stable at 11.30/35 percent.

A bond maturing on 15.09.2027 closed at 11.90/12.05 percent up from 11.95/12.00 percent.

A bond maturing on 15.12.2028 closed at 12.10/20 percent down from 12.10/15 percent.

A bond maturing on 15.07.2029 closed at 12.25/40 percent.

A bond maturing on 15.03.2031 closed at 12.30/50 percent. (Colombo/Apr17/2024)

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Sri Lanka Treasury Bill yields down across maturities

ECONOMYNEXT – Sri Lanka’s Treasuries yields were down across maturities at Wednesday’s auction with the 3-month yield moving down 7 basis points to 10.03 percent, data from the state debt office showed.

The debt office sold all 30 billion rupees of 3-month bills offered.

The 6-month yield fell 5 basis points to 10.22 percent, with 25 billion rupees of bills offered and 29.98 billion rupees sold.

The 12-month yield dropped 4 basis points to 10.23 percent with 18.01 billion rupees of bills sold after offering 23 billion rupees. (Colombo/Apr17/2024)

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