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Thursday June 8th, 2023

Sri Lanka on right path to emerge from bankruptcy by 2026: President

ECONOMYNEXT – Sri Lanka is on the right path with improvements seen in a several sectors, and monetary stability returning, President Ranil Wickremesinghe said in an address to a new session of parliament.

Sri Lanka’s economy is estimated to have shrunk 8 percent in 2022 after the worst currency crisis triggered by the island’s flexible inflation targeting central bank which saw the rupee collapsed from 200 to 360 to the US dollar.

External stability has been restored and forex shortages have eased after the agency stopped trying to control interest rates with printed money (inflationary policy) and some food prices have started to fall with the credit system externally anchored at 360/370 to the US dollar.

“Due to the measures taken, we have been successful in reducing this burden gradually,” President Wickremesinghe said.

“Now there is stability in the economy. People are comfortable. We have been able to safely guide Mother Sri Lanka a long way across a challenging course. It was not an easy journey. However, it is not yet over.”

Sri Lanka had to engage in reforms to make the country grow. A deal with the International Monetary Fund is still in abeyance until China gives debt assurances acceptable to the agency. India and Paris Club nations, the other major creditors have already given assurances.

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Sri Lanka has also raised taxes to pay the public service which had been bloated with unemployed graduates under a policy articulated by the Janatha Vimukthi Peramuna which was embraced by successive Rajapaksa regimes.

President Wickremesinghe has also tried to control expenditure departing from the IMF’s earlier policy of expanding the state by revenue based fiscal consolidation and abandoning cost cutting.

He said the banking system has to be fixed.

“We committed to securing the financial system that was on the verge of collapse,” he said.

“Government expenditure was controlled. Measures were taken to increase tax revenue.”

He said state workers could be given some money by the end of 2023, if the economy improves.

“We are now moving from a negative economy towards a positive one. By the end of 2023, we can achieve economic growth,” he said.

“When I first addressed this Parliament as the President, the inflation of the country was 70 percent. Due to the measures we have implemented, it was reduced to 54 percent in January 2023. We will strive to make it a single digit by the end of 2023.”

Greece which suffered debt crisis took 13 years to recover, he said.

“During that period, they received aid from the IMF three times,” President Wickremesinghe said.

“However, if we continue according to this plan, we can rise out of bankruptcy by 2026.

“As I have been continuously appealing, if all the parties in this Parliament join the process to build the country, we would be able to extricate from this crisis even earlier.” (Colombo/Feb09/2023)

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Sri Lanka’s shares slip on profit taking and selling pressure

ECONOMYNEXT – Sri Lanka’s shares closed lower on Wednesday after four consecutive gains in previous sessions spiraled into selling interest and profit taking, an analyst said.

The main All Share Price Index was down 0.28 percent or 24.39 points to 8,722.06, this is the lowest the index has been since May 02, while the most liquid index S&P SL20 was down 0.40 percent or 9.92 points to 2,468.44.

“The market was gaining in the previous sessions and there is selling and profit taking present today, due to continuously being on green,” an analyst said.

In the previous sessions the market was seeing gains, due to lowered policy rates and low inflation stimulating buying interest and driving the sentiment up, an analyst said.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

“There are gradual improvements in the market sentiment, with positive sentiments coming in from lowered policy rates and inflation,” an analyst said.

The market generated foreign inflows of 12 million rupees and received a net foreign inflow of 18 million rupees, due to low share prices and discounted shares followed by a dividend announcement.

The market generated a revenue of 554 million rupees, this is the lowest the turnover has been since May 10, while the daily turnover average was 1 billion rupees. From the total generated revenue, the banking sector contributed 120 million rupees, Diversified Banks contributed 115 million rupees and the Capital Goods Industry generated 78 million rupees.

Top losers during trade were Sampath Bank, Commercial Bank and Aitken Spence. (Colombo/June06/2023)

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Sri Lanka Treasuries yields plunge, 12-month down 318bp

ECONOMYNEXT – Sri Lanka’s Treasuries yields plunged across maturities at Wednesday’s auction with the 12-month yield falling 318 basis points, in one of the biggest one day falls, data from the state debt office showed.

The 3-month yield fell 244 basis points to 23.21 percent.

The 6-mont yield fell 339 basis points to 21.90 percent, along with the 12 months to 19.10 percent.

The short-term yield curve is inverted.

The central bank last week cut its policy rate 250 basis points in a signaling move but is not printing money to enforce the rate cut.

The debt office sold all 140 billion rupees of offered securities. (Colombo/June07/2023)

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Sri Lanka forex reserves rise US$722mn in May 2023

ECONOMYNEXT – Sri Lanka’s foreign reserves grew 722 million US dollars to 3,483 million US dollars in May 2023 from 2,761 million US dollars in April, official data showed as deflationary policy and weak credit reduced ‘above the line’ outflows.

Sri Lanka lost almost all its reserve in over two years as the central bank sold reserves and printed money to keep rates down (sterilized reserves sales) including borrowed dollars from India.

Gross official reserves fell to a low of 1,705 million US dollars in September 2022.

Sri Lanka’s central bank hiked rates in April 2022 to slow credit and also stopped printing money after it ran out of borrowed Asian Clearing Union dollars from India.

Sri Lanka’s gross official reserves are made up of both monetary reserves of the central bank and any balances of the Treasury account from loans or grants it gets.

The central bank’s net foreign reserves are still negative after busting up borrowed reserves to suppress rates. By April (before the collection of reserves in May) the central bank’s net reserves were negative by 3.7 billion US dollars.

In May alone 662 million US dollars were bought from the market, Central Bank Governor Nandalal Weerasinghe said.

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Borrowing dollars through swaps and busting them up, was invented by the US Federal Reserve as it was printing money and breaking the Bretton Woods system in the early 1970s.

Sri Lanka received a 350 million US dollar tranche from the Asian Development Bank and 331 million US dollars from the IMF to the Treasury for budget support.

The loans can be sold to the central bank by the government to generate rupees and spend. However, since credit is weak, not all the inflows go out of the country particularly as the central bank is conducting deflationary open market operations on a net basis.

By allowing the rupee to appreciate unlike in previous episodes of recovery in an IMF program, after a bout of money printing, the central bank is bringing down inflation – in some cases absolute prices – and restoring confidence and easing the ‘pain’ of ‘monetary policy’ or stimulus.

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Why is Sri Lanka’s rupee appreciating?

Though exports are falling, tourism revenues are also picking up.

The budget support loans, tourism receipts less the reserve collected will widen the trade deficit. Building foreign reserves involves lending money to the US or other western nations and is similar to repaying foreign debt. (Colombo/June07/2023)

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