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Tuesday May 21st, 2024

Sri Lanka overnight money markets dry up as soft-peg drives up counterparty risks

ECONOMYNEXT – Sri Lanka’s overnight call money markets have dried up in rising counterparty risks contradictory money and exchange policy continue and authorities fail to establish a working peg or floating exchange rate amid interventions.

Though policy rates have been raised the central bank has continued to print money to accommodate various activities with its Treasury bills stock representing permanently injected money rising to 2,269 billion rupees from 2,234 billion a week earlier.

Over trading banks which gave loans without deposits are borrowing another 766 billion rupees overnight from the central bank while more cautious plus banks have deposited 315 billion rupees in the monetary authority instead of lending in the interbank market.

Cash plus banks are reluctant to lend to banks which are facing liquidity shortages. Many banks which face rupee liquidity shortages are also facing dollar liquidity shortages.

The central bank has no limit per individual bank to restrain central bank credit. There have been calls to tame the central bank domestic operations through strict limits.

Sri Lanka has a Latin America style central bank where reserve sales are sterilized as a matter of course to maintain an artificial policy rate leading to a balance of payment deficit.

Latin America style sterilizing central banks were set up rejecting basic classical money anchoring theory including those of David Ricardo and David Hume and giving tools to state bureaucrats to destroy sound money to keep interest rates down.

The central bank attempted to float the currency to end money and exchange policy contradictions (suspend convertibility) but the attempt failed amid a surrender requirement and the rupee fell from 200 to 360 to the US dollars.

Overnight call market lending by plus banks to short banks which were around 50 to 60 billion rupees at the time the float started has now declined to around zero.

The central bank has now run out of foreign reserves to intervene in forex markets and is borrowing dollars from India to continue to intervene and finance imports which analysts say leads to worsening loan to deposit ratios of central banks when they are sterilized with liquidity injections.


Sri Lanka continues monetary financing of imports, pegging after ‘running out’ of reserves

Foreign banks are among the cash plus banks. Cash plus banks have little or no risk limits to counter parties making it difficult for them to trade, market participants say.

Sri Lanka’s central bank started aggressive open market operations after the end of a civil war and they worsened after the third quarter of 2014 in a bid to maintain artificially low interest rates as domestic credit recovered in the post-civil war period, leading to three forex crises is seven years, heavy foreign borrowing and eventually default.

Most Latin America style sterilizing central banks trigger sovereign debt default repeatedly in cycles after printing money to suppress rates despite having lower deficits and national debt than Sri Lanka.

Sri Lanka, is following the failed policies of Robert Triffin-Raul Prebisch (sterilzing central banking), John H Williams (key currency advocate/rejection of Hume, specie flow), John Williamson (basket,band, crawl depreciation).

Similar policies (except BBC/REER targeting policy which were not adopted by the Fed or Bank of England) drove both the US and the UK into severe monetary difficulties and political turmoil until 1980, critics have said.

In a draft monetary law, Williamson style BBC/REER targeting policy is to be legitimized through a reserve collecting soft-peg called a flexible exchange rate (a permanently depreciating non-floating exchange regime).

As the US tightened policy from the 1980s, economies in countries in which central banks were set up or issue departments were made more aggressive through Prebisch-Triffin reforms collapsed and defaulted like Sri Lanka.

In Sri Lanka a Latin America style central bank was set up by a US money doctor giving the ability to economists to engage in monetary financing of imports and deficits and trigger currency crises from 1950.

Persisting currency crises and high rates from the failure to establish a float or re-pegging where credibility is restored, then lead to banking crises.

Drying up of call markets represents risk perceptions at an institutional lender level which have not yet permeated to the general public, showing there is still a window to restore a credible monetary regime, analysts say. (Colombo/July20/2022)

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Sri Lanka declares May 21 as National Mourning day over Iranian President’s death

ECONOMYNEXT – Sri Lanka declared a national mourning day on Tuesday, May 21 in view of expressing its solidarity with Iran after sudden death of Iran President Ebrahim Raisi following a helicopter crash.

President Raisi and eight others including Iranian Foreign Minister Hossein Amir Abdollahian were killed in the crash when the helicopter had a “hard landing” reportedly due to adverse weather conditions with heavy fog. However, President’s two convoy helicopters reached the destination safely.

“The Sri Lankan government has declared a national mourning day on tomorrow (May 21) on behalf of the sudden death of Iranian president Mr. Ebrahim Raisi,” the Department of Government Information said in a statement.

It also urged all the state institutions have to hoist the national flag half mast.

Raisi was in Sri Lanka on April 24 to launch the Uma Oya dam on a one-day official visit amid tight security. His helicopter crashed when he was returning to Iran after launching a dam in the Azerbaijan border.

President Raisi is seen as a hardliner and a potential successor to Supreme Leader Ayatollah Ali Khamenei.

Earlier this month, Sri Lanka’s Foreign Minister Ali Sabry said the island nation will deal with Iran for investments and trade without being caught into the United States-led sanctions.

Sri Lanka was unable to receive $450 million from Iran for a recently opened Uma Oya multipurpose project started before the sanctions.

Sri Lanka now exports tea to Iran for no dollar payment. Instead, Sri Lanka tea producers are paid by the state-owned Ceylon Petroleum Corporation (CPC) in rupees for the pending crude oil import payments for Iran.

President Ranil Wickremesinghe expressed his condolences on the tragic incident.

“Sri Lanka is deeply shocked and saddened by the tragic death of President Ebrahim Raisi, Foreign Minister Amir Abdollahian and other senior Irani official,” he said in his official X-platform.

“I express my deepest sympathies and sincere condolences to the bereaved families, the government and the people of Iran.”

Raisi, a Muslim jurist, served as the eighth president of Iran from 2021 until his death. (Colombo/May 20/2024)

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Sri Lanka helps launch Global Blended Finance Alliance

ECONOMYNEXT – Sri Lanka has joined a group of nations led by Indonesia which aims to mobilise capital to achieve carbon neutrality, Minister of Water Supply and Estate Infrastructure Jeevan Thondaman said.

The Global Blended Finance Alliance mooted by Indonesia in 2018, was formally launched at the World Water Forum in Bali today.

Among the other founding members are Fiji, France, UAE, Kenya, Luxembourg and Canada.

“Through our collective efforts, the Global Blended Finance Alliance aims to mobilise both public and private capital to help nations achieve carbon neutrality and the SDGs,” Thondaman said on social media platform X (twitter).

“The world has a USD 2.5 trillion funding gap to achieve the Sustainable Development Goals (SDGs) by 2030,” he said.

Blended finance is the strategic use of development finance, such as public and/or philanthropic funds, for the mobilisation of additional commercial finance towards sustainable development in developing countries. (Colombo/May20/2024)

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Sri Lanka rupee closes slightly stronger at 299.60/75 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee appreciated slightly to close at 299.60/75 to the US dollar on Friday, from 299.70/80 the previous week, dealers said. Bond yields were up.

A bond maturing on 15.12.2026 closed up at 10.15/35 percent from 10.05/15 percent.

A bond maturing on 15.09.2027 closed up at 10.45/55 percent from 10.25/40 percent.

A bond maturing on 01.07.2028 closed at 10.80/90 percent.

A bond maturing on 15.01.2030 closed at 11.70/80 percent.

A bond maturing on 01.10.2032 closed up at 11.90/12.05 percent from 11.85/12.00 percent. (Colombo/May20/2024)

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