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Friday March 31st, 2023

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 rupee closes at 328/329 against the US dollar, bond yields down

ECONOMYNEXT – Sri Lanka’s treasury bond yields were down and the rupee closed at 328/329 against the US dollar in the spot market on Friday, dealers said.

A 01.07.2025 bond closed at 29.80/30.20 percent on Friday, down from 31.25/30 percent on Thursday.

A 15.09.2027 bond closed at 27.45/55 percent, steady from 28.80/85 percent on Thursday.

Sri Lanka rupee closed at 328/329 rupees against the US dollar, from 327/330 rupees from a day earlier. (Colombo/ March31/2023)

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Sri Lanka tax hike: no response from president, professionals to discuss next steps

GMOA Secretary Haritha Alutghe

ECONOMYNEXT – Sri Lanka’s trade unions and professional associations who have been agitating against an International Monetary Fund (IMF) backed progressive tax hike will meet to discuss further union action after a letter to the president went unanswered.

Government Medical Officers’ Association (GMOA) secretary Dr Haritha Aluthge told reporters on Friday March 31 that the unions will meet as the self-styled Professionals’ Trade Union Alliance (PTUA) collective which have so far been organising strikes and demonstrations demanding a revision of the taxes.

The PTUA has been awaiting a promised meeting with President Ranil Wickremesinghe for some days now. Aluthge previously said on Monday that if the meeting did not materialise, the unions would be compelled to go on strike.

The issue has become stagnant due to government inaction, said Aluthge at Friday’s press conference.

“The PTUA informed the president in writing yesterday for the last time to please understand the gravity of this situation and to immediately give us a meeting and present the government’s interim solution, through which the government can take measures to ease the sense of tension among professionals,” he said.

The purpose of the meeting is to discuss an “interim solution” to the professionals’ grievances over the progressive income tax hike until a reported revision that’s due in six months when the country’s recently approved 17th IMF programme comes up for review.

“Sadly, there has still been no response,” the GMOA official said.

All unions and professional associations will meet Friday evening together with a number of other unions to discuss further action, he added.

The privately-owned English-language weekly newspaper The Sunday Times reported on March 26 that the IMF had indicated the possibility of revising some of the taxes imposed as part of the IMF’s staff-level agreement with Sri Lanka when the programme comes up for review in six months.

According to the newspaper, IMF officials had conveyed this to representatives of trade unions during a virtual roundtable held last Friday March 24. The virtual meeting was held on the initiative of the IMF and was attended by trade unions and professional associations representing the PTUA including the GMOA. (Colombo/Mar31/2023)

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Sri Lankan transport associations cut haulage and transportation fees after fuel price cut

ECONOMYNEXT –  Sri Lanka Association of Container Transporters and fuel bowser owners has decided to reduce the haulage charges and transportation fee, after the government cut the auto diesel prices by 80 rupees, association officials said.

“Due to the recent reduction in Auto Diesel price from March30, 2023, the committee has decided to reduce haulage charges by 7 percent,” association said.

Sri Lanka Private Petroleum Tanker owners has also decided to reduce the transportation fee of fuel by 8 -10 percent from April onwards.

“We will be meeting with the association members and will be deciding on exactly how much we will be reducing,” the General Secretary of the association Nimal Amarasekera told EconomyNext.

“We hope to reduce it by 8-10 percent and will be applied.”

Meanwhile United Lanka Fuel Transport Bowser Owners Association said, the price reduction will be done, and the specific amount will be calculated using the cost per kilometer for a transporting bowser.

“We have different types of bowsers such as 13,200 litre and 19,800 litre likewise,” Association President K.W. Charles told EconomyNext.

“So the cost per kilometer per bowser is different and after we calculate only we can give a specific percentage.

“It will come to effect from this month and the payments for the next month will be based on the new prices.”

Charles said, this is only based on the price reduction of fuel, however several costs as maintenance and spare part costs should also be considered when deciding the transportation cost, which is also being discussed with the Ceylon Petroleum Corporation.

Sri Lanka slashed fuel prices with effect from Wednesday (29) midnight, Power and Energy Minister Kanchana Wijesekera said, after a protest by trade unions of state-run fuel retailer Ceylon Petroleum Corporation (CPC) resulting in queues at filling stations due to supply disruption.

The price of Petrol 92 Octane will be slashed by 15 percent or 60 rupees to 340, Petrol 95 Octane 95 will be reduced by 26.5 percent or 135 rupees to 375, Auto Diesel by 19.8 percent or 80 rupees to 325, and kerosene by 3.3 percent or 10 rupees to 295. (Colombo/ March31/2023)

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