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Sunday December 10th, 2023

Sri Lanka, Pakistan discuss cross-investing forex reserves in government bonds: Minister

ECONOMYNEXT – Sri Lanka and Pakistan had discussed the possibility of cross-investing foreign reserves in each others’ sovereign bonds during a visit of Prime Minister Imran Khan to the island, State Minister for Money and Capital Markets, Nivard Cabraal said.

“We have been investing foreign reserves in Western government bonds at low rates about 1.5 percent,” Cabraal told reporters in Colombo.

“They are also investing in various instruments in the Western world. They are also generating 1.5 percent, just like us. Sometimes it makes sense to invest in theirs (bonds) and for them to invest in ours.

“”But we borrow at high rates. When we give money to Western nations it is not called giving a loan but an investment.”

There was “merit” in investing forex reserves in each other’s dollar sovereign bonds up to a prudential limit, he said.

“Bangladesh central bank I know has Sri Lankan bonds,” he said. “We should look at South-South investment.”

Over the last two decades Bangladesh has had superior monetary policy running a fairly credible implicitly pegged regime, analysts say.

Many emerging market central banks which have explicit or implicit pegs countries which use the dollar as the intervention currency, also invest in Euro denominated bonds, which exposes them to high cross currency risks.

Investing in dollar bonds reduces currency risk, though default and liquidity risks may exist in low rated emerging market bonds.

Most South Asian governments have issued international sovereign bonds which are traded in key over the counter markets in Asia, Europe and the US.

Pegged central banks invest in Western government bonds because they have a high rating with low default risk and Western markets are liquid and they do not impose exchange controls.

Before 1951 when a money printing Latin America style central bank was set up by a Federal Reserve money doctor Sri Lanka had a currency board where money was created only through forex purchases (net foreign assets) keeping the exchange rate fixed from 1885 to 1951.

Its assets were invested in a number of liquid Sterling Area government securities and not just UK analysts familiar with the operations of the Board of Commissioners of Currency of Ceylon said.

Issuing domestic money only against NFA provided a non-discretionary monetary rule that allowed Sri Lanka (Ceylon) to be among highest income countries in Asia after Japan and its stock exchange to finance FDI in countries like Malaysia.

Currency Boards are not expected to have more than 115 or 120 percent of the monetary base in forex reserves and was a tool devised by British rulers to allow unit of their empire to get part of the profits of note issue.

But Latin America style pegs try to collect large reserves to run counter-cycle policy and trigger balance of payments crisis in the process of selling reserves and sterilizing interventions to resist market interest rates in the economy in pro-cyclical policy or by printing money for budgets.

After printing large volumes of money in 2020 (issuing money against domestic assets) Sri Lanka suffered its biggest balance of payments deficit in its history. (Colombo/Feb25/2021)

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ADB USD200mn loan for Sri Lanka economic stabilization efforts

ECONOMYNEXT – The Asian Development Bank (ADB) has approved a US 200 million dollar concessional loan to Sri Lanka to help stabilize the country’s finance sector.

The Financial Sector Stability and Reforms Program comprises two subprograms of IS 200 million dollars each, according to a statement by the ADB.

“The program’s overarching development objective is fully aligned with the country’s strategy of maintaining finance sector stability, while ensuring that banks are well-positioned for eventual recovery,” ADB Country Director for Sri Lanka Takafumi Kadono was quoted as saying in the statement.

“The expected development outcome is a stable financial system providing access to affordable finance for businesses in various sectors of the economy.”

The ADB statement continues:

“Subprogram 1 targets short-term stabilization and crisis management measures that were implemented in 2023, while subprogram 2 is planned to be implemented in 2024 and focuses on structural reforms and long-term actions to restore growth in the banking sector.

The program will help strengthen the stability and governance of the country’s banking sector; improve the banking sector’s asset quality; and deepen sustainable and inclusive finance, particularly for women-led micro, small, and medium-sized enterprises.

According to the International Monetary Fund’s (IMF) latest review, Sri Lanka’s economy is showing tentative signs of stabilization, although a full economic recovery is not yet assured.

The program is a follow-on assistance from ADB’s crisis response under the special policy-based loan that was approved for Sri Lanka in May 2023.

It is aligned with the fourth pillar of the IMF’s Extended Fund Facility provided to Sri Lanka to help the country regain financial stability.

It is also in line with the government’s reform agenda, including strengthening the operational independence of the Central Bank of Sri Lanka (CBSL) and its designation as the country’s macroprudential authority.

In designing this subprogram 1 loan, ADB has maintained close coordination and collaboration with the IMF to design targeted regulatory reforms for the banking sector—including the asset quality review—and with the World Bank on strengthening the deposit insurance scheme.

“The loan is accompanied by a $1 million grant from ADB’s Technical Assistance Special Fund to provide advisory, knowledge, and institutional capacity building for Sri Lanka’s Ministry of Finance and CBSL.”

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Sri Lank in blackout as power grid hit by cascading failure

ECONOMYNEXT – Sri Lanka suffered a blackout as Saturday evening as the state-run Ceylon Electricity Board grid was hit by a cascading power failure.

The cascading failure is believed to have been triggered by the failure of the Kothmale-Biyagama transmission line.

“The Ceylon Electricity Board wishes to inform our customers that due to the failure of Kotmale – Biyagama main transmission line, an island wide power failure has occurred,” CEB Spokesman Noel Priyantha said.

“Step by step restorations are underway and it may take few hours to completely restore the power supply.”

With hydro plants running flat out, a outage of the line tends to create a big imbalance in the demand and supply, leading to tripping of more lines and generators.

Lines can trip due to lightening strikes, or equipment failures.

Sri Lanka last suffered a cascading failure in December 2021, due to the failure of the same transmission line.

RelatedSri Lanka power blackout as grid hit by cascading failure

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Sri Lanka to host regional Food and Agriculture Organization conference

ECONOMYNEXT – Sri Lanka will host the 37th session of the Asia Pacific Regional Conference (APRC) of the United Nations Food and Agriculture Organization (FAO), from February 19-22, 2024 in Colombo.

The Conference will bring together agriculture ministers and officials from 46 countries across the region to discuss challenges in food and agriculture.

“The 37th APRC will provide a vital platform for regional collaboration, benefitting the agricultural landscape, fisheries sector and environment of Sri Lanka,” Minister Mahinda Amaraweera said at a press briefing on Friday (8) to announce the conference.

FAO has had an active presence in Sri Lanka for over 40 years. “FAO has supported the country in the implementation of Good Agricultural Practices (GAP), and the development of the fisheries sector for growth and climate resilience,” Vimlendra Sharan, FAO Representative for Sri Lanka and the Maldives said.

“The APRC conference will be an opportunity to highlight the innovative approaches introduced in partnership with the government.”

By hosting APRC, Sri Lanka hopes to demonstrate the country’s dedication to the growth of sustainable agriculture, and showcase its commitment to sustainable agricultural development.

The APRC agenda will include a forum on agritourism, especially requested by the Sri Lankan government.

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