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Saturday April 20th, 2024

Sri Lanka parliament approves controversial IMF backed central bank law

ECONOMYNEXT – Sri Lanka’s parliament passed a controversial new central bank law which the opposition slammed for lack of accountability in a country where there is growing understanding of the inevitable effects of central bank rate cuts enforced by inflationary open market operations.

The law passed with 66 legislators voting for and 23 voting against in a partially empty house where the debate was disrupted earlier in the day amid protests that there was no quorum.

“The intention of the new law is to correct past mistakes,” State Minister Shehan Semasinghe said.

The opposition called for amendments to make the central bank which has a history of printing money through various liquidity tools for macro-economic policy.

Countries with bad money central banks run on so-called Keynesian policies end up in the arms of the International Monetary Fund again and again, while their currencies depreciate permanently due to conflicting aims and goals.

The passage of the controversial law is a requirement under the 17th IMF program that the flexible exchange rate central bank dragged the country into.

The opposition slammed the law for giving independence to the agency without proper accountability provisions.

“I am not at ease with this bill, because I feel we have come back to the same place again,” opposition legislator Kabir Hashim said.

“The central bank still has along with its primary objectives of price stability, contradictory, output gap targeting, exchange rate determination, policy rate determination, and inflation targeting.

“This is a toxic mix.”

Output gap targeting or active macro-economic policy involves printing money for growth or cutting policy rates using inflationary open market operations.

The IMF itself taught the country to calculate a potential output, dangling a goal for the central bank to print money to reach it.

Countries with bad money central banks with contradictory money and exchange policies continue to have exchange and trade controls, social unrest and repeated IMF programs.

Flexible inflation targeting and similar regimes with different labels (targeting a domestic anchor while trying to collect reserves) especially with a high inflation targeting is found in defaulting countries with external instability including Ghana and Argentina.

Hashim said as far back as 1966, former President J R Jayewardene (before he became President) had engaged B R Shenoy to come up with solutions when the country ran into forex problems in 1966.

Sri Lanka had two back to back IMF programs – with the second starting before the first one ended – in that period. Shenoy had advocated a clean float.

In 1980 when Jayewardene liberalized the economy, the central bank was again printing money and Goh Keng Swee had and advised him not to allow the central bank to print money.
He also warned there was no benefit in depreciating the currency.

Singapore does not have a policy rate and operates on currency board principles.

But the advice was not carried out, Hashim said.

The law has a provision which legitimizes printing money to reach a potential output, or active macroeconomic policy while having exchange rate policy and reserve management objectives.

Opposition legislator Harsha de Silva said the law was a step in the right direction, but amendments were needed and hoped the government would accept them.

De Silva warned central banks cannot create growth.

The central bank will continue to print money for provisional advances for the government with an amendment that they would be printed at market rates, raising the question why the money was not raised from the market in the first place instead of being printed to blow the balance of payments apart as in the past.

Hashim told parliament that several East Asian countries showed during the Pandemic that it was possible to raise real money and even cut taxes, while countries that started Covid re-finance funds including Nigeria and Pakistan had ended up in crises, not to mention Sri Lanka.

Accountability in the new law was weak or non-existent, opposition legislators warned.

Related Sri Lanka legislators slam new IMF backed central bank law for lack of accountability

“The central bank can continue to create instability as in the past mis-using certain clauses and powers in the bill,” Hashim warned.

“There are no penalties for central bankers who fail to meet inflation targets set by parliament.”

“They are allowed to make people poor overnight through inflation and go Scott free.  (Colombo/July20/2023)

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Sri Lanka discussing giving extra land, water for Chinese oil refinery

ECONOMYNEXT – Sri Lanka is in discussions with China’s Sinopec to give extra land and assure water supplies after the company decided to expand the capacity of a planned oil refinery in Hambantota, Energy Minister Kanchana Wijesekera said.

“There are concerns on how the water supply is going to be provided for the refinery,” Minister Wijesekera told reporters Friday.

The refinery will need more land and also revise conditions in a Board of Investment agreement, he said.

Read more
Sinopec to double capacity of new refinery in Sri Lanka’s Hambantota

Recommendations and decisions from Sri Lanka’s side had already been sent and Sinopec is expected to revert back in May.

“We are hoping to sign the agreement once everyone has agreed,” Wijesekara said.

The principle agreements are expected to be signed by June, he said.

The refinery could sell up to 10 percent of its output in the domestic market.

“There is no commitment by the government to purchase anything,” Minister Wijesekera said. (Colombo/Apr19/2024)

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Sri Lanka rupee closes weaker at 302.00/50 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 302.00/50 to the US dollar in the spot forex market on Friday, down from 301.50/302.00 a day earlier, dealers said.

There was increased demand for dollars after the central bank bought 715 million dollars from forex markets. In the previous two months it was buying on average about 200 million US dollars, leaving market participants and bank in a ‘oversold’ position.

There were some official dollars sales Friday dealers said.

READ Sri Lanka rupee quoted wide to US dollar as peg inconsistencies flare up

Bond yields were broadly steady.

A bond maturing on 15.12.2026 closed at 11.30/40 percent down from 11.35/40 percent.

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

A bond maturing on 15.12.2028 closed stable at 12.15/25 percent.

A bond maturing on 15.09.2029 closed stable at 12.30/40 percent.

A bond maturing on 01.10.2032 closed stable at 12.40/50 percent. (Colombo/Apr19/2024)

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Sri Lanka stocks close down, banks trade down

ECONOMYNEXT – The Colombo Stock Exchange closed down on Friday, data on its site showed.

The broader All Share Index closed down 0.38 percent, or 44.80 points, at 11,753; while the S&P SL20 Index closed down 0.53 percent, or 18.46 points, at 3,456.

Turnover was at 1.4 billion. The diversified financials (Rs366mn) and banks (Rs266mn) sectors continued to see selling pressure.

“This was possibly due to uncertainty around the bond discussions,” market participants said.

With the exception of Sampath Bank Plc (up at 77.50) all other banks traded down in the day. Commercial Bank of Ceylon Plc was down at 104.50, Hatton National Bank Plc was down at 188.50, and DFCC Bank Plc was down at 77.00.

LOLC Finance Plc saw the most trades and closed up at 6.40. Another LOLC company, Browns Investments Plc, also saw high traded volumes and closed up at 5.60.

Softlogic Capital Plc was up at 7.00, and Softlogic Holdings Plc was up at 11.20. A trading suspension imposed on SHL.N0000 was lifted effective today as the company submitted the annual report for the year ended 31st March 2023.

However, shares of the Company will remain in the Watch List “due to Qualified Audit Opinion and Emphasis of matter on going concern in the Independent Auditor’s Report in the Audited Financial Statements for the year ended 31st March 2022.”

Dialog Axiata Plc, which announced its merger with Bharti Airtel Thursday, saw its share price close up at 11.90.

“There was some traction on index heavyweights,” market participants pointed out.

Top contributors to the APSI included Aitken Spence Plc (up at 134.50), Ceylon Tobacco Company Plc (up at 1,245.25, and Lion Brewery (Ceylon) Plc (up at 1,048.50).

There was a net foreign inflow of 5 million. (Colombo/Apr19/2024)

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