An Echelon Media Company
Wednesday February 28th, 2024

Sri Lanka pegs rupee in both directions in May 2022 amid ‘float’

ECONOMYNEXT – Sri Lanka has bought 76.6 million US dollars in May 2022 and sold 155.1 million US dollars continuing to intervene in both sides of a soft-peg or flexible exchange rate three months after an attempt was made to float the currency, official data show.

The central bank bought 150.9 million US dollars from commercial banks in April 2020, through a surrender requirement, despite the currency being under pressure and sold 244 million US dollars, providing convertibility at a given pegged exchange rate.

In March an attempt was made to float the currency, which requires a complete suspension of convertibility to end forex shortages.

Forex shortages persist when a central bank with a policy rate intervene for imports, because liquidity is re-injected to the banking after an intervention in a sterilized forex sale.

After completely running out of reserves the central bank is intervening with surrendered dollars and deferred payments to India under the Asian Clearing Union.

In April the central bank ran a 2.56 billion US dollar balance of payments deficit, up from 2.26 billion US dollar in March with borrowed reserves.

The surrender rule in addition to pushing the peg down, alters rupee reserves in the banking system.

Forex surrenders to the central bank and subsequent sales sterilized with overnight money tends to increase asset liability mis-matches in banks financing loss-making state enterprises and oil bills, while creating excess liquidity in banks which are not over-trading.

However surrenders had reduced in May from the April number.

Central bank interventions for imports (financing private credit) with ACU dollars tends to increase the central bank’s debt or negative net foreign assets position, while triggering a balance of payments deficit.

A currency is usually floated to end forex shortages and balance of payments deficits after a soft-pegged central bank runs out of reserves to restore monetary instability with a complete suspension of convertibility (exchanging dollars for rupees).

A float is usually accomplished at a lower overall interest rate level than by smashing credit to re-establish a peg without a float.

Analysts had warned against half-hearted floating, which tends to happen in third world central banks and those in Latin America due to so-called ‘fear of floating’.

“..[A]ny kind of half-hearted Treasury bill and bond auctions, partially failed bond or bill auctions with some volumes of printed money will lead to progressively higher interest rates but the reserve losses and currency depreciation will continue,” EN’s Economic columnist had warned. (Sri Lanka’s monetary meltdown will accelerate unless quick action is taken)

“Soft-peggers are not good at floating. Partial interventions (flexible exchange rate) will lead to even higher interest rates and more losses of confidence.

“In Argentina, short term rates went up to 60 percent due to the ‘flexible exchange rate’ (which is neither floating nor pegged) that had caused so much damage to Sri Lanka since 2015 coupled with an unsterilized disorderly market conditions (DMC) rule, which also lacks credibility.

“The high interest rates can kill many businesses. The high rates from partial floating can kill finance companies and banks.

“When dying banks are bailed out with printed money, it is generally even more difficult to control the exchange rate.

“Inflation and cash shortages will lead to a consumption collapse which will also destroy businesses. Low reserves will lead to a default on foreign debt as happened to the Weimar Republic.”

Comments (1)

Your email address will not be published. Required fields are marked *

  1. The Sri Lankan says:

    Isn’t the truly evil, root problem that is causing all this misery the draconian foreign exchange control laws operating in the country since the 50s? I.e., citizens are barred from obtaining and keeping dollars.

    If that rule (found nowhere else with a functioning economy) is removed, the central bank can print money to its’ heart’s content and the people will be insulated from it because no one will hold rupees long-term.

    The govt and central bank will see the immediate impact of printing money in the form of steep devaluation.

    This law is what has been used for over 70 years to silently rob generations of their wealth by politicians.

View all comments (1)

Comments (1)

Cancel reply

Your email address will not be published. Required fields are marked *

  1. The Sri Lankan says:

    Isn’t the truly evil, root problem that is causing all this misery the draconian foreign exchange control laws operating in the country since the 50s? I.e., citizens are barred from obtaining and keeping dollars.

    If that rule (found nowhere else with a functioning economy) is removed, the central bank can print money to its’ heart’s content and the people will be insulated from it because no one will hold rupees long-term.

    The govt and central bank will see the immediate impact of printing money in the form of steep devaluation.

    This law is what has been used for over 70 years to silently rob generations of their wealth by politicians.

Sri Lanka’s religious leaders need to cultivate harmony: Prez

ECONOMYNEXT – The responsibility of cultivating harmony rests significantly on the shoulders of religious leaders, Sri Lanka’s President Ranil Wickremesinghe has said.

“While politicians often pursue power, religious leaders strive to maintain their positions, frequently resorting to the perilous avenues of racism and bigotry. This unfortunate trend has plagued our country since the 1930s, yielding disastrous outcomes,” Wickremesinghe was quoted by his media division as saying at the ‘Religions to Reconcile’ national inter-religious symposium, organized by the National Peace Council of Sri Lanka, held today (28) at the Bandaranaike International Conference Hall (BMICH).

“Our nation has endured the bitter consequences of racism and religious extremism, culminating in a devastating conflict.

“With the military conflict resolved, Sri Lanka’s political challenges are now receiving attention, necessitating a renewed focus on coexistence,” Wickremesinghe said, adding that steps are being taken to resolve land disputes, address the issue of missing persons, release certain individuals, and initiate a delimitation of powers.

The President’s speech:

Having acknowledged the intrinsic connection between religion and reconciliation, our nation has endured the bitter consequences of racism and religious extremism, culminating in a devastating conflict. Following the cessation of hostilities, our main objective has been to foster coexistence among all communities.

The responsibility of cultivating harmony rests significantly on the shoulders of religious leaders. It is imperative that we remain mindful of our intentions. While politicians often pursue power, religious leaders strive to maintain their positions, frequently resorting to the perilous avenues of racism and bigotry. This unfortunate trend has plagued our country since the 1930s, yielding disastrous outcomes that require no further explanation.

Take Singapore, for example, where the absence of racism and bigotry has contributed to its rapid development despite its diverse linguistic landscape. With the military conflict resolved, Sri Lanka’s political challenges are now receiving attention, necessitating a renewed focus on coexistence, a topic also being deliberated in Parliament.

Mr. Karu Jayasuriya, served as the Chairman of the Sectoral Oversight Committee on Religious Affairs and Co-Existence when he was serving as the Speaker. This committee was established in response to conflicts involving Muslims in March 2018, as well as incidents in Galle in 2017 and Beruwela in 2014. Various proposals were put forth by these committees to address these issues, and consensus was reached on their implementation. It’s crucial that we uphold this agreement and continue working collaboratively to resolve these challenges.

Towards the close of last year, numerous Buddhist monks and Tamil leaders presented the Himalaya Declaration, a document we are currently adhering to. As we move forward, the final phase entails fostering synergy, particularly through discussions with Tamil political parties and MPs, aimed at addressing lingering issues. Steps have been initiated to resolve the matter of missing persons, with further updates forthcoming in the near future. Additionally, arrangements have been made for the release of certain individuals held in connection with these matters.

The primary concern at present revolves around the fate of the missing persons. To address this issue, we’ve presented and successfully passed a bill in Parliament to establish the Truth and Reconciliation Commission (TRC). Numerous reports from Disappearance Commissions have been reviewed, and one report authored by Judge A.H.M.D.Nawaz was selected.

Following the approval of the draft for the Truth and Reconciliation Commission, South African President Cyril Ramaphosa pledged his support for these initiatives. Similar assistance is being extended by other nations as well, enabling us to advance these critical endeavours.

Addressing the on-going political challenges, our attention is directed towards resolving land disputes, particularly in regions like Jaffna where tensions persist between villagers and the Wildlife Department. Similar conflicts also arise in areas such as Vavuniya, Trincomalee, Polonnaruwa, and Mahianganaya. We aim to address these issues through inclusive dialogue, involving all concerned parties. Furthermore, I have instructed to proceed in accordance with the 1985 map. Additionally, I anticipate meeting with Tamil MPs in Parliament next week to discuss these matters further. Following consultations with the security forces, agreements have been reached to release more land, providing a pathway forward in our efforts.

Another pressing issue is the delimitation of powers. A key demand is the empowerment of the 3rd list of devolution, with an emphasis on not interfering with police powers at present, leaving them open for future consideration. The Land Act is slated for presentation, and there are no objections to the delegation of other subjects in the 3rd list. However, securing the necessary consensus with other parties in Parliament to achieve a two-thirds majority remains crucial.

Simultaneously, discussions are underway regarding the implementation of the Provincial Board of Education. Proposals have been made to establish provincial professional training institutes in each province. Additionally, plans are underway to appoint provincial-level committees to lead the modernization of agriculture, establish a tourism board, and undertake related initiatives.

Additionally, the work of five provincial ministries is expected to be distributed among twenty ministries. This restructuring cannot simply resemble a general ministry, so officials are currently deliberating on adjusting their structure accordingly.

I eagerly anticipate addressing the final aspect of this matter, the decentralized budget, once all parties have convened. There’s also a call for a secondary board, akin to a Senate, which the government does not oppose. However, such an initiative would need to coincide with the framing of a constitution, potentially requiring a referendum. I also intend to engage in discussions on this topic with other party leaders.

These measures aim to lay the groundwork for a new era in our country. Religious leaders have been entrusted with significant responsibilities in this endeavour. I am confident that further discussions on these matters will yield fruitful outcomes.

Continue Reading

Sri Lanka rupee closes at 310.00/15 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 310.00/15 to the US dollar Wednesday, from 310.25/50 on Tuesday, dealers said.

Bond yields were broadly steady.

A bond maturing on 01.02.2026 closed at 10.60/80 percent from 10.60/75 percent.

A bond maturing on 15.09.2027 closed at 11.90/12.00 percent up from 11.80/95 percent.

A bond maturing on 15.03.2028 closed stable at 12.00/15 percent.

A bond maturing on 15.07.2029 closed at 12.20/50 percent from 12.25/50 percent.

A bond maturing on 15.05.2030 closed stable at 12.25/40 percent.

A bond maturing on 15.05.2031 closed at 12.55/75 percent down from 12.60/80 percent.

A bond maturing on 01.07.2032 closed at 12.50/90 percent down from 12.55/13.00 percent. (Colombo/Feb28/2024)

Continue Reading

Sri Lanka Treasuries yields edge up after steep fall

ECONOMYNEXT – Sri Lanka’s Treasury bill yields edged up across maturities at Wednesday’s auction with the 3-month yield up 09 basis points to 9.87 percent, data from state debt office showed.

The debt office sold 27.5 billion rupees of 3-month bills after offering 35 billion rupees.

The 6-month yield rose 09 basis points to 9.95 percent with 37.23 billion rupees of bills sold, after offering 47.5 billion rupees.

The 12-month yield went up 03 bis points to 10.05 percent, with 39.5 billion rupees of bills sold and 40 billion rupees offered.

Sri Lanka’s Treasuries yield have come down sharply in recent weeks.

The trend was partly helped by some banks which were earlier not buying into bills, starting to buy them.

Deposit in the central banks overnight window (private sector sterilization) has come down from around 200 billion to around 130 billion rupees in recent weeks.

Sri Lanka’s central bank in the past have triggered currency crises and eventual high corrective rates by not allowing Treasury bill yields to move when up private credit picks up and buying them into the balance sheet.

The resulting forex problems are then blamed on budget deficits (politicians) and current account deficits (mainly imports of the public usually petroleum, gold or cars).

The central bank can still buy Treasury bills outright from banks, term or overnight to inject money, alter rupee reserves of banks and encourage them to overtrade and trigger forex shortages, confidence shocks, capital flight and a second default, critics say.

The central bank recently lifted counterparty limits of standing facilities, which are given at the policy rate without a penalty unlike in countries with greater monetary stability.

In recent weeks the central bank has oversold bills outright and injected money long term and short term, though so far overall net injections have been deflationary. (Colombo/Feb28/2024)

Continue Reading