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Thursday August 18th, 2022

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.”

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  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.

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Comments (1)

Your email address will not be published.

  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 rupee, yields in govt securities slightly changed

ECONOMYNEXT – Sri Lanka Central Bank’s guidance peg for interbank transactions weakened on Thursday (18) and yields in Treasury bonds picked up slightly while in T-bill edged down in dull trade after the central bank kept key monetary policy rates steady, dealers said.

On Thursday, before the market opened, the central bank held its key policy rates steady at 15.50 percent, while data showed market interest rates are close to twice the rate of them while private credit and imports falling as a consequence.

The central bank is injecting 740 billion rupees of overnight money to banks at 15.50 percent, which were originally injected mostly after reserves were sold for imports (or debt repayments) to artificially keep down rates (sterilized interventions), effectively engaging in monetary financing of imports.

The injections (sterilizing outflows) prevent the credit system from adjusting to the outflows and encourage unsustainable credit without deposits, which is the core problem with soft-pegged central banks, triggering a high rate and an economic slowdown later.

A bond maturing on 01. 06. 2025 closed at 27.90/28.00 percent, slightly up from 27.75/90 percent on Wednesday.

The three-months bill closed at 28.30/29.25 percent, down from 29.25/30 percent on Wednesday.

Sri Lanka’s central bank announced a guidance peg for interbank transactions weakened by one cent to 360.97 rupees against the US dollar on Thursday from 360.96 rupees.

Data showed that commercial banks offered dollars for telegraphic transfers between 367.97 and 370.00 for small transactions.  (Colombo/ Aug 18/2022)

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Japan grants medical equipment worth 500-mn yen to Sri Lanka govt hospital

ECONOMYNEXT –  The  Japanese government has granted medical equipment worth 500 million Japanese yen to the Sri Jayawardenepura government hospital to improve the hospital’s treatment facilities under Japan’s Non-Project Grant Aid Programme.

A statement by the Department of External Resources said the grant was given in response to a request by Sri Lanka’s government.

Under the 500 million Japanese yen (approximately 1,265 million rupees) grant assistance, angio-CT machine, other radiology equipment, ophthalmic instruments, surgical instrument sets (stainless steel with satin finish), 15 dental units with accessories, liver transplant instrument sets, and a cardiac catheterization laboratory will be provided, a statement said on Thursday August 18.

Sri Lanka due to its worst economic crisis in its post-independence history is currently facing shortages of essential medicine, non-essential and lifesaving medicines pressuring the health sector to only attend to emergency cases to preserve available limited medicine stocks.

On Thursday at the policy rate announcement media briefing by the Central Bank of Sri Lanka (CBSL), Governor Nandalal Weerasinghe said, with the strict measures taken in the recent past, Sri Lanka is currently managing the limited forex income coming into the country to purchase essential goods such as fuel and medicine.

Sri Lanka has received various grants from several countries including China and India which gave a 200 million US dollar credit line to purchase medicine from India.

In June, Minister of Health Keheliya Rambukwella said there is no shortage of vital medicines in the country and all medicines will be restocked by August 2022. However, shortages of medicine aer still being reported in various hospitals islandwide.

“This improvement at the hospital will facilitate the enhancement of the quality of the care provided especially to the patients with non-communicable diseases while enabling high quality medical professional training to medical undergraduates and postgraduates from the National School of Nursing at the aculty of Medical Sciences of the University of Sri Jayawardenepura,” the External Resources Department statement said.

“This project will eventually assist the development of human resources of the health sector in Sri Lanka,” it said. (Colombo/Aug18/2022)

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Sri Lanka immigration on the hunt for Scotswoman who documented protests

Kayleigh Fraser via @kayzfraser Instagram

ECONOMYNEXT – Sri Lanka’s Immigration and Emigration Department is attempting to track down Kayleigh Fraser, the Scotswoman who documented the country’s anti government protests.

Fraser was ordered to leave the island on or before Monday August 15 after officials cancelled her visa. She and her lawyer had filed a writ petition against her deportation with the Supreme Court, which was dismissed on the grounds that she was not being deported deported, only had her visa cancelled.

“The learned State Council submits that the impugned document ‘X4’ is not a deportation order as claimed by the petitioner and she confirmed that no deportation order has been made up to date by the authorities against the petitioner,” a court document shared by Fraser said.

Immigration officials stated that the police and SSD were on the lookout for Fraser.

“Her visa was cancelled on August 15, so we are looking to put her in a detention camp until she can get a ticket to leave the country,” the official told EconomyNext, confirming that Fraser was not getting deported but that her visa was cancelled.

“Legally we cannot give her a grace period, but on a humanitarian basis, we can give her the time to get a ticket,” the official said.

Fraser had used her social media to share pictures and videos of the anti-government protests in front of the Presidential Secretariat, and has been vocal against state sanctioned violence against protestors.

“Given what I have witnessed here in Colombo – the chemical weapons attacks on protestors, the government instructing the military to beat and torture protestors, the arbitrary arrests and blackmailing of prominent faces from the protests, intimidation tactics and threats etc – I should not be surprised at what has happened today,” she said, speaking to the Daily Record, a Scottish tabloid.

There were no reports of chemical weapons being used against any protestors in Sri Lanka, and it is unclear whether Fraser was erroneously referring to tear gas which was used to disperse crowds.

Fraser also called out media channels who she claimed had attempted to misrepresent peaceful protests as violent.

“It became very clear to me early on that this was not being reported. There was no international coverage on what was happening, and the media here were very much trying to say that it was violent, but that is the absolute opposite of what I saw,” she said over social media.

“What I saw was a beautiful union [of people] coming together in absolute unity. It was a beautiful movement and I’ve never seen anything like that in my life and that kept me coming back.”

However, Sri Lanka’s authorities maintain that the arrests so far have been legal and that violence did occur on the part of some protestors, though activists and some civil society groups disagree. On May 09, after supporters of then Prime Minister Mahinda Rajapaksa launched an unprovoked attack on peaceful protestors in Colombo, a wave of retaliatory mob-violence erupted across the country which saw the residences of some parliamentarians torched to the ground. One government MP was killed.

Authorities say many of the arrests so far have been of protestors who had violated court orders or had illegally occupied government buildings.

Fraser continues to post on her social media. (Colombo/Aug18/2022)

 

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