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Wednesday December 7th, 2022

Sri Lanka per capita GDP edges lower amid soft-peg collapse

ECONOMYNEXT – Sri Lanka’s gross domestic product edged marginally lower to 4,102 dollars per person in 2018 from a revised 4,104 dollars in 2017 amid a collapse in the currency from operating a soft-pegged exchange rate.

Sri Lanka’s economy grew 3.2 percent in 2018, with growth in the fourth quarter slowing to 1.8 percent amid a political crisis and greater moneary instablity than the earlier two quarters.

Sri Lanka’s Central Bank has an explicit strategy of targeting a real effective exchange rate index but does not have a floating policy rate to enforce it, generating balance of payments troubles.

The Central Bank also cuts rates and prints money when inflation falls (independent monetary policy) effectively operating a de facto inflation targeting regime with a exchange rate peg, generating balance of payments troubles through what economists call the impossible trinity of monetary policy objectives.

Last year, the Central Bank also brought in Nixon shock-style trade restrictions to cover its monetary policy errors, shattering a key plank of the current administration’s economic strategy.

Sri Lanka has seen back-to-back balance of payments troubles since 2015, with monetary stability only maintained by the Central Bank in 2017.

In 2017, the rupee was permanently depreciated despite the Central Bank generating a balance of payments surplus by mopping up inflows, to ostensibly target a real effective exchange rate index.

According to revised data released by the statistics office, per capita GDP grew from 3,821 dollars in 2014 to 3,842 in 2015 and to 3,886 dollars in 2016, when the rupee fell from 131 to 150 to the US dollar.

In 2017, per capita GDP rose faster to 4,102 dollar from 3,886 with some monetary stability returning.

In 2018, per capita GDP edged down to 4,102 dollars from 4,104 with the rupee collapsing first to 161 and then to 180 in two episodes of instability. The census department is using an average exchange rate of 163 rupees for 2018.

Sri Lanka’s per capita GDP fell 869 dollars to 838 dollars in 2001 and the economy contracted 1.5 percent, after a case of severe monetary instability and currency collapse in the midst of a war.

Sri Lanka’s growth has flagged in recent years after spiking with the end of a war in 2009, partly as GDP computation changed but also due to lack of liberalisation to spur growth, combined with monetary instability, analysts say.

For about a decade, Sri Lanka pursued a strategy of crony protectionism, expropriation, and building loss-making state enterprises mis-allocating resources, which hurt long term growth prospects reducing the usage of infrastructure built with state borrowings.

Monetary instability had worsened since 2015. Monetary instability has been a key constraint on the economy and people’s freedoms since a soft-pegged Central Bank was set up in 1950 leading to draconian exchange and trade controls.

Currency depreciation and unsound money in general destroys real wages and also destroys real capital available to invest and increase labour productivity and cut slashes the economic foundations of a family.

From 2015, Sri Lanka tried to implement ‘ a social market economy’ in without the fundamental building block – Central Bank reform – as Germany did for its own social market economy, while Britain which won World War II regressed with monetary instability and currency collapsed (Sterling crises) as it pursued Keynesian economics.

"Stability may not be everything," said Karl Schiller, one-time economy and finance minister of Germany. "But without stability everything is nothing."

Sri Lanka is planning to move from a second class (soft-pegged) exchange rate regime which is called a ‘flexible exchange rate’ to a second class (flexible) inflation targeting regime. (Colombo/Mar21/2019-SB)

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Crisis-hit Sri Lanka sees recovery in cruise ship tourism from zero

ECONOMYNEXT – Seventeen cruise ships are scheduled to arrive in Sri Lanka next year with
Queen Mary 2, one of the largest and popular ships, Colombo’s harbor master said, as the island nation is looking for alternative avenues to boost its faltered tourism sector.

The rise is expected to bring thousands of high end tourists with higher spending capacity after two years. The island nation saw a record high 54 ships in 2019, rising from the previous year’s 42, Nimal Silva, Colombo Port Harbor Master said.

“The 2019 was one of the best years and in 2020 there were more than 60 scheduled vessels to
call but with COVID pandemic all hell broke loose,” Silva told EconomyNext.

Fourteen cruise ships are scheduled to call from January-May next year and another three are scheduled to arrive in Colombo in November, when the peak tourism season begins.

Cruise tourism cycle begins in Sri Lanka from October to May with a dip during the monsoon
seasons.

Sri Lanka welcomed two cruise ships in November after almost two years.

Three ships are scheduled to arrive in December and Azamara Quest, carrying at least 722 tourists, arrived in Colombo on December 3 and is now heading to Hambantota.

On December 18, Le Champion carrying 264 will arrive in Colombo and depart to Mumbai and the third vessel, Silver Spirit will arrive in Colombo on December 23 carrying up to 648 passengers.

There are two scheduled in January, one in February, and four in March next year, according to the harbormaster.

“Next year more ships could schedule, so far these are the confirmed ones now,” he said.

This also generates income for the port and the prices are charged according to the size of the
vessel.

Silva said the first medium sized-cruise vessel, 229 meters long, generated about 14,000 dollars
for docking in the port for a day.

He said Queen Mary 2, a 325 meter long ship and one of the largest cruise ships in the world, is also
scheduled to call at Colombo in February. It can carry up to 3200 passengers.

Silva said almost all the ships that were scheduled have arrived on the island and therefore, he is
confident all the ships including Queen Mary 2 will arrive in Sri Lanka.

“Only one ship has been canceled thus far. There are no last minute cancellations if there were some they would have informed us by now,” Silva said. (Colombo/Dec07/2022)

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Sri Lanka President says 2015-2019 policy struggle was ‘warfare’

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe said his attempts to reverse the inward-looking protectionist policies and fix state finances during his last term as Prime Minister was opposed both by politicians and business interests.

“In the 4.5 years as prime minister it was an effort to take this economy out in a different direction,” President Wickremesinghe told an economic forum organized by Sri Lanka’s Ceylon Chamber of Commerce.

“We were able to get a surplus in the primary budget. But it was warfare.

“Politicians wanted to protect their power, businessmen wanted to protect their profits and many others wanted to see what the country would provide them free of charge.”

Wickremesinghe was unable to bring private investment to the port under apparent internal political opposition. Relations with President Maithripala Sirisena also soured and he appointed his own economic advisors.

Meanwhile Wickremesinghe’s free trade agenda was hit by monetary instability as the central bank printed money under flexible inflation targeting and triggered forex shortages which were followed by trade controls.

Related

Sri Lanka controls imports in ‘Nixon-shock’ move to protect soft-pegged rupee

Sri Lanka President calls to expand Nixon shock as rupee falls

Wickremesinghe’s ‘Yahapalana’ administration also went on a spending spree called ‘100-day program’ in 2015 triggering a currency crisis in 2015/2016 as the central bank printed money to suppress rates.

The central bank however had already started injecting liquidity and losing reserves (by terminating term repo deals) from the fourth quarter of 2014 as domestic credit recovered from a 2012 currency crisis before his administration came to power.

The rupee fell from 131 to 152 and stabilization policies led to an output shock. The International Monetary Fund then taught the agency which had already depreciated the currency from 4.70 to 152 to the dollars seeking bailouts 16 times, how to calculate an output target.

Under Finance Minister Mangala Samaraweera taxes were raised and budget were fixed in 2018 to bring deficits back to pre-2015 levels, though state spending went up from 17 to around 20 percent of GDP under the spendthrift ‘revenue based fiscal consolidation’ where cost cutting was dropped.

The central bank then printed money by purchasing bonds from banks to target the yield curve, jettisoning a bills only policy established by ex-Central Bank Governor A S Jayewardena, through term reverse repo and overnight injections taking the rupee from 151 to 162 to the US dollar.

The central bank also created money by entering into a swap with the Treasury in 2018, a type of strategy used by speculators to bring down East Asian pegs putting, further pressure on the currency from around July 2018 onwards.

Related

What went wrong; Sri Lanka’s illiberal economics and unsound money : Bellwether

Stabilization policies then led to another output shock. As forex shortages came Sri Lanka resorted to heavy external borrowing as it was unable to settle maturing loans with domestic borrowings.

After two currency crises and output shocks, macro-economists of the new administration cut taxes saying there was a ‘persistent output gap’ and printed even more money for stimulus (close the output gap). (Colombo/Dec07/2022)

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China calls for joint effort to ease Sri Lanka’s debt burden, no mention of restructure

ECONOMYNEXT — A top Chinese official has expressed hope that countries and multilaterals like the International Monetary Fund (IMF) work with Beijing to play a constructive role in easing Sri Lanka’s debt burden, stopping short of an assurance on debt restructuring.

Chinese Foreign Ministry spokesperson Mao Ning was quoted by international media as saying on Monday December 05 that China attaches high importance to Sri Lanka’s difficulties and challenges.

She was responding to a question on media reports that an IMF team will be in China this week to discuss faster progress on debt restructuring for countries including Sri Lanka, which is negotiating for an IMF bailout.

“On Sri Lanka’s debt issue, I’d like to stress that we support the financial institutions in working out ways with Sri Lanka to properly solve the issue,” said Ning.

“We also hope relevant countries and international financial institutions will work with China and continue to play a constructive role in helping Sri Lanka overcome the current difficulties, ease its debt burden and realise sustainable development,” she added.

She said China has long-standing sound cooperation with the IMF and other international economic and financial institutions.

The spokesperson avoided any mention of debt restructuring, a prerequisite for the IMF extended fund facility (EFF).

Nearly a fifth of Sri Lanka’s public external debt is held by China, according to one calculation. The emerging superpower has been generous in Sri Lanka’s time of need, extending much needed assistance in the form of rice, medicine and other commodities.

The latest arrival in the Colombo port from China was 2 billion Sri Lankan rupees worth of essential medicines and medical supplies, delivered on Tuesday.

However, critics say China is doing everything but what Sri Lanka really needs: agreeing to restructure its outstanding debt.

At least one Sri Lankan opposition MP has demanded that China agree to a restructure.

Related:

Sri Lanka debt restructuring: opposition MP warns of “China go home” protests

Tamil National Alliance (TNA) legislator Shanakiyan Rasamanickam, who had been on the warpath with Beijing over an apparent lethargy in helping the crisis-hit island nation restructure its debt, recently warned of a “China, go home” protest campaign similar to the “Gota, go home” protests that unseated the country’s powerful former president in July.

The MP told parliament last Friday December 02 that Sri Lanka owes 7.4 billion dollars to China, a nearly 20-trillion dollar economy, and if the latter was was a true friend, it would agree to either write off this debt or at least help restructure it.

Colombo has been vague at best on the status of ongoing restructure talks with Sri Lanka’s creditors, and opposition lawmakers and others have expressed concern over what seems to be a worrying delay. Rasamanickam and others have claimed that China, Sri Lanka’s largest bilateral creditor, is the reason for the apparent standstill. (Colombo/Dec06/2022)

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