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Wednesday June 19th, 2024

Sri Lanka plans to hike renewable purchase tariffs after currency collapse

ECONOMYNEXT – Sri Lanka is considering hiking competitive tariffs offered to renewable power producers as they cannot complete projects at the previously competitively tendered rate after a currency crisis, Minister of Power and Energy Kanchana Wijesekera has said.

Sri Lanka’s rupee collapsed from 200 to 370 to the US dollar in 2022 after two year of money printing to suppress interest rates and a failed float botched with a forced dollar sale requirement to the central bank.

Meanwhile interest rates have also rocketed as attempts were made to stabilize the exchange rate after liquidity injections destroyed the credibility of the peg.

“We have a problem now,” Minister Wijesekera said. “Parties that came for tenders and put bids can no longer proceed on the basis of tenders.

“Due to the exchange rate and interest rates changing, in getting bank loans, or in importing the solar panels or equipment the cost has gone up.

“All those parties who got tenders have requested a change in tariff. We are in discussions at the moment with the advice of the Attorney General on how to do that.”

Feed in tariffs for rooftop solar had already been hiked, he said.

Sri Lanka has also seen some foreign investors who are ready to build renewable plants for state-run Ceylon Electricity Board at a dollar tariff, known as market-seeking FDIs. However most seem to want to build unsolicited plants without coming for competitive tenders.

The utility’s revenues are in rupees requiring a tariff hike when the central bank depreciates the rupee after mis-targeting rates.

The CEB is already exposed to dollar expenses through coal and fuel imports. It manages to keep costs down due to its fully owned large hydros which have been fully depreciated.

Forex shortages and currency crises are a problem associated with intermediate regime central banks also known as soft-pegs or ‘flexible’ exchange rates which are neither clean floats nor hard pegs.

Under a ‘flexible’ exchange rate, errors in mis-targeting rates are compensated by depreciation in a bid to maintain an artificially low policy rate for a longer period by targeting an inflation rate as high as 5 percent six percent, or twice the rate of stable central banks.

However both the currency collapse and the rate hike – higher than the one originally needed to maintain the credibility of the peg – eventually takes place. After two years of money printing to maintain a policy rate interest rates, market lending rates are close to 30 percent. (Colombo/Jan01/2023)

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  1. Parakrama Jayasinghe says:

    It is good to see that the Hon Minister is at last ready to face reality. However, he continues to distort facts. The increased tariff offered to Rooftop solar is still based on unrealistic cooked-up rates of exchange and interest rates. This is an urgent need for correction if we are to get out of the present mess. Also offering a $ tariff for foreign investors is no better than importing coal and oil for $ when we will be buying our natural resources for $. They must be allowed to recover their investments and repatriate profits. This can be done using the provisions of BOI and by offering a dollar tariff. Hope someone takes the trouble to evaluate this before taking rash decisions to face short-term problems

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

  1. Parakrama Jayasinghe says:

    It is good to see that the Hon Minister is at last ready to face reality. However, he continues to distort facts. The increased tariff offered to Rooftop solar is still based on unrealistic cooked-up rates of exchange and interest rates. This is an urgent need for correction if we are to get out of the present mess. Also offering a $ tariff for foreign investors is no better than importing coal and oil for $ when we will be buying our natural resources for $. They must be allowed to recover their investments and repatriate profits. This can be done using the provisions of BOI and by offering a dollar tariff. Hope someone takes the trouble to evaluate this before taking rash decisions to face short-term problems

Central banks expect to increase gold reserves after buying 1,037 tonnes in 2023: Survey

ECONOMYNEXT – About 29 percent of central banks in the world intended to increase their gold reserves in 2023, up from 24 percent in 2023 and just 8 percent in 2019, a survey by the World Gold Council showed.

“The planned purchases are chiefly motivated by a desire to rebalance to a more preferred strategic level of gold holdings, domestic gold production, and financial market concerns including higher crisis risks and rising inflation,” the WGC said.

About 81 percent of 70 central banks that responded to the survey expected global central bank holdings of gold to go up, from 71 percent in 2023.

While in prior years, gold’s “historical position” was the top reason for central banks to hold gold, this factor dropped significantly to number five this year.

This year, the top reason for central banks to hold gold is “long-term store of value / inflation hedge” (88%), followed by “performance during times of crisis” (82%), “effective portfolio diversifier” (75%) and “no default risk” (72%).

Concerns about sanctions were listed as by 23 percent of emerging market central banks (0 advanced).

De-dollarization as a reason to hold gold gained ground, but was not among the main reasons.

About 13 percent of emerging market central banks listed de-dollarization as one of the reasons to buy gold up from 11 percent last year and 6 advanced nations said the same from zero last year.

Around 49 percent of central banks expected gold reserves to be moderately lower five year from now in the 2024 survey, against 49 percent in 2023 and 38 percent in 2022.

About 13 percent of central banks surveyed said US dollar reserves would be significantly lower in the 2024 survey, up from 5 percent in 2023 and 4 percent in 2022. (Colombo/June18/2024)

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Sri Lanka rupee closes weaker at 304.75/305.40 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed weaker at 304.75/305.40 to the US dollar Tuesday, down from 304.15 to the US dollar Friday, dealer said, while some bond yields edged up.

Sri Lanka’s rupee has weakened amid unsterilized excess liquidity from earlier dollar purchases.

Excess liquidity fell from as high as 200 billion rupees, helped by some sales of maturing bills and also allowing some term contracts to run out.

However the central bank has started to inject liquidity again below its policy rate to suppress interest rates.

On Tuesday 30 billion rupees was printed overnight at an average yield of only 8.73 percent.

Separately another 25 billion rupees was printed till June 25 at 8.09 percent to 9.05 percent, which was still below overnight the policy rate of 9.5 percent.

Nobody has so far taken the central bank to court for printing money beyond overnight at rates lower than the overnight rate.

Sri Lanka operates an ad hoc exchange rate regime called ‘flexible exchange rate’ which triggers panic among market participants, as the central bank stays away when spikes in credit either creates import demand or unsterilized credit is used up.

“If large volumes of unsterilized liquidity is left, the exchange rate has to be closely defended to prevent speculation involving early covering of import bills and late selling of exports proceeds,” EN’s economic columnist Bellwether says.

“Just as an appreciating or stable exchange rate leads to late covering of import bills, a falling rates leads to immediate covering of import bills.

“Keeping exchange rates stable is a relatively simple exercise but it is difficult to do so if short term rates are also closely targeted with printed money, as liquidity runs out, as if the country had a free float and no reserve target.”

“When there is a large volume of excess liquidity remaining (except those voluntary deposited for long periods by risk averse banks) the the interest rates structure is under-stated compared to the reported reserves.

“Interest rates would be a little higher than seen in the market if the liquidity was mopped up and domestic credit and imports were blocked to prevent the reserves from being used up.”

In East Asia there is greater knowledge of central bank operational frameworks, though International Monetary Fund driven flawed doctrine are also threatening the monetary stability of those countries, critics say.

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Vietnam selling SBV bills to stabilize the Dong, as Sri Lanka rupee also weakens

Sri Lanka’s rupee started to collapse steeply after the IMF’s Second Amendment in 1978 along with many other countries as flawed operational frameworks gained ground without a credible anchor.

A bond maturing on 15.12.2026 closed at 10.10/30 percent up from 10.05/30 percent Friday.

A bond maturing on 15.10.2027 closed at 10.60/57 flat from 10.60/80 percent.

A bond maturing on 01.07.2028 closed at 11.15/35 percent, up from 11.05/20 percent.

A bond maturing on 15.09.2029 closed at 11.80/90 percent unchanged.

A bond maturing on 15.10.2030 closed at 11.90/12.00 percent.

A maturing on 10.12.2031 closed at 11.95/12.10 percent.

A bond maturing on 01.10.2032 closed at down at 11.95/12.10 percent, down from 12.00/10 percent. (Colombo/Jun14/2024)

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Sri Lanka’s Ceylon Chamber links up with Gujarat Chamber

ECONOMYNEXT – The Ceylon Chamber of Commerce has signed an agreement with the Southern Gujarat Chamber of Commerce and Industry (SGCCI) to increase trade cooperation between India and Sri Lanka.

The MOU was signed by CCC CEO Buwanekabahu Perera, SGCCI President Ramesh Vaghasia, in the presence of Dr Valsan Vethody, Consul General for Sri Lanka in Mumbai, India.

“With the signing of the MoU, … the Ceylon Chamber of Commerce and SGCCI aim to facilitate trade between the two countries via initiatives such as trade fairs and delegations, business networking events, training programmes,” the Ceylon Chamber said in a statement.

“This partnership will open doors for Sri Lankan businesses to explore opportunities in Surat’s dynamic market and enable the sharing of expertise and resources between the two regions.”

Established in 1940, SGCCI engages with over 12,000 members and indirect ties with more than 2,00,000 members via 150 associations. It promotes trade, commerce, and industry in South Gujarat.

The region’s commercial and economic centre Surat has risen to prominence as the global epicenter for diamond cutting and as India’s textile hub, and is ranked the world’s 4th fastest growing city with a GDP growth rate of 11.5%

Surat’s economic landscape is vibrant and diverse. As India’s 8th largest and Gujarat’s 2nd largest city, it boasts the highest average annual household income in the country.

The nearby Hazira Industrial Area hosts major corporations like Reliance, ESSAR, SHELL, and L&T. (Colombo/Jun18/2024)

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