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Wednesday December 7th, 2022

Sri Lanka President meets IMF to hammer out credible plan for creditors

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe met visiting International Monetary Fund team for a round of discussions as the country tries to strike a staff level agreement with a credible economic program to negotiate with creditors to re-structure their debt.

Senior Mission chief Peter Breuer, who is an expert in debt re-structuring, Sri Lanka mission chief Masahiro Nozaki, Resident Representative Tubagus Feridhanusetyawan met President Wickremesinghe, who is also Finance Minister on August 25.

The cabinet of minister on Monday has approved a budgetary framework which where 9.9 percent of Gross Domestic Product budget deficit in 2022 will be brought down to 6.9 percent by 2023.

Sri Lanka is also aiming to bring down the primary deficit, or the deficit without interest costs, a key performance criterion in an IMF fiscal framework from a negative 4 percent in 2022 to a deficit of 1 percent in 2023 in a 3 percent of GDP correction.

Related Sri Lanka plans to cut budget deficit to 6.8-pct of GDP in 2023

The IMF team will again meet central bank officials on August 26, the President office said in a statement.

Sri Lanka’s central bank has already raised interest rates, smashed domestic private credit to reduce outflows and restore the credibility of the an unstable soft-peg with the US dollar lost after two years of money printing, and forced dollars sales (surrender requirement) to the central bank.

A float is usually required to end contradictory money and exchange policies and turn the peg around allowing the central bank to re-peg it and buy dollars with domestic credit reduced.

Turning the peg around will lead to a gradual fall in interest rates. At the moment however the central bank is still intervening in the both directions of the broken peg and interest rates are high.

Sri Lanka’s printed money for two year ran record balance of payments deficits and defaulted on foreign debt in April 2022 and is seeking to re-structure the foreign debt.

There has also been speculation that domestic debt will be restructured, though Sri Lanka’s stand is that it is not required as the debt has been steeply depreciated and the economy has inflated in rupee terms.

A staff level agreement is a broad economic framework involving fiscal and monetary targets and reforms, which are needed to stabilize the broken peg and eventually allow the country to grow.

In this case Sri Lanka also has to re-structure debt to reduce gross financing needs (GFN) to a manageable level.

Holders of International Sovereign Bonds which ratcheted up sharply after the end of the 30-year war amid monetary instability from flexible inflation targeting are the biggest commercial lenders.

China and Japan are among the biggest bilateral lenders.

A staff level lead is vetted by the IMF’s fiscal and monetary departments and eventually turned into a letter of intent with quarterly fiscal and monetary targets and sequenced reforms, called structural benchmarks.

However before the LOI is signed the IMF has said Sri Lanka will need “assurances from creditors” that they will restructure debt.

The LOI may be structured with fiscal or monetary prior actions, before going to the Executive Board of the IMF.

Sri Lanka has already started market pricing fuel with a price formula, power prices have been raised and water tariffs are expected to be hiked.

In an unexpected development, Sri Lanka slammed import controls on 300 items in a ‘Nixon shock’ style move the day before negotiations with the visiting team began despite elevated rates killing private credit.

It is not clear how the move will be viewed by the IMF which usually want import controls to removed as fast as possible.

Sri Lanka has already hiked rates to kill private credit. Since the private sector is a net saver, import pressure comes from domestic credit, and deficits from central bank re-financed credit. A reduced deficit will also help moderate domestic credit.

Related Sri Lanka halts imports of over 300 items

By the time an LOI is approved by the Board, a country has already restored monetary stability and reserves are no longer needed for imports, with available inflows and money printing ended.

Any IMF drawdowns are then kept in foreign reserves – usually invested in the US deficit – and more foreign reserves are collected from inflows under a Net International Reserve target.

Most soft-pegged central bank will usually get into currency crises every two Fed cycles (about 8 to 10 years) and go the IMF. Sri Lanka however has got into four currency crises over a decade under flexible inflation targeting with output gap targeting.

Soft-pegs which default will also tend to default again until the country either becomes a clean float or a hard peg. (Colombo/Aug25/2022)

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Despite losses, Sri Lanka to resume “park & ride” transport after complaints  

ECONOMYNEXT –  Sri Lanka’s state-run Transport Board will resume its loss-making City Bus service from January 15, 2022 Cabinet Spokesman Bandula Gunawardena said, after the service abruptly discontinued with the state-run firm’s director board citing losses.

The City Bus service was introduced in 2021, under the government of former President Gotabaya Rajapaksa, from Makubura to Pettah and Bambalapitiya.

The service was started to reduce the number of automobiles travelling to and from Colombo and suburbs by providing a comfortable, convenient and safe public bus transportation for passengers and riders who use cars and motorcycles as their means of transportation.

During the time period in which the service was initiated, there were 800 hundred vehicles that would be parked and would use the system, Gunawardena, who is also the Transport Minister, said.

The service was later collapsed due to inconsistencies in scheduling and it was completely stopped after

“Without informing the Secretary or the Minister of the relevant Ministry, the Board of Directors have come to a conclusion that this is loss making route and must be halted,” Gunawardena said.

“The users of the City Bus service brought to our notice and therefore I gave the Secretary to the Ministry of Transport the approval to start the City Bus service from January 15.”

“If we stop all loss making transport services then massive inconveniences will occur to the people in far parts of the island.”

The chairman of the state run Ceylon Transport Board has been asked to handover the resignation letter by the Minister Gunawardana citing that the head has failed to implement a policy decision approved by the government. (Colombo/ Dec 06/2022)

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Sri Lanka may see rates falling next year: President

ECONOMYNEXT – Sri Lanka’s interest rates are high and hurting small businesses in particular but interest rates are required to maintain stability, President Ranil Wickremesinghe said.

“One is, all of you want to know what’s going to happen to the interest rates?,” President Wickremesinghe told an economic policy forum organized by the Ceylon Chamber of Commerce.

“I wish I know. The governor has told me that the inflation has peaked. It’s coming down. You all understandably want some relief with the interest rates to carry business on.”

“I understand that and appreciate the viewpoint. It’s not easy to carry business on with such high interest rates. On the other hand, the Central Bank also has to handle the economy. So maybe sometimes early next year we will have a meeting of minds of both these propositions.”

Sri Lanka’s interest rates are currently at around 30 percent but not because the central bank is keeping it up. The central bank’s overnight policy rate is only 15.5 percent but the requirement to finance the budget deficit and roll over debt is keeping rates up.

Rates are also high due to a flaw in the International Monetary Fund’s debt workout framework where there is no early clarity on a whether or not domestic debt will be re-structured.

After previous currency crises, rates come down after an IMF deal is approved and foreign loans resume and confidence in the currency is re-stabilished following a float.

This time however there has been no clear float, though the external sector is largely stable and foreign funding is delayed until a debt re-structure deal is made.

Sri Lanka’s external troubles usually come because the bureaucrats do not believe market rates are correct when credit demand picks up and mis-uses monetary tools given in 1950 by the parliament to suppress rates, blowing the balance of payments apart.

The result of suppressed rates by the central bank are steep spikes in rates to stop the resulting currency crisis.

A reserve collecting central bank has little or no leeway to control interest rates (monetary policy independence) without creating external troubles, which is generally expressed as the ‘impossible trinity of monetary policy objectives’.

However, it has not prevented officials from trying repeatedly to suppress rates, perhaps expecting different results.

After suppressed rates – supposedly to help businesses – trigger currency crises, the normalization combined with a currency collapse leads to impoverishment of the population.

The impoverishment through depreciation leads to a consumption shock, which also leads to revenue losses in businesses.

The suppressed rates then lead to bad loans.

In the 2020/2022 currency crisis the sovereign default has also led to more problems at banks. Several state enterprises also cannot pay back loans.

“…[T]he bad debt that is being carried by the banks is mainly from the private sector or the government sector,” President Wickremesinghe said.

“Keep the government sector aside. We’re dealing with it. How do you handle it? Look, one of our major areas of are the small and medium industries. You can’t allow them to collapse, but they’re in a bad way.”

Classical economists and analysts have called for new laws to block the ability to central bank to suppress rates in the first place so that currency crises and depreciation does not take place in the first place.

Then politicians like Wickremesinghe do not have to take drastic and unpopular measures to fix crises and there will be stability like in East Asia.

Sri Lanka had stability until 1950 when the central bank was created by abolishing an East Asia style currency board. The currency board kept the country relatively stable through two World Wars and a Great Depression.

In 1948 after the war (WWII) was over “we stood second to Japan” Wickremesinghe said.

“But we started destroying it from the sixties and the seventies,” he said. :We started rebuilding an economy, which was affected by a (civil) war, and thereafter the way we went, is best not described here.”

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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

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

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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