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Friday January 27th, 2023

Sri Lanka prevented a worse contraction with rate hike: CB Governor

ECONOMYNEXT – Sri Lanka’s central bank did not contract the economy by hiking rates, but prevented a further contraction and possible hyper inflation by stabilizing the external sector with high rates, Governor Nandalal Weerasinghe said.

“By tightening monetary policy, we minimized the damage,” Governor Weerasinghe told an economic forum organized by the Ceylon Chamber of Commerce.

“If we did not implement tight monetary policy and raising interest rates, we could have had a double-digit contraction and 100 percent inflation or hyperinflation.”

A modern central bank destroys growth or trigger output shocks generally with stimulus where banks are encouraged to give credit with money injected through open market operations to\ mis-target a policy rate and not real deposits.

In a soft-pegged or flexible exchange rate central bank which is not a clean float, such injections also trigger forex shortages long before the results of such inflationary policy shows up in consumer price indices.

Sri Lanka suppressed rates for two years by printing large volumes of money before Governor Weerasinghe took office in2023.

Sri Lanka’s economy is expected to contract around 7-8 percent in 2022.

Economic activity was coming to stop in many areas due to forex shortages before rates were hiked and there were already import controls in place before April 2022. As fuel shortages hit the economy, tourists avoided the country.

Banks stopped opening letters of credit and food imports were in jeopardy despite the country earning over 1.7 billion dollars a month through exports and remittances.

Once confidence has been lost in the currency, a steep credit slowdown is required to stabilize the external sector.

Reserve currency central banks like the Fed which also printed money for employment, and created supply chain shocks and commodity bubbles are now tightening to put the brakes on inflation which is showing up in indices.

The Fed invented aggressive open market operations in the 1920s shortly in the course of triggering roaring 20s bubble which ended in the Great Depression.

The Fed’s policy rate and open market operations also killed the Bretton Woods system of soft-pegs and the gold standard in 1971-3.

Sri Lanka printed money – despite having a reserve collecting central bank – for stimulus (push growth), after the International Monetary Fund gave the country technical assistance to calculate an output gap.

Attempts to push growth with macro-economic policies and not creating space for real activity and competition usually end up in lower growth and higher unemployment.

The International Monetary Fund slashed growth for the 2023 after the money printing during the Covid period. The shocks in a country with a flexible exchange rate however is much greater due to a steeply collapsing currency peg.

Related IMF slashes global growth after monetary stimulus as Sri Lanka reels

The wrong policies in earlier policies have to be pulled back to prevent a hyper inflationary spiral and total loss of confidence in the currency.

“The truth is that by a mistaken theoretical view we have been led into a precarious position in which we cannot prevent substantial unemployment from re-appearing,” classical economist Friedrich Hayek said in his Nobel speech in 1974 as the world was gripped by high inflation and the Bretton Woods soft-pegs was in shambles.

“Not because my view is sometimes misrepresented, this employment is deliberately brought about as a means to combat inflation, but because it is now bound to appear as a deeply regrettable but inescapable consequence of the mistaken policies of the past as soon as inflation ceases to accelerated.

“The manufacture of unemployment by what are called ‘full employment policies is a complex process.

“In essence it operates by temporary changes in the distribution of demand, drawing both unemployed and already employed workers into jobs which disappear with the end of inflation.”

Large numbers of Sri Lankans are now fleeing the country in search of jobs abroad.

Some who have jobs are also leaving due to lost confidence, low disposable incomes after the currency collapse and left-leaning steeply progressive taxes that were imposed this year. (Colombo/Jan25/2022)

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Sri Lanka’s Dialog Axiata hopes to hold prices despite rising costs

ECONOMYNEXT – Sri Lanka’s Dialog Axiata hopes to hold prices despite higher taxes, rising costs like energy, officials said as the country goes through the worst currency crisis in the history of its intermediate regime central bank.

High inflation following a collapse of the currency has reduced real incomes of customers.

“There are many factors to consider, especially with the last price increase we did in last year did not resulted in a significant increase in revenue” Pradeep De Almeida · Group Chief Technology Officer at Dialog Axiata said at the launch of its Future zone at Lotus tower.

In September,2022 following an electricity tarrif hike dialog increased its tariffs on Mobile, Fixed Telephone, Broadband Plans and Value Added Services (Prepaid and Postpaid) by 20 percent while tariffs on all Pay Television Services were raised 25 percent.

Value Added Tax (VAT) was also raised by the government from 12 percent to 15 percent on all Telecommunications and Pay TV services.

“Even though we increase the prices we only saw around 8-9 percent increase in revenue,” Almeida said.

“That is because many users cut off their usage to limit the spending”.

Over the 24 months to December 2022, the central bank has generated inflation of 76 percent, based on the Colombo Consumer Price Index official data shows.

Dialog will increase efficiencies and manage costs in an attempt to avoid prices increases for customs, he said.

“We are trying to mainly bear the cost from our side. We are getting a massive support from our parent company Telekom Malaysia International,” Navin Peiris, Group Chief Enterprise Officer at Dialog told EconomyNext.

“Therefore as of now, there is no plan to increase prices”. (Colombo/Jan 26/2023)

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Sri Lanka shares fall at market close on profit taking

ECONOMYNEXT – Sri Lanka shares fell on Thursday as profit taking entered the market mainly on financial and diversified sectors, brokers said.

The main All Share Price Index (ASPI) fell 0.13 percent or 11.50 points to close at 8,926.56.

“The market was trading on dull trade mainly due to profit taking,” an analyst said.

“Also we saw investors taking a sideline as quarterly reports started to come”.

The earnings in the first quarter of 2023 are expected to be negative with revised up taxes and an imminent electricity tariff hike.

Earnings in the second quarter are expected to be more positive with the anticipation of IMF loan and possible reduction in the market interest rates as the tax revenue has started to generate funds.

The central bank’s policy decision was expected and investors have been eying on IMF deal with hopes of rapid economic recovery from the current unprecedented economic crisis, however since the market gained in the last sessions profit taking has come about, analysts said.

The market has been on a rising trend on the hopes of a faster IMF deal. However, the central bank government said the IMF deal is likely in the quarter or in the first month of the second quarter.

The most liquid index S&P SL20 fell  0.33 percent or 9.21 points to 2,798.

LOLC had seen some attention by investors as the firm disposed 90,256,750 shares held with Agstar PLC at 15-17.50 rupees a share.

The market witnessed a turnover of 1.2 billion rupees, lower than the month’s daily average of 1.9 billion rupees.

Expolanka dragging the market down closed 2.36 percent down at 186.7 rupees a share. Sampath bank fell 1.41 percent to close at 42 rupees a share while Royal Ceramic Lanka closed 2.59 percent dwn at 30.1 rupees a share.

(Colombo/Jan26/2023)

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Sri Lanka bonds yields steady at close

ECONOMYNEXT – Sri Lanka bond yields were steady at close on Thursday, dealers said, while a guidance peg for interbank transactions by the Central Bank remained steady.

A bond maturing on 01.05.2024 closed at 31.00/20 percent unchanged from the last close.

A bond maturing on 15.05.2026 closed at 26.60/90 percent, up from 28.50/70 percent on Wednesday.

A bond maturing on 15.09.2027 closed at 28.60/85 percent, up from 28.50/60 percent at the last close.

The three months bill closed at 29.75/30.25 percent unchanged from the last close.

The Central Bank’s guidance peg for interbank US dollar transactions appreciated by another 2 cents to 362.14 rupees against the US dollar.

Commercial banks offered dollars for telegraphic transfers at 360.49 rupees on Thursday, data showed.  (Colombo/Jan 26/2022)

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