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Tuesday May 30th, 2023

Sri Lanka Prime Minister briefs FAO, UNDP on looming food shortage 

ECONOMYNEXT – Sri Lankan Prime Minister Ranil Wickremesinghe on Friday (03) briefed the representatives of Food and Agriculture Organisation (FAO) and United Nations Development Program (UNDP) over possible food shortage and the plans to overcome the production gap, the prime minister’s office said.

The meetings come as the island nation’s agricultural experts have warned of a possible shortage of rice and other essential foods possibly in September because of lower production due to the impacts of chemical fertilizer ban last year and inability to import amid dollar shortage.

Wickremesinghe has already warned of an acute food shortage by August and said the island nation would require $600 million to import fertilizer amid Sri Lanka’s near zero foreign currency reserves. Crop scientists have warned that Sri Lanka could produce enough rice only for seven months of this year due to the fertilizer ban. Before the fertilizer ban, Sri Lanka had self sufficiency in rice production.

Wickremesinghe met Vimlendra Sharan, the Country Representative of the FAO and Malin Herwig, the Deputy Country Representative of UNDP on Friday.

“The Prime Minister explained that in view of the threat of a food shortage, a food security program was being compiled by the agriculture department officials. This program is due to be unveiled next month, with the UNDP expressing their support for the initiative,” Wickremesinghe’s office said in a statement.

“He (Wickremesinghe) stated that the biggest issue currently facing the agriculture sector is the fertiliser and fuel shortage. The Prime Minister also elaborated on the urban agriculture initiative that he had established to try and overcome a potential food shortage.”

Sri Lanka is unable to import fertilizer although President Gotabaya Rajapaksa has cancelled his detrimental fertilizer ban policy because it does not have dollars and sharp increase in fertilizer prices globally.

Sri Lanka produces no nitrogen fertilizer. Rajapaksa banned chemical fertilizer and requested farmers to go for only organic fertilizer. Paddy harvest has seen a decline of around 40 percent in the last two cultivation seasons, crop scientists have said.

The prime minister’s office said the UNDP explained that they were compiling an innovative farming assistance program which would help the farming community overcome the fertiliser shortage.

“The FAO also explained that donors had stepped forward to assist the country in the urban agriculture program, and was hopeful that a successful implementation would see more financial support provided,” it said in the statement.

“The FAO also stated they were drafting a food crisis response plan that can be enacted in Sri Lanka.”

“The Prime Minister explained that within 5-6 months the current agriculture shortages could be salvaged if swift action was taken to address the shortages faced by the farmers.” (Colombo/June 03/2022)

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Sri Lanka rupee at 296.75/297.25 to dollar at open, bond yields steady

ECONOMYNEXT – Sri Lanka’s rupee opened at 297 /297.50 against the US dollar in the spot market on Monday, while bond yields were steady, dealers said.

The rupee closed at 296.75 /297.25 to the US dollar on Monday after opening around 296.50 /297.50 rupees.

A bond maturing on 01.09.2027 was quoted at 26.50/75 percent steady from Friday’s close at 26.50/65 percent.

Sri Lanka’s rupee is appreciating amid negative private credit which has reduced outflows after the central bank hiked rates and stopped printing money. (Colombo/ May 29/2023)

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Sri Lanka rupee appreciation squeezes exporters

ECONOMYNEXT – Sri Lanka’s recent appreciation is starting to squeeze apparel exporters as their domestic costs including wages and energy, were hiked over recent months, when the rupee fell steeply, an industry official said.

Companies had raised salaries and emoluments at rates averaging 25 percent for workers while transport costs have also gone up but not has come down, Yohan Lawrence Director General of the Join Apparel Association Forum said.

Apparel factories in particular also provide transport and some meals for workers.

Electricity prices have also been hiked, based on the rupee which was weaker. A tariff cut is expected from June after the rupee appreciated and imported fuel prices fell.

Sri Lanka’s rupee collapsed in 2022 from 200 to 360 to the US dollar as interest rates were suppressed with liquidity injections and a failed attempt was made to float the rupee with surrender requirement in place.

From the second half of 2022, with higher interest rates and negative private credit, the central bank has avoided printing money under conditions which are generally accepted to be difficult, and is broadly running deflationary open market operations, triggering a balance of payments surplus and putting the rupee under upward pressure.

Central bank net credit to government which was 3,302 billion rupees in September in 2022, was down to 3,209 billion rupees by March 2023, part of which was due to rollovers, analysts say.

Market pricing of fuel and electricity by the Ministry of Energy and also spending controls and tax hikes buy have also helped contain domestic credit.

Sri Lanka also has mandatory conversion rules, imposed on exporters, which is a concern for exporters.

“We believe rupee should be at its natural level, but with forced conversions you won’t get the correct picture,” Lawrence said.

Sri Lanka has to release a plan to remove import controls, exchange controls and other restrictions imposed in the period where policy rates were suppressed with liquidity injections (so-called multiple currency practices and capital flow measures) by June under the IMF program.

Apparel exporters have also seen orders fall amid tighter conditions in Western markets.

The central bank has to peg (intervene actively in forex markets and create money) to meet reserve targets under an IMF program and cannot free float (avoid creating money through international operations) the rupee.

The newly created money has generally been absorbed in an overnight liquidity shortage.

There have also been foreign purchases of rupee Treasuries. Amid a contraction in credit, the inflows also do not turn into imports fast as the money if the money is spent.

By making purchases a little below what is allowed by the contraction in domestic credit, the rupee can be allowed to appreciate, analysts say.

The central bank has so far allowed the rupee to appreciate to around 300 to the US dollar from 360 levels under a transparent guidance peg up to February.

Except after the 2008/2009 currency crisis, Sri Lanka’s central bank has not previously allowed to the rupee to appreciate under IMF programs where the first year in particular sees balance of payments surpluses, before private credit and domestic investments picks up again.

One of the considerations used by third world central banks are Real Effective Exchange Rate indices.

The REER of the Sri Lanka rupee based on a basket of currencies calculated by the central bank was 61.12 points in February before the rupee was allowed to appreciate by lifting a surrender rule.

In March the index went up to 69.55 points, but remained steeply below 100. Real effective exchange rates are calculated also taking into account inflation in counterpart trading nations.

Sri Lanka’s inflation index had hardly risen since September amid rupee gains. Falling food prices can help contain pressure for further wage hikes, analysts say. (Colombo/May30/2023)

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Sri Lanka forum to discuss central bank independence vs sound money

ECONOMYNEXT – Central bank independence and sound money will be under discussion at a public event organized by the Sri Lanka chapter of the Bastiat Society today, May 30, as island is recovering from the worst episode of monetary instability since independence.

The forum will feature Lawrence H White, Professor of Economics at George Mason University in the US, and W A Wijewardene, former Deputy Central Bank Governor, of the Central Bank of Sri Lanka.

“The discussion will compare the current system against alternative systems and explore the relationship between such banking systems and sound money,” the organizers said.

White specializes in the theory and history of banking and money. He is the author of “The Clash of Economic Ideas” (2012), “The Theory of Monetary Institutions” (1999), “Free Banking in Britain” (2nd ed., 1995), and “Competition and Currency” (1989).

Wijewardene has been speaking on central bank independence in Sri Lanka long before it became a topic of wider discussion, but also on accountability.

In April, a Central Bank Independence and Other Matters, which includes a collection of his orations on the subject over the years as well a recent development was published.

The discussion comes as independent central banks in the West have created the worst inflation since the 1970s and early 1980s and are apparently unaccountable to parliaments and the public.

The early 1980s also saw the first wave of external debt crises in so-called soft-pegged countries in Latin America and Eastern Europe in particular as the US and UK tightened policy to end the Great Inflation.

The discussion will be held at 7.00 pm at the Lakmahal Community Library and those interested can register online, the organizers said. (Colombo/May30/2023)

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