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Friday December 9th, 2022

Sri Lanka prints Rs2.2bn 10-month money below overnight policy rate

POLICY REVERSAL: The central bank halted regularly draining liquidity to keep overnight rates above the policy floor rate on July 17. From August 07, money was actively printed to boost excess money in the banking system.

ECONOMYNEXT – Sri Lanka’s central bank printed 2 billion rupees at for 315 days at 7.94 percent, and 264 million rupees at 7.90 percent, through outright purchases of bills, below the 8.0 percent policy rate for overnight liquidity injections, official data shows.

The rate setting monetary board cut the cash injection rate to 8.0 percent from 8.5 percent last week, despite the rupee coming under pressure from large scale money printing that began from August 07.

The domestic operations departments printed 20 billion rupees at 7.83 percent from August 07, and banks with excess cash deposited 50 billion rupees in the excess cash window, reversing earlier prudent policy, that kept the exchange rate stable.

Until July 17, the central bank has been withdrawing excess cash at around 7.70 percent keeping overnight rate above market and also above the minimum 7.50 percent set by the monetary board.

There were two rates cuts which were enforced without printing money, and no threat to the rupee, no threat to an International Monetary Fund foreign reserve target.

Amid monetary stability, market rates were gradually falling.

The central bank stopped regularly draining liquidity on July 17, and allowed excess liquidity to build up from dollar purchases made to enforce a pegged exchange rate (a balance of payments surplus) until August 07.

Money printing began from August 7, 20 to 25 billion rupees overnight and for longer terms, pushing down rates across the yield curve.

On August 16, a sudden large bill sell down was made. It is not clear why such a large sell-down was made or why large volumes of money was injected below the policy rate earlier, worsening pressure on the rupee.

Instead of mopping up the excess liquidity when pressure came on the rupee and allowing rates to rise, the central bank then allowed the rupee to slid with more money printed to push up liquidity back to where banks deposited 30 billion rupees in the excess window.

The policy reversal on August 07 seems to have come from targeting a call money rate, according to official statements made later.

The money printed on August 29, allowed some banks to deposit 7.48 billion rupees at the excess window, while other borrowed 9.45 billion rupees from the 8.00 percent overnight policy window.

Critics have said that in 2018, the central bank generated monetary instability with periods of extended unsterilized liquidity and money printing both in February April and July – September, just as the economy was recovering.

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“The principle source of the current instability seems to have come from targeting a call money rate with printed money and other rates along the yield curve below the ceiling policy rate,” EN’s economics columnist Bellwether says.

“As a result Sri Lanka lost the insurance of its Standing Lending Rate or the ceiling policy rate.

“Whenever money is injected for extended periods, the balance of payments will turn into a deficit, the central bank will miss its IMF reserve targets and the government will not be able to generate dollars to repay debt, leading to potential defaults of its dollar debt, Weimar Republic style.”

“While it is easier to contain periods of monetary instability and is more difficult to trigger new ones when private credit is weak or negative, there are many examples – Argentina is a prime example – where the central banks generate instability despite contracting economic output.” (Colombo/Aug30/2019- Update II)

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Sri Lanka president slams power regulator chief after conflicting with minister

ECONOMYNET – The powers to change the electricity tariff in Sri Lanka is vested with the Minister of Power and not the Public Utilities Commission (PUCSL), President Ranil Wickremesinghe told the Parliament.

The minister of Power and Energy, Kanchana Wijesekara has requested an upward price revision to be implemented in two phases both in January and July next year, saying the recent tariff hike was not enough for the state-run utility provider Ceylon Electricity Board (CEB) to continue uninterrupted power supply.

However, Jaynaka Ratnayake, the Chairman of the PUCSL had said  the recent tariff hike is enough for the CEB to cover the cost of production and it will not allow another price hike. However, he has said a twice a year price revision is necessary though it should be in April and October instead of January and July.

President Wickremesinghe said the PUCSL chief was opposing the tariff hike due to his personal reasons.

“The power is vested with the Minister and me. I am the one who made the PUCSL act and I know what is in it,” Wickremesinghe told the parliament on Thursday. quoting a letter from the Attorney General which mentioned provisions in the island nation’s Electricity Act.

Accordingly the Act, the PUCSL would be statutorily obliged to give effect to such policy. It is observed that neither the Act nor the PUCSL Act contains any provisions that empowers the PUCSL to change or act invariant of such policy guidelines.

“The Chairman of the PUCSL is misguiding the general public. I have to meet him and see,” Wickremesinghe said.

WIckremesinghe said the Chairman does not want the tariff hike because he owns one of the highest electricity consuming companies.

“He is the Chairman of the Trillium corporation. It is the firm that takes up the most energy”, he said.

The Trillium group is managed by Janaka Ratnayake and he also holds positions as the chairman and CEO of Trillium Property Management & Services Ltd., City Housing and Real Estate PLC, Trillium Residencies Ltd., Computer Care (Pvt) Ltd., and Rent a Comp Services (Pvt) Ltd., and JR Management Consultants (Pvt) Ltd.

“It means when the electricity bill increases, his expenses increase as well”

He said the CEB still has a loss of 300 billion rupees since 2013 and it needs to be covered.

The CEB issue can be solved only in three ways, either printing more money, increasing value added tax or increasing the tariffm, he said. (Colombo/Dec08/2022)

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Sri Lanka President bemoans over inconsistent LNG deals

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe bemoaned over successive governments’ liquefied natural gas (LNG) deal that has brought in all the world powers into the discussion.

Wickremesinghe’s center-right United National Party (UNP) had discussions with India and Japan between 2002-2004 for an LNG project.

“Following dialogues with India and Japan, the UNP government could come to agreements to get two LNG power plants. After we were defeated the successor government, without cancelling those agreements granted it to New Fortress company in USA,” Wickremesinghe told the parliament.

“Thereafter, as they did not like New Fortress, they gave it back to Pakistan and China. So within the same premises, there were China, Pakistan, India, USA, Japan and only Russia was not there.”

“It was wonderful that a world war did not ignited there as there were five main powers in the world.”

“Now there is no LNG or anything here and now they ask me to solve this issue.”

Wickremesighe’s outburst comes as his government is forced to raise tariffs on power prices after successive governments failed to implement cheap and renewable power generation projects.

He said a total loss for the state-run Ceylon Electricity Board since 2013 was 300 billion rupees and a possible drought next year could increase the 2023 electricity cost to 420 billion rupees.

“If it rained, we need Rs. 352 billion while Rs. 295 is required if rained so much to have floods. How are we going to find this money? We would have to print money, but Rupee would depreciate. We would have to increase VAT but it would increase the price of all commodities or to charge it direct.” (Colombo/Dec08/2022)

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Air quality drop forces Sri Lanka to close schools; public warned

ECONOMYNEXT – A rapid drop in air quality in Sri Lanka has forced the Colombo government to close all schools across the country after a deep depression over Southeast Bay of Bengal, officials said.

The Education Ministry, issuing a special notice on Thursday said, it has decided to close all government schools for Friday, after discussing with the officials in Meteorology Department and Disaster Management Center.

An official said the drop was due to the deep depression over Southeast Bay of Bengal carrying the air from India.

Due to the depression over South east Bay of Bengal (370 km east of Trincomalee) has concentrated into a cyclonic storm “Mandous” by Wednesday night.

“Cyclone in the Bay of Bengal that is the prime reason for the increase in the pollution load as we receive more wind from India,” H.D.S.Premasiri, Senior Scientist, Coordinator-Air Quality, noise and vibrations at National Building Research Organization (NBRO) told EconomyNext on Thursday.

Officials said there is a likelihood of the cyclone moving west-northwestwards and further intensify into a severe cyclonic storm tonight and cross North Tamil-Nadu, Puducherry and South Andhra Pradesh coast around midnight of 09 th December and the maximum wind speeds will be 70-90 km per hour and can increase up to 90 in sea areas.

“Hopefully, today we can expect normalization in the environment and the effects of the fog will disappear”.

According to the NBRO’s real time Air Quality Index Indicator, the quality of air in northwestern coastal district of Puttalam has dropped drastically and indicated a particular matter (PM) 132, while Kegalle (85) and Mannar (84) were the districts which had next worst air quality.

According to NBRO, Battaramulla, Polonnaruwa, Dambulla, Kegalle, Mannar and Puttalam indicate a poor quality of air due to higher PM.

“The fog will lead to lung and breathing issues,” Premasiri said.

“So the public is warned to wear a mask when they travel outside. The pollution highly prevails in city areas and has a less impact on the other parts of the areas.” (Colombo/ Dec08/2022)

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