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Tuesday April 16th, 2024

Sri Lanka private credit grows for the fourth month in September

ECONOMYNEXT – Sri Lanka’s private credit grew for the fourth straight month in September 2023, official data showed, while credit to the government contracted in the wake of a domestic debt restructure.

Private credit grew by 69.9 billion rupees in September, up from 5.5 billion rupees in August.

Sri Lanka’s private credit usually recovers about 12 to 18 months after a successful float ends a balance of payments crisis triggered by bureaucratically decided rate cuts.

Private credit can grow from short term loans as importers stock up for December amid better or expected consumer demand.

In 2022 the BOP returned to surplus in September after private credit contracted following market interest rates but a confidence boosting float took place only in March 2023, after a surrender rule that pushed the currency down was removed.

A successful float ends capital flight, and also brings in money, halting further increases in interest rates.

Following currency crisis, interest however tend to be high due to destroyed real capital and the need to build reserves (finance the deficit of the US other reserve currency countries) though the domestic fiscal deficit is contained.

In September credit to government from the banking system fell 261 billion rupees as central bank debt was restructured.

Any sales of central bank held debt to the private sector (deflationary open market operations) also tends to reduce net central bank credit to government as defined in Sri Lanka, triggering a balance of payments surplus.

However recovering private credit tends to put upward pressure on interest rates. The central bank has in the past engaged in aggressive inflationary open market operations to cut rates, triggering a second currency crisis and rupee depreciation as private credit recovers.

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Under previous IMF programs the central bank has been free to print money on the claim that inflation is low, regardless of the fact that it is a reserve collecting (pegged) central bank.

The currency then slides pushing up energy and food prices, IMF reserve targets are missed, reforms discredited and the incumbent government is ousted, unravelling reforms.

IMF prone central banks (so-called recidivist or Many Happy Returns) tends to print money to boost growth (target potential output) denying monetary stability for economic agents to operate including the government.

Printing money for growth (potential output) was legalized in a new monetary law backed by the IMF.

Countries with recidivist IMF style central banks tends to have high nominal interest rates as currency crises and stabilization programs come in rapid succession and depreciation destroys capital and trigger social unrest.

The IMF was originally set up to stop depreciation, but after the second amendment to its articles in the late 1970s, rapid depreciation and defaults became common in the 1980s and widely diverging inflation and interest rates between IMF and non-IMF prone countries.

Ironically in 1980’s most developed countries including the UK and US itself which suffered BOP troubles due to mis-targeted rates to boost growth while pegging to the US dollar and gold, moved to single anchor regimes. (Colombo/Nov05/2023)

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Sri Lanka State FinMin meets BCIU in US; discusses post-crisis investment prospects 

ECONOMYNEXT – Sri Lanka’s State Finance Minister Shehan Semasinghe met Business Council for International Understanding( BCIU) in Washington on the sideline of the IMF/World Bank Spring Meetings late on Monday and discussed investment prospects in the island nation which is gradually recovering from an unprecedented economic crisis.
“Our discussion centered on the potential that Sri Lanka offers for international investors. Explored various sectors, including education, tourism, renewable energy, agriculture and technology, where strategic investments can drive sustainable economic growth and development,” Semasinghe said in his X (Twitter) platform. 
“We reviewed the current macro-economic landscape of Sri Lanka, including recent reforms that have transformed to results. Glad to concluded the forum by marking constructive dialogue and a shared commitment to support the economic development of Sri Lanka.” 
“We thank participants, stakeholders holders and global partners for the significant interest shown in unlocking the full potential of the Sri Lankan economy and fostering greater international understanding and cooperation.” (Colombo/April 16/2024) 
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India allows Sri Lanka to import 10,000MT of onions

ECONOMYNEXT – India has relaxed an export ban allowing 10,000 metric tonnes of onions to be shipped to Sri Lanka, the Indian High Commission in Colombo said.

“The exemption for Sri Lanka reiterated India’s Neighbourhood First policy, adding to the Sinhala and Tamil New Year festivities here,” the statement said.

Onion prices went up in Sri Lanka after India and Pakistan banned exports.

The Directorate General of Foreign Trade has issued a notice allowing National Co-operative Exports Limited to ship 10,000 MT of onions.

The UAE has also been allowed to import 10,000MT of onions on top of 24,400MT already permitted.

A large Indian and South Asian expat community lives in the UAE. (Colombo/Apr15/2024)

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Iran President to visit Sr Lanka amid rising tension, inaugurate Uma Oya project

ECONOMYNEXT – Iranian President Ebrahim Raisi will arrive in Sri Lanka on April 24 on a one-day official visit to inaugurate Tehran-assisted $529 million worth Uma Oya multipurpose development project with 120MW hydro power generation capacity, official sources said.

The announcement on President Raisi’s visit comes two days after Iran launched explosive drones and fired missiles at Israel in its first direct attack on Israeli territory, a retaliatory strike that raised the threat of a wider regional conflict.

“The President is visiting to inaugurate the Omaoya project. He will be on a one-day visit,” an official at Iran embassy in Colombo told EconomyNext.

A Sri Lankan Foreign Ministry official confirmed the move.

This is the first time an Iranian President coming to Sri Lanka Iranian after then President Mahmoud Ahmadinejad’s visit in April 2008.

The Omaoya project was originally scheduled to be completed in 2015, but had been delayed several times due to unexpected issued faced during the project cycle and funding issue after the United States imposed economic sanctions on Iran and economic crisis in Sri Lanka.

The project was started in 2010 and the funding was to be received as loan grant from the Iranian government. However, Iran was able to provide $50 million before the sanctions. Sri Lanka has to bear the cost after the sanctions.

The project includes storing water in two reservoirs with dams before being brought through a 23 km tunnel to two turbines located underground and generating hydro power with a capacity of 120 megawatts and added to the national grid.

After power generation, the water is expected to be brought to three reservoirs while supplying water to 20,000 acres of old and new paddy fields in both the Yala and Maha cultivating seasons.

The Memorandum of Understanding (MOU) for the construction was signed between the two countries in 2007 while Sri Lanka’s Cabinet approved the execution of the contract agreement between the Executing Agency, Sri Lanka’s Ministry of Irrigation and Water Management (MOIWM) of the GOSL and Iran’s FARAB Energy and Water Projects (FC).

When commencing the project on March 15, 2010, the scheduled date of completion of the project was on March 15, 2015. But the schedule completion date was extended to December 31, 2020 due to the unexpected water ingress into the head race tunnel and followed by social impacts.

The trade between the both countries suffered after the US sanctions. However, Sri Lanka inked a deal in December 2021 with Iran to set off export of tea to Iran against a legacy oil credit owed by state-run Ceylon Petroleum Corporation to the National Iranian Oil Company.

Sri Lanka owes $251 million for crude imported before the US imposed sanctions on Iran. (Colombo/April 15/2024)

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