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Thursday March 23rd, 2023

Sri Lanka pumps Rs240bn into banking system during Coronavirus crisis

ECONOMYNEXT – Sri Lanka’s central bank has pumped 240 billion rupees in liquidity into the banking system an official said of which 140 billion rupees (the equivalent of about 695 million dollars in pre-liquidity injection exchange rate) had been to fill a spike in real money demand.

“We have pumped about 240 billion rupees in the banking system in the,” Deputy Central Bank Governor Nandalal Weerasinghe told Sri Lanka’s Derana television.

“Of that 140 billion rupees had gone to the people. That means people are keeping the money in their hands for use.”

The cash drawn down is probably the largest seen in the history of Sri Lanka’s banking system.

Sri Lanka sees large cash draw downs during April and December holidays, but the Coronavirus crisis had increased the demand for cash.

Any cash drawn down is a real demand for money and does not destroy the rupee peg with the US dollar by artificially lowering interest rates and pushing up excess liquidity.

The money is effectively disappears from the credit system, a phenomenon classical economists call ‘private sector sterilization’ of money printed by a central bank.

Cash drawn does not pressure a peg with the US dollar and there is no need to defend the currency by selling foreign reserves.

But the other 120 billion rupees have been sloshing in the banking system, depressing rates, at a time when total dollar inflows and outflows have also narrowed, until mopped up by dollar sales.

Sri Lanka’s soft-peg with the US dollar fell from 182 to the US dollar before the injections to close to 200 to the US dollar during April. On April 09, the rupee gained sharply amid dollar sales from the state bank, dealers said.

Sri Lanka also cut policy rates starting from January 30 and injected money through a reserve ratio cut.

“We cut policy rates before any central bank in the region,” Weerasinghe said. “Through several cuts we have brought down the policy rate by 100 basis points.”

Sri Lanka’s policy corridor is now 7.00 and 6.00 percent but the central bank targets a narrow mid-point with excess liquidity, losing the protection a corridor usually gives a pegged exchange rate, analysts have said.

Under the last Governor Indrajit Coomaraswamy in addition to targeting a call rate with excess liquidity an earlier protection brought by ex-Governor A S Jayewardene of prohibiting long-term bond purchases were removed.

The policy corridor was also narrowed by 50 basis points.

The Treasuries stock of the Central Bank had gone up from 69 billion rupees on February 19, 2020 to 78.3 billion rupees in the beginning of March to 182 billion rupees by the end of March and 263 billion rupees by April 10.

In February another 24 billion rupees was over-issued by a central bank profit transfer and in March over 50 billion rupees was dropped in to the system by a 100 basis point reserve ratio cut, in another ‘helicopter drop.’

Another 50 billion rupee loan facility has been set up with central bank credit in a quasi-fiscal operation.

Central bank refinanced credit (printed money) operations were halted by then-Governor Jayewardene as they contributed to the monetary instability seen in the 1980s preventing the country from gaining the full benefit of the post -1977 opening of the economy.

Sri Lanka’s economy was closed until then after the Bretton Woods system of soft-pegs collapsed in 1971-73 as the US printed money despite having a soft-peg with gold.

President Nixon then slapped trade controls (Nixon shock), which were soon removed and the dollar was free floated preventing the need for defending and injecting cash to maintain a policy rate.

Sri Lanka closed the entire economy until 1977. The central bank has in the past few weeks had also slapped controls and tightened exchange controls. (Colombo/Apr11/2020)

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Sri Lanka establishes committee to investigate aircraft incidents

An aircraft lands at the Jaffna International Airport, which was opened in October 2019 and promises to push the tourism frontiers in Jaffna.

ECONOMYNEXT: Sri Lanka’s has established an expert committee under the state-run Civil Aviation Authority to investigate aircraft accidents and to implement precautionary methods in the Sri Lankan airspace, an Official said.

“Even if it is only one flight, there is a chance an accident may occur,” Civil Aviation Authority of Sri Lanka, Director General, P. A. Jayakantha said.

“This particular committee is there to investigate aircraft accidents and act as a mechanism to take over if something goes wrong”.

Sri Lanka has encountered around 2,700 minor aircraft accidents and incidents mostly on the ground in the 19 years through 2021, the CAA annual reports showed.

The new committee will analyze the past accidents and take precautionary measures while also conducting investigations and provide independent reports in the future, Jayakantha said.

The team is provided with required training and qualifications by the CAA along with an International organization, free of charge.

“Internationally also it is a requirement to have a team to investigate the aircraft accidents,” Jayakantha added.

“For a long time we have not fulfilled this requirement and that is why we established this team with the cabinet approval. Moreover, recently, Sri Lanka’s two aircrafts, one training aircraft and a commercial aircraft met an accident”

The committee will be on active duty, until the Accident Investigation Act is passed and a proper Aircraft Accident and Incident Investigation Bureau is established. (Colombo/ Mar23/2023)

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Sri Lanka bond yields steady, Rupee 319/325 at close

ECONOMYNEXT – Sri Lanka’s treasury bond yields closed steady on Thursday while rupee closed weaker, dealers said.

A 01.07.2025 bond closed at 30.60/31.00 percent on Tuesday, down from 30.25/75 percent on Wednesday.

A 15.09.2027 bond closed at 27.80/28.10 percent, steady from 27.90/28.00 percent from Wednesday.

Sri Lanka rupee closed at 319/325 against the US dollar depreciating from 318/320 from a day earlier. (Colombo/ March23/2023)

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Sri Lanka shares dive to two-week low on local debt restructuring fears

ECONOMYNEXT – The Sri Lanka market fell for a fourth session to a two-week low on Thursday, led by financials, as worries over domestic debt restructuring continued after the IMF loan was approved earlier this week resulting in investors adopting a wait-and-see approach until further clarity was provided, analysts said.

The main All Share Price Index (ASPI) closed down 1.38 percent or 131.07 points to 9,395.98, lowest since March 02.

Analysts said, majority of the banks have been on slower investment trends on fears of domestic debt restructuring after the IMF approval and waiting for more clarity on the local debt restructuring.

“The market is on muted sentiments despite the IMF loan being approved and is going through a period of consolidation,” Ranjan Ranatunga of First Capital Holdings said.

The market saw a net foreign outflow of 298 million rupees and the total offshore inflows recorded so far in 2023 to 3.3 billion rupees.

The most liquid index, S&P SL20, closed 1.64 percent, or 45.33 points, down at 2,722.94.

The market saw a turnover of 3.4 billion rupees on Thursday, above this year’s daily average of 1.8 billion rupees.

This is the highest turnover generated since March 08, which is when the market was driven off of positive sentiments from International Monetary Fund deal hope after Chinese assurances.

Top contributors to revenue was Agalawatte Plantations, on off board transactions of a stake change, contributing revenue of 1.6 billion rupees, Ranatunga said.

Top contributors to revenue industry wise was Food and Beverage and Telecommunications.

Sri Lanka Telecom has been seeing positive uptrends as the Secretary to the Treasury has informed the Board of Directors of Sri Lanka Telecom PLC (SLT) and Lanka Hospitals PLC that the Cabinet of Ministers has granted approval in principle for the divestment of the stakes held by the Treasury Secretary in the two companies.

Top losers were Sampath Bank, Hatton National Bank and Commercial Bank.

Sri Lanka is looking at options to re-structure domestic debt, or local law local currency debt (LLLC), without harming the banking sector and announce them the International Monetary Fund said in a report.

Banks have been witnessing profit taking and selling pressures after continuous uptrends prior to the IMF loan had been approved.

Analysts said, selling pressures is expected to ease as the IMF hopes to reduce inflationary pressures which will in turn lead to reductions in interest rates. (Colombo/Mar23/2023)

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