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Monday April 15th, 2024

Sri Lanka rate hike beginning of long journey, IMF may be inevitable: Wijewardene

ECONOMYNEXT – Sri Lanka’s recent rate hike was a step in the right direction into standard policy but an International Monetary Program may be inevitable, W A Wjiewardene, a former central bank deputy governor said.

For over 19 months Sri Lanka’s central bank has maintained that there was an ‘alternative’ set of policies to maintain economic stability and printed large volumes of money and also boosted bank credit to the government, he said.


“But today we have come to a very critical level,” Wijewardene said in a conversation with Dhananath Fernando, Chief Operating Officer of Advocata Institute, a Colombo-based think tank.

“With IMF or without IMF we cannot continue with this loose monetary policy anymore and we cannot maintain this low interest rate regime anymore

“As a result the central bank has done what it should do in a situation like this. It has reversed its policy stance.

“Instead of claiming that it is going by this alternative policy, it is now going by its normal monetary policy where it has increased the policy interest rate and increase the statutory reserve ratio.

“This is actually the beginning of a long journey in order to maintain the macro-economy in Sri Lanka.”

“Without going to the IMF there is no other solution.”

Though the government itself had spelled it out in a formal document, Sri Lanka was using an ‘alternative’ policy in vogue among many irresponsible governments in the world, called the modern monetary theory, according to statements.

MMT advocates claim “the printing of money has no relation to inflation or exchange rate depreciation,” Wijewardene explained.

“And based on that the central bank had been printing new money on a massive scale and had been permitting commercial banks to lend to the government huge amounts of money…” he said.

Sri Lanka is now facing severe forex shortages as money was printed to keep rates down, turning legacy debt into reserve money, as well as funding the current deficit.

Corrective Policies

The government has vastly expanded the money supply by taking large volumes of credit after cutting taxes and creating a large hole in the budget, he said.

Foreign financiers of the government debt had also lost confidence, which was leading to high yields in government debt.

He said before going to the IMF, Sri Lanka will have to raise taxes “and put its house in order’ to avoid a ‘tsunami’.

Raising taxes will reduce the corrective interest rate required to balance the budget and halt money printing.

A debt restructuring will also reduce the required corrective rate analysts have said. An IMF program also unlocks other budget support loans from development lenders. (Colombo/Aug23/2021)

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Sri Lanka to discuss two contentious points with bondholders: report

ECONOMYNEXT – Sri Lanka and sovereign bondholders are to discuss two matters in the near future which the two sides failed to reach agreement at March talks in London, a media report quoting a top aide to President Wickremesinghe as saying.

Sri Lanka and bondholders had discussed four matters on restructuring international sovereign bonds in late March and agreement had been reached on two, President’s Chief of Staff Sagala Ratnayake was quoted as saying on state-run ITN television.

A restructuring proposal by bondholders was not in line with IMF requirements, and Sri Lanka had sent a counter proposal, he said.

The matters will be discussed at round of talks in the near future.

Sri Lanka was optimistic of reaching an agreement with the bondholders before June, officials have said.

According to matters already in the public domain, sovereign bond holders are keen to get a bond tied to dollar gross domestic product, as they feel IMF growth projections are too low.

In past re-structuring so-called value recovery instruments, a type of warrant, gave their owners extra payments if a country did better than expected and were tied to items like oil prices.

Bondholders had initially proposed bond which would have a lower hair cut initially, and it will have additional hair cuts if growth is low (about 3.1 percent) as projected in an IMF debt sustainability analysis. (Colombo/Apr15/2024)

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BIMSTEC Secretary General visits Sri Lanka, discusses regional cooperation

ECONOMYNEXT – The Secretary General of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), discussed measures to enhance regional cooperation, during his visit to the island last week.

Ambassador Indra Mani Pandey, Secretary General of BIMSTEC visited Sri Lanka from 07 – 12 April 2024, following his assumption of office as Secretary General of BIMSTEC in January this year.

The Secretary General “met with senior officials of relevant Ministries/Agencies to discuss measures to enhance regional cooperation under various BIMSTEC initiatives,” the Foreign Ministry said in a statement.

Several BIMSTEC countries have bilateral trade agreements, such as Sri Lanka and India, Thailand and Myanmar, Sri Lanka and Thailand, but no collective regional agreement to enable intra-regional leverage.

During the visit, Secretary General Pandey held discussions with Ministry of Foreign Affairs officials and paid courtesy calls on the President and the Minister of Foreign Affairs.

Secretary General Pandey participated at an event on “Regional Cooperation through BIMSTEC” organized by the Lakshman Kadirgamar Institute (LKI) on 9 April. (Colombo/April15/2024)

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Sri Lanka rupee closes weaker at 299.00/10 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 299.00/10 to the US dollar in the spot forex market on Monday, from 298.50/55 on Wednesday, dealers said, while bond yields were broadly steady.

A bond maturing on 15.12.2026 closed stable at 11.30/35 percent.

A bond maturing on 15.09.2027 closed stable at 11.90/12.00 percent.

A bond maturing on 15.12.2028 closed at 12.10/20 percent up from 12.10/15 percent.

A bond maturing on 15.09.2029 closed stable at 12.20/40 percent. (Colombo/Apr15/2024)

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