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Sunday March 26th, 2023

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 seeks to settle India ACU debt, credit lines over 5-years

ECONOMYNEXT – Sri Lanka has requested India to settle payments due to the country under the Asian Clearing Union mechanism and credit lines given in 2022 over 5 years, Indrajit Coomaraswamy, an advisor the island’s government said.

Sri Lanka is negotiating with India to settle the money over a 5-year period, Coomaraswamy, a former central bank governor told an online forum hosted by the Central Bank.

“Our request from the Indians is to settle it over five years,” he said. “That I think is still in the early stages of negotiation. The same with the one billion line of credit.”

Sri Lanka’s central bank owed the ACU 2.0 billion US dollars to the Asian Clearing Union according to a year end debt statement, issued by the Finance Ministry.

Sri Lanka owned India, 1,621 million dollars according to ACU data by year end, excluding interest.

India has given a 1 billion US dollar credit line to Sri Lanka as well a credit line for petroleum.

Sri Lanka in March 2024 has paid 121 million US dollar out of a 331 million US dollar IMF tranche to settle an Indian credit line.

Indian credits were given after the country defaulted in April 2022 as budget support/import when most other bilateral lenders halted giving money. (Colombo/Mar26/2023)

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Sri Lanka coconut auction prices up 1.16-pct

ECONOMYNEXT- Sri Lanka’s coconut auction prices went up by 1.16 percent from a week ago at an auction on Thursday, data showed.

The average price for 1,000 nuts grew to 83,219.45 from 82,260.58 a week earlier at the weekly auction conducted by Sri Lanka’s Coconut Development Authority on March 23.

The highest price was 92,500 rupees for 1,000 nuts up from the previous week’s 90,600 rupees, while the lowest was 76,500 also up from 70,000 rupees.

The auction offered 900,010 coconuts and 583,291 nuts were sold. (Colombo/Mar 26/2023)

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Sri Lanka in talks for billion dollar equivalent Indian rupee swap

ECONOMYNEXT – Sri Lanka is in talks with India for a billion US dollar equivalent Indian rupee central bank swap, to facilitate trade, Indrajit Coomaraswamy, ad advisor to the government said.

“The amount is still uncertain it could be up to the equivalent of a billion US dollars,” Coomaraswamy told an online forum hosted by Sri Lanka’s central bank.

The money will be used to facilate India Sri Lanka trade, he said.

India has been trying to popularize the use of Indian rupees for external trade and also encouraged Sri Lanka banks to set up Indian rupee VOSTRO accounts.

However the first step in popularizing a currency for external trade is to get domestic agents, especially exporters, to accept their own currency for trade, like in the case of the US or EU, analysts say.

India’s billion US dollar credit to Sri Lanka given during the 2022 crisis is settled in Indian rupees (transaction need).

However the Indian government itself has chosen to denominate it in US currency for debt purposes (future value).

In most South Asian nations, receivers of remittances are willing to accept domestic currencies, leading to active VOSTRO account transactions.

Sri Lanka is expected to repay a 400 million US dollar swap with the Reserve Bank of India next year under an International Monetary Fund backed program for external stability and debt re-structuring.

Central bank swap proceeds sold to banks, which are then sterilized with inflationary open market operations, can trigger forex shortages and currency crises, analysts warn.

Sri Lanka went to the International Monetary Fund after two years of inflationary monetary operations by the central bank’s issue department (money printed to suppress interest rates) triggered the biggest currency crisis in its history and external sovereign default.

Sri Lanka had gone to the IMF 16 times with similar external troubles except for the April 2003 extended fund facility under Central Bank Governor A S Jayewardene which was a purely reform-oriented program with the World Bank (PRGF/PRSP) program at a time when he was collecting reserves with deflationary monetary policy and perhaps the lowest inflation since the Bretton Woods collapsed. (Colombo/Mar26/2023)

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