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Thursday March 23rd, 2023

Sri Lanka records BOP surplus in Sept 2022

ECONOMYNEXT – Sri Lanka has recorded a balance of payments surplus in September 2022, official data show, after rates were hiked to reduce private credit, allowing money printing to be phased out and the agency also ran out of reserves options to borrow and engage in sterilized interventions.

Sri Lanka’s central bank started to lose the ability to collect reserves and run BOP surpluses from around August 2019 as liquidity injections to target the yield curve began.

From December 2019 taxes were cut and from around February 2022 large volumes of money was printed and Treasury bills issued to finance past and current deficits were bought to mis-target rates.

In the 9 months to September Sri Lanka recorded a BOP deficit of 2,927 million dollars, down from 3,035 million US dollars a month earlier, indicating a monthly surplus.

Though a BOP surplus implies a rise in central bank foreign reserves, repayment of reserve related liabilities can keep gross reserves unchanged.

A pegged (intermediate regime) central bank which runs inflationary policy either by injecting liquidity outright to keep rates down or by filling liquidity shortages after defending the peg (using reserves for imports and re-financing private sector activity) to mis-target rates will trigger forex shortages and a BOP deficit.

Sri Lanka’s central bank stopped mis-targeting rates around April 2022 and allowed market rates to go up, helping reduce domestic private credit, drive more money to the deficit and reduce money printing, which is causing forex shortages.

Sri Lanka also hiked taxes and raised utility charges to reduce public sector borrowings.

However the Reserve Bank of India gave deferred Asian Clearing Union dollars to Sri Lanka until June to continue to create BOP deficits by sterilizing interventions with borrowed money. (Sri Lanka owed US$1.9bn to Asian Clearing Union by June 2022)

However after India halted ACU deferements, the central bank lost the ability to run BOP deficits.

Related Sri Lanka’s BOP deficit creating ability wanes

A central bank which runs deflationary policy and reverses money printing will build up reserves and run a BOP surplus.

In September net central bank credit to government fell marginally. However reserve money has also fallen.


Sri Lanka Central Bank credit negative in Sept 2022

Sri Lanka key current inflows exceed imports for fourth month in Sept

Sri Lanka is now operating a peg around 360 – 370 to the US dollar, intervening in both directions with the 3-month rate around 30 percent.

At least 8-10 basis points of the rate may be due to flaw in a debt re-structuring framework where there is uncertainty whether domestic debt, which has already in a steep in an IFR hair-cut, will suffer a default and second re-structuring, according to some analysts.

Classical economists and analysts had earlier urged the central bank to float the currency after hiking rates as it bring backs confidence at a lower corrective interest rate than if a peg with lost credibility is continued. (Sri Lanka has to hike rates, tourism recovery will not help end forex crisis)

A float involves isolating reserve money from the balance of payments and halting all interventions (suspending convertibility) in forex markets whether to buy or sell dollars.

Sri Lanka’s float in March failed due to low rates which were driving credit and forced dollar sales (a surrender requirement or strong side convertibility undertaking) of dollars to the central bank which pushed the peg down further.

A float restores confidence in the exchange rate and encourages dollar holders to sell, exporters to convert early and importers to delay import payments to pre-crisis levels and bring down interest rates faster.

The central bank was a net buyer of foreign exchange from commercial banks in September and October as private credit contracted and imports reduced.

Under an International Monetary Fund program, a float is a prior action. The exchange rate is then re-pegged to collect reserves. IMF money is disbursed after the BOP is turned around and ‘reserves for imports’ are no longer required.

An IMF program will impose a net international reserve target where the central bank will run deflationary policy which is tighter than a currency board to re-build reserves and sell down its Treasury bill stock.

When reserves are collected under deflationary policy (dollar purchases are sterilized), it is possible to appreciate a currency peg as credit is weak and rates are higher than the required market rate.

However due to a belief in (basket, band, crawl policy) peddled by theoreticians living in more stable single-anchor regime nations, and lack of a doctrinal foundation in sound money in countries with intermediate regimes, currencies are not allowed to bounce back unlike a floating regime, tipping people who have partially crawled out of poverty back into the abyss and triggering social unrest, in one of the most merciless post-1931 Mercantilist strategies.

In a shocking revelation, a World Bank survey found that only 2 percent of policy makers it surveyed in South Asia knew that currency troubles were caused by central banks.

Forex shortages and BOP deficits (as defined) is a problem related to soft-pegs or intermediate regimes. They are absent in floating regimes and hard pegs without a policy rate where interventions are unsterilized. A central bank is the only agency which can create forex shortages and BOP deficits and also the only agency that can stop them.

Under an IMF program it is not possible to operate a clean floating exchange rate as there is a NIR target. As a result it is also not possible to run orthodox inflation targeting regime.

Under the IMF program, flexible inflation targeting where liquidity was injected for stimulus, mis-using the central bank’s its statutory obligation to maintain stability would be legalized in a new monetary law.

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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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