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Monday March 4th, 2024

Sri Lanka repays debt or collects reserves of U$5bn via banking system since rate correction

RESERVE BUILD UP: Reserves were built up by both commercial banks and the central bank. The graph does not show the central bank net reserve build up.

ECONOMYNEXT – Sri Lanka’s banking system has collected foreign reserves or repaid borrowings of 5.0 billion US dollars since the central bank allowed interest rates to correct in April 2022, official data shows.

The central bank has collected reserves or repaid debt of 1.69 billion US dollars since April 2022.

Meanwhile commercial banks have collected about 3.2 billion US dollars or repaid maturing credit lines in the period.

Large volumes of the collected cash are lying in various NOSTRO accounts, preventing a Lebanon style default on private forex bank accounts, preventing any loss of confidence, a run on bank dollar accounts and keeping the net open positions in balance.

Some of the money is also used to back trade credits.

Under Governor Nandalal Weerasinghe, banking stability has given first place, with reserve sales in September to support banks in a domestic dollar debt restructuring, according to observers.

Collecting reserves (lending money to foreign borrowers like the US government or depositing in correspondent banks) is exactly the same as repaying debt.

Sri Lanka’s monetary system started to deteriorate in the latter part of 2019 under so-called ‘flexible’ inflation targeting, with potential output targeting, the latest deadly inconsistent monetary regime peddled to countries without a doctrine in sound money.

Similar regimes (under different labels, but with 5 percent inflation target or higher) are found in almost all defaulting countries that depreciate or other countries with monetary instability like Turkey.

The Slippery Slope

The collapse of the monetary system accelerated from 2020 with even more aggressive macro-economic policy to close what macro-economists said was a ‘persistent output gap’, based on a belief that money printing can lead to ‘easy’ growth without hard work, critics say.

The central bank ran out of reserves around April, but was able to spend non-existent reserves (and print money to offset the intervention, running contradictory money and exchange policies) because India loaned its dollars through the Asian Clearing Union, delaying the correction to the monetary system.

As a result, the central bank’s net reserve collections in the 12 months of 2023 were higher at 1.86 billion US dollars that from April 2022. The net foreign assets started to turn around in the third quarter of 2022, after India closed the tap on ACU loans.

Analysts say the ability of the central bank to borrow through swaps or ACU loans should be outlawed in a future monetary law aimed at preventing a second default and reducing the ability of macro-economsts’ to run contradictory money and exchange policy to create balance of payments troubles.

Critics say central bank swaps one of the flawed monetary actions invented by the Fed in the run up to the collapse of the Bretton Woods, as was deliberate mis-targeting of rates by a committee of bureaucrats.

Mis-targeting rates through open market operations was also invented by the Fed in the 1920s in in the run up to the Great Depression, which then led to the so-called ‘age of inflation’ and persistent balance of payments troubles smashing self-correcting note-issue banks.

A country can repay debt or collect reserves as long as domestic investment is balanced by a market interest rate at a given (fixed) exchange rate, which tends to generate a surplus in the current account of the balance of payments.  

Sri Lanka’s suspended loans and interest up to September 2023 was 4.2 billion US dollars.

The 5.0 billion US dollar net reserves number from April 2022 does not include any capital flight of private individuals and corporations that took place in the period through official and unofficial means.

In the period of monetary instability and BOP deficits triggered by the policy rate, many firms also ran up suppliers’ credits or debts to parent companies (worsening the external current account deficit) which were paid down after stability was restored with market rates.

A BOP deficit as defined under Anglophone inflationism does not take into account commercial bank or other capital flight but only the official net reserves.

Spurious Monetary Doctrine

BOP deficits build up due to a belief that central bank reserves can be used for private imports that seems to have developed during the age of inflation.

“The IMF also advocates a (statistical) ‘reserve adequacy metric’ or pegging but at the same time propagates the idea of ‘exchange rate as the first line of defence’ giving the lie to the first claim,” says EN’s economic columnist Bellwether.

“This is a consequence of rejecting the deductive reasoning of classical economists like Smith, Ricardo, Hume and later Hayek and Mises and embracing souped up versions of John Law doctrine garnished by statistics.”

“As a result, these countries continue to get into trouble whatever the fiscal corrections that are done. John Law is now firmly in Sri Lanka’s monetary law.”

“The spurious monetary doctrine flowered among war winning Allies of World War I, primarily the US, which had no classical economists to speak of in the past and were then propagated through various Anglophone ‘Saltwater universities’ and Cambridge with devastating effect.”

Current central bank Governor Weerasinghe arrested the monetary meltdown that was gathering pace in 2022, which showed initial signs of moving into hyper inflation and a complete loss of confidence in the rupee.

Importers and other businesses were giving invoices that had validity in days, at the time.

However, when rates are mis-targeted with printed money and confidence in the country is lost, the corrective rate is very high. Under domestic debt restructuring now advocated by the International Monetary Fund, rates go sky high on fears of a deliberate default.

Governments of market access countries with IMF style soft-pegs started to default from the 1980s (when the Fed tightened policy severely) after the agency’s ‘Second Amendment’ to its articles left countries without a credible monetary anchor.

Argentina was one of the first market-access victims of un-anchored money and is the top IMF client. Britain, the home of JM Keynes, had the distinction until Thatcher-Hayek reforms.

Attempts by current President Javier Milei to carry out economic reforms without first fixing the central bank (essentially ending inflation targeting by a reserve collecting central bank) following pressure by macro-economists against dollarization, has led to widespread protests.

Similar opposition was faced by Thatcher from inflationist macro-economists at the time, but she rejected the pressure saying “This lady is not for turning’. Both Friedrich Hayek and Milton Friedman was alive at the time. (Colombo/Feb07/2024)

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Sri Lanka rupee opens at 308.20/50 to the US dollar

Sri Lanka stocks reversed its falling trend and gained for the first time in six sessions on Tuesday closed stronger on Tuesday (21).

ECONOMYNEXT – Sri Lanka’s rupee opened at 308.20/50 to the US dollar Monday, from 308.80/90 on Friday, dealers said.

Bond yields were broadly steady.

A bond maturing on 01.08.2026 was quoted stable at 10.90/11.00 percent.

A bond maturing on 15.09.2027 was quoted at 11.90/12.00 percent from 11.90/12.05 percent.

A bond maturing on 01.07.2028 was quoted at 12.20/30 percent from 12.15/35 percent.

The Colombo Stock Exchange opened up; The All Share was up 0.60 percent at 10,755, and the S&P SL20 was up 1.24 percent at 3,077. (Colombo/Mar4/2024)

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Sri Lanka central bank swaps top $3.2bn by December

ECONOMYNEXT – Sri Lanka’s central bank borrowed US dollars from various counterparties through swap transactions, which had topped 3.2 billion US dollars by December 2024, official data show.

The net short position, including swaps disclosed by the central bank, grew by over almost 1.28 billion US dollars from December 2022 to 3,280 million dollars.

The gross position grew from 2,263 million dollars to 3,280 million US dollars over the year.

The central bank supported some state banks with dollars to cover their dollar exposures, which had since been paid back.

By December reported gross reserves of the central bank was 4,491 million US dollars, against swaps of 3,280 billion US dollars.

Swaps of around 1500 related to the People Bank of China.

Swaps allow a central bank to increase gross reserves, without raising domestic interest rates.

Swaps with domestic counterparties lead to liquidity being injected into money markets, which can be mopped if domestic credit growth is moderate.

At the moment many private banks have large dollar positions invested outside the country, which cannot be used for transactions domestically because of a money monopoly given to macro-economists. (Sri Lanka repays debt or collects reserves of U$5bn via banking system since rate correction)

However unwinding swaps after private credit has picked, or engaging in swaps after private credit has picked up, may lead to money being injected to maintain the policy rate, leading to excess credit by banks and balance of payments deficits and or currency collapses, analysts say.

Central bank swaps in the third quarter of 2018 led to a collapse of the currency under the ‘exchange rate as the first line of defence’ policy peddled to Sri Lanka, critics have said earlier.

Domestic currency proceeds of swaps were the primary ammunition to bust East Asian currencies in 1997-98.

Any depreciation after the swap proceeds have been used for imports (effectively mis-targeting rates) a central bank will run a forex loss.

The PBOC however had put a rule, preventing the use of the swap after gross reserves fell below 3 – months of imports, preventing Sri Lanka from getting into further trouble through the use of official reserves for private imports.

Sri Lanka’s central bank also used borrowings from the Reserve Bank of India, via the Asian Clearing Union to run BOP deficits.

Losses from exposed dollar positions of central banks which have gained ‘independence’ from fiscal rules and parliaments and engaged in macro-economic policy, including the Fed, have led to taxpayers bearing the losses in the end.

Swaps were invented by the Fed in the early 1960s, as it deployed macro-economic policy (printed money for growth) threatening its gold reserves and the Bretton Woods system.

Sri Lanka has other borrowings also, including from the IMF, which has made net foreign assets of the central bank negative. (Colombo/Mar05/2024)

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Sri Lanka loses MICE tourists to Thailand on minimum room rates

ECONOMYNEXT – Sri Lanka has lost Meetings, Incentive Travel and Exhibition travelers to competitors in East Asia and India due to minimum room rates as higher standard rooms were available in other countries at lower prices, industry officials said.

President of the Sri Lanka Association of Inbound Tourist (SLAITO) Nishad Wijetunga said they the industry managed to retain a majority of booking made before the minimum room rates were imposed by the state last year.

“However, there were MICE groups that were supposed to come and cancelled Sri Lanka and went to places like Thailand and other parts of India and we lost,” Wijetunga told EconomyNext.

“We know that large groups of MICE (tourists) are affected.”

India is a key source of MICE tourists to Sri Lanka.

Sri Lanka’s businesses have got used to protectionism and try to push up prices with import taxes to extract more money from customers using the coercive power of the state, with tiles and steel being among the most prominent examples.

RELATED: Stand-alone hotels unviable in Sri Lanka due to high construction, capital costs

High priced tiles and steel in turn makes hotels expensive to build and make the leisure industry less competitive, analysts say.

However, in tourism, unlike in building materials customers are not trapped within the country and are free to move to other markets.

Managing Director of CEC Events and Travels, Imran Hassan, said the industry lost groups to East Asia due to minimum room rate.

In one instance, an operator was in discussions to get a group of 900 passengers.

“And that moved out to Thailand,” Hassan said. “Like that, there are many instances that the minimum room rate was not conducive.”

Thailand in 2023 attracted 28.04 million tourists.

A group that used to come to Sri Lanka annually used to take 40 to 50 five-star hotel rooms. This time Sri Lanka competed by offering lower standard.

“This year, they’re only giving 10 rooms to the five-star hotels,” Hassan explained. “They are staying in smaller hotels because they can’t afford it because it has become so expensive.”

“But overall, we are working with the authorities to correct it.

“We don’t mind demand and supply situation taking the rates up as in the Maldives. But what we are saying is keep an open market.”

RELATED : Sri Lanka should say good bye to minimum room rates: President

President Ranil Wickremesinghe has said Sri Lanka cannot progress with protectionism and the country has to learn to face competition. (Colombo/Mar04/2024)

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