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Thursday December 1st, 2022

Sri Lanka rupee collapses as gold imports end

ECONOMYNEXT – Sri Lanka’s rupee started to collapse rapidly from around April 2018 as soon as legal gold imports ended official data show, in a remarkable display of the effects of Mercantilism.

Classical economics pioneered by Adam Smith, David Ricardo and later by Bertil Ohlin, Friedrich von Hayek and Ludwig von Mises among others have shown balance of payment trouble and currency collapses are caused by monetary instability from Central Banks not imports. (Sri Lanka’s Dr de Silva re-kindles debate on Ricardo’s evil and Penelope’s web of Dr Smith as rupee falls)

In a throwback to classical Mercantilism and the Nixon shock era when Bretton Woods collapse after money printing, Sri Lanka slapped an import tax on legal gold imports in April 2018, weeks after the central bank started printing money. (Sri Lanka slaps 15-pct Mercantilist knee-jerk tax).

Sri Lanka’s legal gold imports soared 73 percent to 649 million US dollars in 2017 when the central bank was mopping up dollars (sterilizing inflows) and keeping the peg on the strong side of its convertibility undertaking.

In 2017, Sri Lanka was mopping up between 100 to 200 million US dollars a month off current transactions, reversing money printing (selling down central bank domestic assets, keeping the peg extremely strong).

But the central bank depreciated the currency from around 149 to 153 US dollars during 2017 to target a real effective exchange index despite recording a 2.0 billion US dollar balance of payments surplus, in the style of East Asia laggard Indonesia.

In February 2018, the central bank stopped repo auctions to mop up inflows (sterilizing inflows) as the credit demand picked up and in March terminated repo deals in the style of the central bank of Argentina re-purchasing its own sterilization securities.

In April, rates were cut and excess liquidity was built with reckless injections, critics have said while taxes were slapped on gold.

Gold was being imported to Sri Lanka to mainly to sell to Indian couriers who were smuggling them to India by paying money for it, after the Reserve Bank of India, in a fit of Mercantilism slapped taxes on gold.

RBI’s Mercantilism has been a bad example for Sri Lanka after independence from British colonisation when monetary instability began. Specie-pegged RBI was nationalized and Sri Lanka’s currency board was converted to a money printing central bank.

The gold tax, while curbing smuggling to India, also made Sri Lanka’s jewellery industry un-competitive. It also deprived easy export profits to gold re-sellers, who would have paid income tax, had there been a good tax system.

In 2019, the rupee has started to strengthen as domestic credit fell. Legal gold imports are still near zero, while people are caught by customs for smuggling gold and punished.

However, there is no criminal punishment for the central bank, either for halting mopping up operations in February, terminating term repos in March or recklessly injecting cash in to banking system in April.

The cost of maintaining the soft-pegged central bank has been heavy on the poor and the country.

The central bank and its so-called soft-pegged exchange rate has triggered exchange controls, trade controls, inflation, price controls, black markets and shortages, helping worsen poverty and make Sri Lanka a lagging nation in Asia.

The latest risk to the country is the inability to repay foreign debt with a soft-peg. There have been calls to harden the peg, or go for a clean float. (Colombo/Apr18/2019-SB)


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Sri Lanka electricity losses from overpriced fuel, no tariff hike considered: regulator

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Board’s high operating costs are partly due to excessive prices paid for fuel and no tariff hike is being considered, Chairman of the Public Utilities Commission of Sri Lanka, Janaka Ratnayake said.

The CEB itself does not buy fuel but depends on state-run Ceylon Petroleum Corporation and Lanka Coal, another state firm to buy fuel. Both firms are periodically caught in procurement scandals.

“They are paying about 385 plus rupees per litre for furnace oil,” Ratnayaka told EconomyNext.

“That is too much. From the global market we can buy it to much lower price. It can be imported below 200 rupees,”

“I ask the government to take the necessary steps to create a system to import furnace oil, like they did for fuel, to be imported at the lower price levels. If that happens, we can go without going for a price hike.”

Sri Lanka’s CEB generally gets furnace oil and residual oil from the domestic refinery and usually do not import furnace oil.

The refinery however is not regularly operating due to inability to get crude amidst the worst currency crisis in the history of the island’s intermediate regime central bank.

Ratnayake had earlier brought to light import costs of the CPC.

Pushing for operations efficiency of the CEB is a role of the regulator. Regulating costs based on global benchmark prices to push for procurement efficiencies is a standard practice. However the PUCSL is not the official regulator of the petroleum sector.


Sri Lanka power tariff revisions sought in Jan and July: Minister

Power and Energy Minister Kanchana Wijesekera told parliament that cabinet approval was sought to twice yearly tariff hikes in January and July of each year.

No Electricity tariff hikes are being considered yet, Ratnayake said.

Wijesekera blamed the regulator as well as successive administrations for not regularly revising power prices and pushing the sector into crisis.

In Sri Lanka activists had also blocked cheap coal power. (Colombo/Dec01/2022)

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Sri Lanka banks may need more regulatory, accounting forbearance: Coomaraswamy

ECONOMYNEXT – Sri Lanka’s banks may need more regulatory forbearance ex-Central Bank Governor Indrajit Coomaraswamy said as the country imposes stabilization measures after the worst currency crisis since independence.

“We need to look at regulatory forbearance,” Coomaraswamy told a forum organized by CT CLSA Securities, a Colombo based brokerage.

“For CA Sri Lanka to do some more accounting forbearance. They have given some already.”

Sri Lanka’s central bank has given some regulatory loosening in the mark to market losses and also in liquidity ratios.


Sri Lanka relaxes bank capital rules to cushion bond losses as rates spike

Sri Lanka’s banks are seeing higher levels of bad loans after the latest currency crisis as well as mark-to-market losses, and the impact of dollar sovereign bonds in default.

Sri Lanka’s stage 3 loans were 7.9 percent of total advances (net 8.7) by the end of the second quarter of 2022.

It compares with a 6.6 percent NPL ratio in the first quarter of 2020 as the Coronavirus pandemic started, which also triggered bad loans just as the roots of the current currency crises started.

In a currency crisis, a soft-pegged or reserve collecting (flexible exchange rate) central bank will inject liquidity to either monetize mostly maturing Treasuries from past deficits (in Latin America mainly failure to roll-over sterilization securities) to suppress rates.

When forex shortages begin to emerge from the excess credit, the flexible exchange rate central bank will intervene and sterilize the dollar sales to keep suppressing rates and prevent reserve money from contracting. Both moves allow banks to give credit without deposits, worsening their loan to deposit ratios and blowing a hole in the balance of payments.

When interest rates correct to stabilize the currency crisis and injections end, bad loans pile up. During the Coronavirus crises however economic activity was muted, compared to previous credit cycles and large volume of injected liquidity piled up in the banking system.

Before the twin crises, the central bank had earlier made banks boost capital.

Coomaraswamy who was Central Bank Governor until the beginning of 2020 said the then head of bank supervision A Thassim had insisted that banks comply with the Basle III capital standards as early as possible, when he himself was prepared to give some more time.

As a result, Sri Lanka banks were well capitalized at the start of the crisis, he said.

In the crisis with government finances already weakened, the banks were made to give relief and took the pressure, Coomaraswamy said.

After Sri Lanka default in April and interest rates were normalized to stop the currency crisis, banks were now facing pressure.

CA Sri Lanka, the island’s accounting body had already given some leeway to re-classify trading portfolios of securities to reduce the impact of mark-to-market losses.

In previous currency crisis, the IMF makes the briefly float the currency to establish confidence in the exchange rate after raising rates to curb domestic credit. This time rates were raised after a float failed by a surrender rule.

A successful float leads to early exporter conversions and a resumption of delayed import settlements which leads to a gradual fall of interest rates. Fixes to the budget and utilities also help.

The falling rates help boost capital gains of banks, offsetting some of the loan loss provisions.

This time however though external stability has large been reached, there has been no successful float to convince the market but taxes have been raised and utility prices adjusted to reduce domestic credit.

Lack of clarity over domestic debt re-structuring has also kept rates elevated. But long term rates have now started to ease.

Meanwhile President Ranil Wickremesinghe had already proposed an asset management company to take-over bad loans. (Colombo/Dec01/2022)

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Sri Lanka power cuts expanded on low water levels

ECONOMYNEXT – Due to water level reduction in reservoirs and high usage of fuel in generating electricity was the main reason the Public Utilities Commission has approved power cuts of 2 hours and 20 minutes, Chairman Janaka Rathnayaka said.

Sri Lanka power cuts were two hours earlier. The Ceylon Electricity Board had requested a 3 hour cut which was not granted.

“The reason it was brought to 2 hours and 20 minutes, was the water levels are lowering in reservoirs and we need to maintain a certain water level to generate hydro power,” Rathnayaka told EconomyNext.

“And also we are using more fuel which is costlier, and therefore we had to increase the power cuts period”.

CEB unions had warned of extended power cuts from July unless coal for 2022 was brought before the April monsoon season starts, when ships cannot be unloaded.

Sri Lanka has already secured seven coal shipments which will complete in the next two days, and should work to secure 38 more shipments in order to secure the necessary coals for 2023. (Colombo/ Dec 01/2022)

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