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Thursday August 18th, 2022

Sri Lanka rupee dollar swap discounts jump amid forex crisis

RATE IMBALANCE: Steeply rising domestic assets of a pegged central make downgrades likely.

ECONOMYNEXT – Sri Lanka’s rupee-dollar foreign exchange swaps, which are going at discounts despite forex shortages deepened sharply in this week after a credit downgrade from Fitch further tightened dollar liquidity in bank funding books, market participants said.

The spot/1-month swap was quoted around negative 550/400 cents up sharply from -170/-150 in the second week of December.

Swaps and forward dollars started to trade at discounts instead of a premium as is usual for a weak currency due to artificially low interest rates enforced by money printing.

Under Keynesian dogma taught in some Anglo-American universities particularly after the 1933 float of the Sterling pound, currency weakness is blamed on fixed exchange rates, but currency pegs collapse due to fixed interest rates enforced by liquidity injections.

Dollar interest rates overtook rupee yields in 2020 as sovereign bond yields went up and accelerated after a credit downgrades in late in the year, as cross-border banks reduced risk limits to their Sri Lanka counterparties.

After the latest Fitch downgrade to CC limits were cut further and banks found it even more difficult to renew their funding lines, market participants said.

The central bank had earlier put caps on domestic dollar deposit rates instead of allowing rupee rates to rise as dollars were sold in the market and liquidity tightened. In another cascading soft-pegging policy error dollar deposits of residents earning salaries were also banned analysts have said.

At the moment interventions are sterilized with printed money at 6.0 percent injecting non-deposit rupee reserves into the banking system to spur credit and create more forex shortages.

Spot/1 month business was done around minus 530 cents this week showing that the 1-month forward rate implied in the transaction is 194.70 rupees to the US dollar and the receiver is generating dollars above 30 percent, depending on the funding cost.

Spot/3 month swaps were quoted at -1450/-1300 cent and business was done at 1,400, indicating the 3 month rupee/dollar forward is at 186 rupees, despite continued foreign reserve losses.


Sri Lanka foreign exchange swap discounts widen, fears of underworld grabbing kerb market

Two weeks ago spot/3 months was quoted -500/-400.

There were no firm quotes for 6 or 12 month swaps, after the sovereign downgrade by Fitch to ‘CC’.

Moody’s had in October downgraded Sri Lanka to Caa2. But Fitch had earlier confirmed the ‘CCC’ rating, despite continued money printing pushing up domestic assets of the central bank which automatically triggers more reserve losses as convertibility is provided for the new rupees.

“Rating agencies do no really understand soft-pegs, money printing and liquidity injections, after all their staff also went to the same universities like Harvard, Yale, Cambridge or Oxford that peddle money printing and stimulus and Western financial media lionize them,’ EN’s economic columnist Bellwether explained earlier this year. (Sri Lanka’s monetary meltdown will accelerate unless quick action is taken: Bellwether)

“But they do understand the opposite side of a central bank’s balance sheet – foreign reserves – which fall when liquidity is redeemed against dollars.”

Sri Lanka’s dollar borrowings started to go up sharply after call money rate targeting de-stabilized the monetary regime.

From 2015 to 2021, Sri Lanka was able to pay back dollar debt with current account flows only in two years, 2017 and 2019.

In all other years, liquidity injections under a highly discretionary ‘flexible’ inflation targeting and ‘flexible’ exchange rates created forex shortage making it impossible to repay foreign debt with current inflows (sterilized inflow).

Instead the central bank sterilized outflows buying securities into its balance sheet and borrowing abroad.


How Sri Lanka’s IMF-backed ‘Young Plan’ fired a foreign debt death spiral: Bellwether

As a result the net accumulation of foreign debt was greater than the foreign financed budget deficit in all years with inflationary central bank policy.

A the moment outflows are sterilized. A float is required to end sterilized interventions. Consistent or hard pegs (currency boards) interventions are unsterilized.


Sri Lanka overnight injections top Rs400bn amid sterilized interventions

In countries which maintain stable exchange rate, a wide policy corridor reduces sterilized forex sales and allows overnight rates to go up quickly and slow credit, before the credibility of the peg is completely lost. (Colombo/Dec23/2021)

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Sri Lanka rupee, yields in govt securities slightly changed

ECONOMYNEXT – Sri Lanka Central Bank’s guidance peg for interbank transactions weakened on Thursday (18) and yields in Treasury bonds picked up slightly while in T-bill edged down in dull trade after the central bank kept key monetary policy rates steady, dealers said.

On Thursday, before the market opened, the central bank held its key policy rates steady at 15.50 percent, while data showed market interest rates are close to twice the rate of them while private credit and imports falling as a consequence.

The central bank is injecting 740 billion rupees of overnight money to banks at 15.50 percent, which were originally injected mostly after reserves were sold for imports (or debt repayments) to artificially keep down rates (sterilized interventions), effectively engaging in monetary financing of imports.

The injections (sterilizing outflows) prevent the credit system from adjusting to the outflows and encourage unsustainable credit without deposits, which is the core problem with soft-pegged central banks, triggering a high rate and an economic slowdown later.

A bond maturing on 01. 06. 2025 closed at 27.90/28.00 percent, slightly up from 27.75/90 percent on Wednesday.

The three-months bill closed at 28.30/29.25 percent, down from 29.25/30 percent on Wednesday.

Sri Lanka’s central bank announced a guidance peg for interbank transactions weakened by one cent to 360.97 rupees against the US dollar on Thursday from 360.96 rupees.

Data showed that commercial banks offered dollars for telegraphic transfers between 367.97 and 370.00 for small transactions.  (Colombo/ Aug 18/2022)

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Japan grants medical equipment worth 500-mn yen to Sri Lanka govt hospital

ECONOMYNEXT –  The  Japanese government has granted medical equipment worth 500 million Japanese yen to the Sri Jayawardenepura government hospital to improve the hospital’s treatment facilities under Japan’s Non-Project Grant Aid Programme.

A statement by the Department of External Resources said the grant was given in response to a request by Sri Lanka’s government.

Under the 500 million Japanese yen (approximately 1,265 million rupees) grant assistance, angio-CT machine, other radiology equipment, ophthalmic instruments, surgical instrument sets (stainless steel with satin finish), 15 dental units with accessories, liver transplant instrument sets, and a cardiac catheterization laboratory will be provided, a statement said on Thursday August 18.

Sri Lanka due to its worst economic crisis in its post-independence history is currently facing shortages of essential medicine, non-essential and lifesaving medicines pressuring the health sector to only attend to emergency cases to preserve available limited medicine stocks.

On Thursday at the policy rate announcement media briefing by the Central Bank of Sri Lanka (CBSL), Governor Nandalal Weerasinghe said, with the strict measures taken in the recent past, Sri Lanka is currently managing the limited forex income coming into the country to purchase essential goods such as fuel and medicine.

Sri Lanka has received various grants from several countries including China and India which gave a 200 million US dollar credit line to purchase medicine from India.

In June, Minister of Health Keheliya Rambukwella said there is no shortage of vital medicines in the country and all medicines will be restocked by August 2022. However, shortages of medicine aer still being reported in various hospitals islandwide.

“This improvement at the hospital will facilitate the enhancement of the quality of the care provided especially to the patients with non-communicable diseases while enabling high quality medical professional training to medical undergraduates and postgraduates from the National School of Nursing at the aculty of Medical Sciences of the University of Sri Jayawardenepura,” the External Resources Department statement said.

“This project will eventually assist the development of human resources of the health sector in Sri Lanka,” it said. (Colombo/Aug18/2022)

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Sri Lanka immigration on the hunt for Scotswoman who documented protests

Kayleigh Fraser via @kayzfraser Instagram

ECONOMYNEXT – Sri Lanka’s Immigration and Emigration Department is attempting to track down Kayleigh Fraser, the Scotswoman who documented the country’s anti government protests.

Fraser was ordered to leave the island on or before Monday August 15 after officials cancelled her visa. She and her lawyer had filed a writ petition against her deportation with the Supreme Court, which was dismissed on the grounds that she was not being deported deported, only had her visa cancelled.

“The learned State Council submits that the impugned document ‘X4’ is not a deportation order as claimed by the petitioner and she confirmed that no deportation order has been made up to date by the authorities against the petitioner,” a court document shared by Fraser said.

Immigration officials stated that the police and SSD were on the lookout for Fraser.

“Her visa was cancelled on August 15, so we are looking to put her in a detention camp until she can get a ticket to leave the country,” the official told EconomyNext, confirming that Fraser was not getting deported but that her visa was cancelled.

“Legally we cannot give her a grace period, but on a humanitarian basis, we can give her the time to get a ticket,” the official said.

Fraser had used her social media to share pictures and videos of the anti-government protests in front of the Presidential Secretariat, and has been vocal against state sanctioned violence against protestors.

“Given what I have witnessed here in Colombo – the chemical weapons attacks on protestors, the government instructing the military to beat and torture protestors, the arbitrary arrests and blackmailing of prominent faces from the protests, intimidation tactics and threats etc – I should not be surprised at what has happened today,” she said, speaking to the Daily Record, a Scottish tabloid.

There were no reports of chemical weapons being used against any protestors in Sri Lanka, and it is unclear whether Fraser was erroneously referring to tear gas which was used to disperse crowds.

Fraser also called out media channels who she claimed had attempted to misrepresent peaceful protests as violent.

“It became very clear to me early on that this was not being reported. There was no international coverage on what was happening, and the media here were very much trying to say that it was violent, but that is the absolute opposite of what I saw,” she said over social media.

“What I saw was a beautiful union [of people] coming together in absolute unity. It was a beautiful movement and I’ve never seen anything like that in my life and that kept me coming back.”

However, Sri Lanka’s authorities maintain that the arrests so far have been legal and that violence did occur on the part of some protestors, though activists and some civil society groups disagree. On May 09, after supporters of then Prime Minister Mahinda Rajapaksa launched an unprovoked attack on peaceful protestors in Colombo, a wave of retaliatory mob-violence erupted across the country which saw the residences of some parliamentarians torched to the ground. One government MP was killed.

Authorities say many of the arrests so far have been of protestors who had violated court orders or had illegally occupied government buildings.

Fraser continues to post on her social media. (Colombo/Aug18/2022)


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