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Sunday July 14th, 2024

Sri Lanka rupee, forex markets in pickle as LC rationing froths

ECONOMYNEXT – Sri Lanka’s forex markets are mired in tight trading restrictions and banks found it increasingly difficult to accommodate customer requests for letters of credit market participants said, as money printing and excess liquidity continue to pressure the rupee.

Sri Lanka’s rupee is now in a non-credible peg at 200 to the US dollar with over 100 billion rupees (about 500 million US dollars) in excess liquidity pressuring the peg via potential new credit.

Last week another 22 billion rupees (about 100 million US dollars) were printed to keep Treasury bill yields below 5.21 percent, which is functioning as a de facto ceiling policy rate.


Sri Lanka prints Rs22bn after failing to sell bills at ceiling rate

LC Rationing

With interbank forex trading coming to a virtual standstill banks are finding it difficult to cover letters of credit obligations in time, forcing them to ration LCs to customers who have access to printed money from the central bank to do business with.

“We cannot accommodate the requests for LCs so we have to ration them,” a banker said. “There is no regulation to say to ration them, but we are forced to do it.”

Bank NOPs were slashed in April as credit demand picked up and printed money hit forex markets.

Then a non-credible peg was imposed at around 200 to the US dollar, making it difficult for banks to cover their positions after providing dollars for customers to cover bills and LCs.

Problems with LCs began to emerge shortly after but has now intensified.


Sri Lanka forex market caught between moral suasion and slashed NOPs

Sri Lanka’s non-credible peg to US dollar devalued to 202 amid LC struggle

Several banks are now running short (negative) net open positions.

This week isolated forward transactions took at 200 to the US dollar as some banks tried to reduce their negative NOPs, market participants said.

Forward legs at discount in swap market

In the swap market one year forwards are quoted at discounts with domestic dollar yields overtaking the rupee rates kept down by money printing.

The year was quoted this week at 1700/2200 levels or a discount of around 17 rupees.

Banks are mandated to sell to importers around 200 to the US dollar.

However it is not clear whether a similar restriction applies to capital outflows with foreign investors in particular selling out of stocks in bid to protect their money.

Sri Lanka has been following excessively loose monetary policy associated with Sterling crises in the late 1960 and the collapse of the US dollar and the Bretton Woods soft-peg system in 1971, which worsened after 2015.

During the recent past a highly unstable and discretionary external anchor called a ‘flexible exchange rate’ which had zero credibility in the market was coupled with discretionary domestic anchor called the ‘flexible exchange rate’ with predictable consequences.

In 2020, unprecedented liquidity injections were made under so-called Modern Monetary Theory, with pegged exchange rate regime.

Though the peg is now enforced at 200 to the US dollar with multiple controls, there is no monetary policy to back it analysts say as long liquidity is injected.

A US money-doctor set up Sri Lanka’s soft-pegged central bank in 1950 in the style of several set up in Latin America abolishing a currency board that had kept the exchange rate and free trade since 1885.

A false promise was made that that the agency will be able to engage in discretionary credit policy (print money) and also supply foreign exchange in unlimited quantities as the currency board had done since 1885.

Economists and analysts have been calling for the central bank’s open market operations to be restrained, and if not for it to be abolished altogether so that resident of Sri Lanka can get on with their lives without monetary instability.

From 2015 large volumes of liquidity has been released into banks to keep call money rates at the middle or bottom of the policy corridor in a steep regression of policy.

The China-backed Colombo Port City is to be protected from the soft-pegged central bank through multiple currency dollarization.


Sri Lanka Port City dollarization upheld, constitution violation from depreciation: SC

Sri Lanka’s Supreme Court has upheld the right of Port City residents to be protected from depreciation.


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Ex-US President Trump shot at in campaign rally

ECONOMYNEXT- Republican nominee to the upcoming polls and former US President Donald Trump has been shot during a campaign rally, media reports said.

The bullet grazed the ear of Trump, who is reported to be doing well.

The gunman was shot and killed by secret service snipers within second of firing the shots at Trump.

At least one civilian was killed reports said.

Television footage showed blood in Trumps ear.

As he was hustled out of the venue by Secret Service officials Trump was seen shaking his fist in the air. (Colombo/July14/2024)

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UNESCO DG to discuss archaeological endeavours in Anuradhapura, Sri Lanka: President

ECONOMYNEXT – Sri Lanka’s president has said that he will discuss initiatives for long-term archaeological endeavours in the Anuradhapura city with visiting UNESCO Director General Audrey Azoulay.

Azoulay will visit Sri Lanka from July 16-19 and take part at the celebration of the 75th Anniversary of Sri Lanka’s membership of UNESCO at the Nelum Pokuna Theatre in Colombo.

She will also travel to UNESCO World Heritage Sites around the island, the Ministry of Foreign Affairs said.

“I have invited the Director General of UNESCO to visit Sri Lanka and discuss initiatives for long-term archaeological endeavours in the Anuradhapura city. Several universities overseas have shown interest in supporting us for these activities, and we are moving forward with their collaboration,” Ranil Wickremesinghe said.

“Anuradhapura boasts a rich history spanning over a millennium, once renowned as a hub of trade and economics. Preserving and exploring this ancient city’s archaeological treasures remains a significant endeavour.”

“New archaeological efforts in the Anuradhapura district are now imperative,” Wickremesinghe said during a ceremony to inaugurate a 150-kilowatt solar power system installed by the LTL Group at the Sri Maha Bodhiya premises in Anuradhapura on Saturday (13).

Wickremesinghe pointed out that UNESCO has undertaken extensive archaeological projects in Angkor Thom in Cambodia, and Luang Prabang in Laos.

“However, we have not taken the necessary steps to implement these activities in Anuradhapura city. Therefore, I have advised both the Department of Archaeology and the Cultural Triangle to undertake these initiatives.”

These efforts are part of a comprehensive program aimed at establishing Anuradhapura as a globally renowned city, Wickremesinghe said.

While Sigiriya has gained international fame, Sri Lanka has not adequately highlighted Anuradhapura’s historical significance as a major trade and economic center in the past, the president pointed out.

“Cities like Tanjore (Thanjavur), Madurai, and Sanchipuram are often discussed, yet Anuradhapura, the fourth city, has been overlooked. Therefore, it is crucial to develop Anuradhapura city.”

As part of these initiatives, preparations are underway to establish new hotels in Anuradhapura, which will contribute significantly to its development, Wickremesinghe said. (Colombo/Jul13/2024)

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Government committed to improving living conditions in Jaffna: Sri Lanka PM

ECONOMYNEXT – Sri Lanka’s prime minister, who is in Jaffna “to monitor the progress” and “get a little feedback” has said the government is committed to improving living conditions of the people in the northern peninsula.

“This government is dedicated to improving the living conditions of the Jaffna Peninsula,” Dinesh Gunawardena told a Jaffna District Coordinating Committee meeting on Friday, according to a statement by his media division.

“In order to increase the living conditions, we have embarked on an increase in most of the expenditure needed by the departments, and also special allocations for rural and urban development in the local government area.”

Nationalist Gunawardena met with Tamil politicians at the Jaffna Divisional Secretariat Office and participated in the distribution of rice and egg incubators for low income families.

“A special privilege to be with you all, in order to monitor the progress made by all of you, as well as to get a little feedback where we stand today in relation to the reports given.”

Gunawardena joins a string of leading political figures who have visited the north ahead of upcoming polls.

The government was, he said, “committed to improve the services and living conditions, therefore, to provide the necessary infrastructure for developments, which means much to your area.”

The prime minister said he appreciated the efforts of farmers because “farmers are all private sector, I would say. Let us not forget, farmers are all in the private sector, either in the ownership or in the tenancy. They are private contributors to the national development of the economy.”

The poverty numbers are “fairly managed” in the country. Gunawardena said, pointing out that poverty was a key problems in any economy. “Any country, you would agree with me, the richest country, in the United States even, food stamps have been given. So all economies the world are going through difficult situations in relation to the poor.

“We have to look after the poor especially in these remote villages of the Northern Province…”

Minister Douglas Devanada, MPs M A Sumanthiran, Angajan Ramanathan, C Vigneshwaran, Dharmalingam Siddharthan, and other officials participated in the meeting. (Colombo/Jul13/2024)

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