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Friday June 21st, 2024

Sri Lanka rupee quoted in spot-next dollar market after pressure

ECONOMYNEXT – Sri Lanka’s rupee was quoted at 302.20/30 to the US dollar in the spot next (spot plus one day) market after the stop opened tentatively at 302.00/75 levels, dealers said.

There were one or two sporadic deals at 302.00 to the US dollar, but the spot market was not very active in early trade, dealers said.

Market participants are recovering from a heavy dose of moral suasion last week, after the rupee came under upward pressure from an ‘oversold position’.

Sri Lanka’s central bank collected 715 million dollars from the interbank market in March, three times the around 200 million it collected in the previous two months.

The central bank was able to collect large amount of dollars in March as the rupee was allowed to appreciate steeply within a short time amid deflationary policy, encouraging importers to delay payments and also creating market incentives banks to short their open positions.

Assuming similar policy to February and March is continued it, will take a few weeks of inflows to balance the market, analysts say, as long inflationary policy does not resume on a net basis.

More aggressive liquidity management by not renewing maturing term reverse repo deals can encourage banks which had borrowed from the central bank to curtail credit and balance their books, analysts say.

Banks in general should not given central bank liquidity to trade and make profits and any standing facility cash should be given at a penal rate, to stop forex shortages and eventually a second default, analysts said.

Restricted spot market activity is an overt sign of Sri Lanka’s so-called flexible exchange rate, which critics say is inconsistent as it rejects long established classical economic principles.

A pegged (reserve collecting) central bank can only accumulate dollars to the extent that it can curtail domestic credit and sell down its Treasuries portfolio to mop up liquidity created from dollar purchases (deflationary policy), for which a market interest rate is required.

There was not much panic among importers to cover, but banks were trying to square their positions, and avoid further rockets, market participants said.

Up until March, the central bank had generally operated deflationary policy on a net basis, giving it full control of the exchange rate.

In April it usually prints some money to meet a real demand for cash as people withdraw cash.

On Friday net excess liquidity in money markets was 134 billion rupees and the central bank injected 29 billion rupees at rates as low as 8.56 percent far below the 9.50 ceiling rate.

Term money has been injected as low as 8.62 percent.

In the past, when private credit picked up the rupee has come under pressure from around May as inflationary policy picked up.

In other years, as private credit picks up, currency crises have also started from February when the twin injections from central profit transfers and provisional advances allow banks to give loans without deposits.

Under flexible inflation targeting (inflation targeting without a clean float), the central bank usually cuts rates claiming inflation is low, just around the time private credit picks up from stabilization measures of a previous crisis, and tumbles headlong into a fresh one.

The flexible exchange rate, which is neither a clean float nor a hard peg, is the deadliest soft-peg ever cooked up by Western inflationists and shoved down the throats of hapless third world nations without a doctrinal foundation in sound money, critics say.

Sri Lanka defaulted under the flexible exchange rate which was combined with money printed to target potential output (inflationary suppression of rates through liquidity tools).

A bond maturing on 15.12.2026 was quoted at 11.32/40 Monday steady from 11.30/40 percent down from 11.35/40 percent Friday.

A bond maturing on 15.09.2027 was quoted at 11.95/12.00 flat from 11.95/12.05 percent.

A bond maturing on 15.12.2028 was quoted at 12.15/25 percent from 12.15/25 percent.

A bond maturing on 15.09.2029 was quoted at 12.25/40 percent down from 12.30/40 percent.

A bond maturing on 01.10.2032 was quoted at 12.35/55 percent, down from 12.40/50 percent Friday. (Colombo/Apr22/2024)

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Indian FM meets Sri Lanka political leaders; focuses on committed deals

ECONOMYNEXT – Indian External Affairs Minister (EAM) S. Jaishankar met President Ranil Wickremesinghe and a range of political leaders during his visit to Sri Lanka, focusing on commitments made by Sri Lanka to India, including land and energy pipeline connectivity.

Sri Lanka has committed to renewable energy deals for the Indian Adani group, Trincomalee port development, an investment zone around the port, a bridge between the island nation’s Northern Mannar and South India’s Rameshwaram, a power grid, and an oil and gas pipeline between the two nations.

Though most of the committed projects have been discussed and some already signed, they face delays amid public protests, court cases on environmental concerns, anti-Indian sentiments triggered by high prices of renewable projects, local politicians as well as perceived Chinese influence, analysts say.

India has been pushing Sri Lanka to fast-track these deals under Prime Minister Narendra Modi.Jaishankar’s visit also comes ahead of Sri Lanka’s presidential polls later this year.

Jaishankar met President Wickremesinghe in a one-on-one meeting, Prime Minister Dinesh Gunawardena, and Foreign Minister Ali Sabry before delegation-level talks with Ports, Shipping and Aviation Minister Nimal Siripala de Silva, Agriculture and Plantation Industries Minister Mahinda Amaraweera, and Power and Energy Minister Kanchana Wijesekera.

“Appreciated the progress made on various bilateral projects and initiatives. Under President Ranil Wickremesinghe’s guidance, we discussed the way forward for India-Sri Lanka cooperation, especially in power, energy, connectivity, port infrastructure, aviation, digital, health, food security, education, and tourism sectors,” Jaishankar said on his official Twitter platform.

He also met former President Mahinda Rajapaksa, opposition leader Sajith Premadasa, and leaders of various political parties from the North, East, and the upcountry region.

“Interaction of EAM with the leadership of the Government of Sri Lanka provided an opportunity to review and accelerate progress in the multifaceted India-Sri Lanka partnership,” the Indian External Affairs Ministry said in a statement.

One of the key focus areas of discussion was the Vision Document adopted by President Wickremesinghe and Prime Minister Modi during the Sri Lankan leader’s visit to India in July 2023.

“Discussions added momentum to the ongoing projects as well as initiatives for promoting connectivity in all its dimensions, particularly in domains of energy, physical infrastructure as well as economic and people-to-people ties.”

Jaishankar also met leaders of Sri Lanka’s upcountry Tamils, who originally came from India as plantation workers. He discussed development and devolution of power with an eight-member delegation of Tamil leaders from the Northern and Eastern provinces, including Shanakiyan Rasamanikkam and M. A. Sumanthiran.

India helped Sri Lanka with financial and humanitarian aid when the island nation faced an unprecedented economic crisis amid delays by the International Monetary Fund loan to rescue Sri Lanka.

“Following Sri Lanka’s economic recovery and stabilization, forging deeper long-term economic cooperation was underlined as a priority for sustainable and equitable growth of Sri Lanka, and mutual prosperity in the Indian Ocean Region,” the Indian External Affairs Ministry said.

Though the Sri Lankan government has claimed that Jaishankar’s visit was a precursor to Indian Prime Minister’s visit, the Indian External Affairs Ministry did not mention anything about a possible Modi visit.

This visit is Jaishankar’s first bilateral visit after the formation of the new government.

The Adani wind power project in the Northern district of Mannar has seen some public protests over environmental concerns after some experts said the project has failed to conduct a proper Environmental Impact Assessment (EIA). Critics also protest against its transparency.

President Wickremesinghe, opposition leader Premadasa, and Marxist Janatha Vimukthi Peramuna (JVP) leader Anura Kumara Dissanayaka are expected to contest in the election to choose the island nation’s 8th leader.

Sri Lankan leaders have been under pressure from India in the past two decades amid increasing Chinese influence in the island nation, seen as a security threat to India, analysts say.

The docking of a Chinese nuclear submarine in 2014 led to a dramatic government change in the 2015 presidential poll with the ousting of former leader Mahinda Rajapaksa, who later accused India of orchestrating his defeat.

Rajapaksa’s brother Gotabaya in 2021 unilaterally canceled a key port terminal project given to India’s Adani group after promising Jaishankar to sign the deal.

Gotabaya Rajapaksa was later forced to flee the country in 2022 after mass protests due to his economic policies. (Colombo/June 21/2024)

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Sri Lanka car permit tax losses Rs14bn in two years of partial disclosure

ECONOMYNEXT – Sri Lanka has lost 14.3 billion rupees in taxes from car permits given to public servants, including doctors, military officers, central bankers, finance ministry and tax officials, in 2019 and 2020 information disclosed by the finance ministry shows.

Inclusive of some 2021 tax losses when imports were banned for the rest of the year, 14.4 billion rupees of foregone revenue from a waived luxury tax is shown.

The list only shows waivers of a so-called ‘luxury tax’ imposed on larger vehicles above a certain value and size.

The list does not show other vehicles imported under car permits such as double cabs or cars below a certain size.

The list also does not seem to include tax free cars imported by politicians.

In 2019, Sri Lanka has lost 8.3 billion rupees from the luxury tax on car permits and in 2019 the loss 5.92 billion rupees.

In 2021 when car imports were stopped as the central bank started printing money to cut rates and target ‘potential output’ only 85.6 million rupees were lost.

Among the biggest tax waivers of over 10 million rupees went to some doctors and military officers. Doctors were among the biggest users of tax slashed car permits in the list.

Sri Lanka at one time did not allow cars imported by state workers to be transferred for many years.

But reportedly after Customs raided a finance company involving a fleet of vehicles, the rule was relaxed by the then President.

Among the largest tax waivers listed were given to Rolls Royce and Maclaren assigned to Melwire Rolling (Pvt) Ltd.

The 45.6 million rupee Rolls Royce was given a 42.1 million rupee tax waiver.

The 41.46 million McLaren was given a 37.9 million tax waiver.

There were also a large number of Audi A5 and Q2 vehicles listed at prices over 80 million rupee. It is not clear whether the disclosure is an error. The market value of the A5 and Q2 are much lower.

Up to end 2023, 138 cars imported under a migrant worker remittance scheme was listed to lose 436 million rupees in luxury taxes.
The total for the three years was listed at 14.86 billion rupees, involving 2,034 cars in 2019 and 1,470 cars in 2020.

It is not known how much the total tax losses or total vehicle imported through ‘car permits’ is. (Colombo/June20/2024)

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Construction of Sampur solar power plant to begin mid-July

ECONOMYNEXT – Joint energy projects between India and Sri Lanka, including the Sampur solar power plant due to begin next month, took centre stage during bilateral discussions between president Ranil Wickremesinghe and visiting Indian External Affairs Minister S Jaishankar on Thursday.

Wickremesinghe and Jaishankar discussed initiatives aimed at enhancing energy connectivity and developing the renewable energy sector, a statement by his media division said.

“Significant attention was given to plans for an LNG supply, a proposed petroleum pipeline linking the two countries, and advancing oil and gas exploration projects. Additionally, it was announced that construction of the Sampur Solar Power Plant is set to commence in July 2024.”

The visit comes amid delays in key Indian projects including land, oil and gas pipe, and grid connectivity deals, Adani’s wind power plant deals which are facing a legal battle, and port and investment zone projects in the Eastern port district of Trincomalee.

Indian supported projects for developing Trincomalee and expanding the Kankasanthurai port, the ongoing development of Jaffna Airport and Colombo Airport, and the expediting the unique digital identity card project were discussed.

The efficiency of projects supported by the Indian government aimed at bolstering Sri Lanka’s liquid milk industry and fertilizer production, were also examined.

Sri Lankan leaders have been under pressure from India in the past two decades amid increasing Chinese influence in the island nation as the move is seen as a security threat to India, analysts say. (Colombo/Jun20/2024)

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