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Monday May 20th, 2024

Sri Lanka says will not default on foreign debt as bonds trade at discount

ECONOMYNEXT – Sri Lanka said it will not default on foreign debt as the central bank printed money triggering ‘foreign exchange shortages’ raising concerns over repaying dollar debt, and rating agencies downgraded sovereign rating to ‘B-‘ from ‘B’.

Sri Lanka’s sovereign bonds had been sold down in international markets and is trading at steep discounts to face value.

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Sri Lanka says will maintain zero default record as Coronavirus jitters hit sovereign bonds

Unlike in the last episodes of uncertainty, domestic banks have also been banned from buying Sri Lanka sovereign bonds with borrowed or other dollars deposits, further reducing liquidity.

Steep discounts on bonds show perceptions of default by investors. Some parties had made claims that Sri Lanka would default.

“The Government wishes to categorically deny all such baseless claims, and would like to reiterate to all stakeholders that Sri Lanka will duly honour all its debt service obligations in the period ahead,” the central bank said in a statement posted on its website.

“The recent volatilities in yield levels of Government of Sri Lanka’s International Sovereign Bonds (ISBs) during the Covid-19 pandemic period are no different to what has been observed across a majority of emerging and frontier market economies.

“It is noteworthy that despite such volatility, global institutional investors, fund managers and analysts recommend Sri Lankan debt instruments for investment, while remaining confident of Sri Lanka’s credit quality.”

Sri Lanka’s delayed elections were also due to Coronavirus epidemic and the President had the authority to spend money, the statement said.

“The Government also wishes to clarify that the unintended delay in holding the general elections and the submission of the government budget must not be considered as leading to any policy uncertainty or procedural standoff, but a result of the health policy response to contain the Covid-19 pandemic.”

The full statement is reproduced below:

Sri Lanka Reiterates its Commitment to Meeting all its Financial Obligations

The Government of Sri Lanka finds inferences in recent media reports questioning its ability to honour its debt service obligations. The Government notes with dismay such inferences made by certain media to imply that Sri Lanka is at risk of falling into a sovereign debt crisis by comparing Sri Lanka with other sovereigns which are said to be in similar situations.

The Government wishes to categorically deny all such baseless claims, and would like to reiterate to all stakeholders that Sri Lanka will duly honour all its debt service obligations in the period ahead.

The recent volatilities in yield levels of Government of Sri Lanka’s International Sovereign Bonds (ISBs) during the Covid-19 pandemic period are no different to what has been observed across a majority of emerging and frontier market economies. It is noteworthy that despite such volatility, global institutional investors, fund managers and analysts recommend Sri Lankan debt instruments for investment, while remaining confident of Sri Lanka’s credit quality.

The Government also wishes to clarify that the unintended delay in holding the general elections and the submission of the government budget must not be considered as leading to any policy uncertainty or procedural standoff, but a result of the health policy response to contain the Covid-19 pandemic.

According to the country’s constitution, His Excellency the President is empowered to authorise the government operations in the absence of an annual budget for a period up to three months after convening the Parliament following the elections. Thus, the government operations function without any hindrance, and any uncertainty surrounding the date of holding the general elections will be resolved after the ruling by the Supreme Court on the same in the coming days.

In the meantime, the Government has already introduced measures to curtail expenditure, while the delay in presenting the government budget automatically limits the space for additional expenditure for this year. Further, the cost of Government financing from both domestic and external sources has markedly declined so far during 2020.

The Government has taken proactive measures in mobilising funds from multiple sources of market based and official sources of financing to effectively improve the terms and conditions of financing. Given volatile market conditions across the globe, the issuance of an international bond by the Government is not anticipated in the near term, thereby rendering the current yields observed in the international bond market irrelevant. The focus of financing will be to further explore bilateral and multilateral sources to benefit both risk and cost considerations of debt management, and these discussions are well underway. Further, the country is in the process of exploring SWAP facilities with regional central banks, while arrangements are being made for syndicate financing with identified foreign sources.

Meanwhile, the faster than expected rebound of Sri Lanka’s economy from the Covid -19 outbreak would also lend support to the Government’s efforts to consolidate fiscal operations in the period ahead. Sri Lanka has been able to contain the spread of the pandemic successfully in a short period of time with minimal disruptions to activity. Sri Lanka faced a partial lockdown only for eight weeks, i.e., during the second half of March, April, and the first half of May. During this time, many offices, financial institutions, factories, delivery services, agricultural services, public services were functioning.

The month of April each year is a festive season, in which economic activity is in any case subdued. The stimulus measures announced by the Government and the Central Bank are expected to help a fast revival of businesses and support the individuals affected by the outbreak. Accordingly, Sri Lankan economy is expected to record a growth of around 1.5 per cent in 2020, with much of that growth expected to occur in the second half of the year.

Sri Lanka’s exports and tourism sectors are gearing up for an early recovery, which could support a faster revival of activity while easing any pressure on the external sector. According to latest market information, Sri Lankan factories have received fresh additional orders to manufacture health and safety related equipment.

Sri Lanka’s traditional export commodities such as Tea has attracted record prices at auctions due to good demand from major importers. Hotels remain ready for an early resumption of tourists with extra sanitary preparations. Moreover, the lower fuel import expenditure and the temporary restrict ions imposed on nonessential merchandise imports are expected to cushion any adverse impact on the trade balance.

As such, despite the transitory adverse impact on tourism, transport sector and workers’ remittances due to the Covid-19 outbreak, the narrowing trade deficit is expected to cushion the current account deficit in 2020. Contrary to unfounded inferences and comparisons, Sri Lanka has already initiated measures to return to normalcy and gradually being opened up for business throughout the country. In this backdrop, the Government of Sri Lanka categorically disagrees with recent assessments of risks and rating decisions by some international rating agencies.

In conclusion, the Government emphasizes that Sri Lanka has demonstrated its commitment to honouring all its obligations on time, even during difficult times in the past, and will continue to do so in the future, while engaging with all investment and development partners.

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Sri Lanka may have to depend on India or nuclear to reach low carbon target: researcher

DOUBLE WHAMMY: In Sri Lanka’s driest period, wind potential also goes down, a researcher and policy advocate says

ECONOMYNEXT – Sri Lanka will need to either connect to India or set up a nuclear power plant if the country is to reach its renewable energy targets due the country’s weather patterns, a researcher and policy advocate has said.

Sri Lanka has set ambitious goals for renewable electricity generation by 2030, apparently without much prior study or any costs being revealed when the target was set by President Gotabaya Rajapaksa.

Rohan Pethiyagoda, a taxonomist and researcher who had also been senior state officials involved in policy at one time said overall Sri Lanka used a large volume of biomass (firewood) for cooking.

“We need to recognize, of course, that about 60 percent of Sri Lankan households still use firewood as their primary fuel,” Pethiyagoda told a climate forum organized by Sri Lanka’s Ceylon Chamber of Commerce.

“Bless them, because they reduce our dependence on fossil fuels for cooking. Even the tea industry, one of our largest exports, uses biomass as its primary fuel for about 90 percent of its production.”

In the electricity sector, where the renewable lobby and other activists oppose coal on the basis of carbon emissions based on international trends, as well as dust, base load still has to be generated if thermal generators are replaced.

Solar power is available only for a few hours in daytime and it can also vary depending on cloud cover.

Hydro power (run of the river plants) is more stable but is dependent on rain. Large hydros with storage can be used for peaks, industry analysts say.

Wind is available throughout the day but can also be unstable. The problem of variability (non-firm energy) can be solved to some extent through ramping and battery storage at additional cost, analysts say.

A renewable plant in Poonakary with battery storage was priced at around 48 to 49 rupees (about 15 US cents) based on public statements.

Meanwhile Pethiyagoda said Sri Lanka’s weather patterns created an additional problem.

“We have this unusual thing for our renewable energy in Sri Lanka, that at the tail end of the northeast monsoon, from about December to April, we have a dry period in this country, which means that our hydro potential during those months goes down,” Pethiyagoda said.

“Now, as luck would have it, our wind potential goes down at the same time.”

As a result, Sri Lanka needs a reliable alternative to the current coal baseload.

“So for that reason especially, we need to look at either connecting to India’s grid in the long term or having a nuclear facility in Sri Lanka if we want to be low carbon. And of course, we need to replace our vehicle fleet.”

“And our base load can probably come from nuclear,” Pethiyagoda said.

“But whichever way we do it, the cheaper way would be for us to connect to India’s grid.

“Whichever way we do it, we’re looking at an investment of about 40 billion dollars. And then we have the problem of looking at how wind and solar will behave.”

It was not clear what the 40 billion dollar investments would be made up of.

Sri Lanka’s external debt as at December 2024, including unpaid principal after default was 37.3 billion US dollars.

In 2021 when the 70 percent target was unveiled in President Gotabaya Rajapaksa’s election manifesto power engineers said a 53 percent energy share planned for 2030 in a general plan at the time was was equal to that of Germany.

Pushing up the share to 70 percent would require billions of dollars of extra investments, they said.

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Sri Lanka generation plan renewable power share for 2030 equal to Germany: CEB engineers

After the central bank cut rates and triggered an external default however, Sri Lanka growth, and power demand in the next few years is expected to be lower than before extreme macro-economic policy.

Related Sri Lanka to invest US$11bn by 2030 to meet renewable target

In 2023, the CEB said about 11 billion US dollars would be needed to meet the 70 percent target. (Colombo/June19/2024)

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Sri Lanka President discusses Starlink with Elon Musk

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe has discussed connecting the island to the Starlink satellite system with its founder Elon Musk, his office said in a statement.

President Wickremesinghe has met Musk at a World Water Forum High-Level Meeting in Indonesia.

President Wickremesinghe discussed “the implementation of Starlink in Sri Lanka & committed to fast-tracking the application process to connect SL with the global Starlink network,” the statement said.

Starlink is a low earth orbit satellite network, connected to Musk’s SpaceX group. (Colombo/Jun19/2024)

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Sri Lanka’s CEB March 2024 profits Rs84bn with capital gain, fx strength

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Board group has reported profits of 86 billion rupees with the help of 25.9 billion rupees of capital gains from a transfer of shares, interim accounts show.

The rupee also appreciated in the quarter which keeps imported fuel prices low.

As a standalone entity, the Ceylon Electricity Board, made profits of 84.6 billion rupees in the March quarter.

CEB’s revenues rose 38.5 percent to 167 billion rupees in the March 2024 quarter, while cost of sales fell 26.1 percent to 105.0 billion rupees giving gross profits of 62.7 billion rupees.

The CEB also reported 30.6 billion rupees of other incomes and gains in the March quarter, up from 3.1 billion rupees last year.

Other Income and Gains

The utility said it made a 25.9 billion rupee capital gain from transferring LTL Holdings shares to West Coast Power an IPP in which other entities have a majority holding.

In the quarter the rupee also appreciated.

A rupee appreciation will help reduce the carrying cost of dollar loans and also reduce the cost of imported thermal fuels and maintenance costs of spares.

The central bank allowed Sri Lanka’s exchange rate to appreciate from 324.40 rupees in December 2023 to 300.17 on March 2024 amid deflationary policy and weak private credit allowing imported fuel costs also to fall.

Especially after 1978, after rate cuts drove the country into balance of payments crises, the central bank had collected reserves with free market interest rates, but has not usually allowed the exchange rate to re-appreciate despite generating a BOP surplus with deflationary policy.

Un-anchored Bad Money

Before 1978, when an apparently doctrinally foxed International Monetary Fund abandoned both external and specie anchors simultaneously after the Fed closed its gold window triggering the Great Inflation period, Sri Lanka also did not depreciate its currency, analysts have pointed out.

Related Why the IMF is hated now and is backing bad money in Sri Lanka and Latin America

Since it was set up in 1951, the central bank has printed money under various dual anchor conflicting Saltwater-Cambridge ideologies (re-financing rural credit, sterilizing outflows, potential output targeting, yield curve targeting) to create forex shortages and currency crises and started to go the IMF from the mid-1960s.

From 1978, after the IMF’s second amendment to its Articles denied the central bank a credible external and domestic anchor simultaneously, the currency stated to depreciate steeply.

The government was therefore unable to balance its budget and state enterprises were also unable to balance their budgets running large losses whenever the rupee fell and energy prices went up.

After abandoning its external and specie anchor the central bank followed a anchor conflicting regime involving money supply targeting without a floating exchange rate in the 1980s.

The ideology was rejected in toto by Singapore, Malaysia, Hong Kong, Thailand and China.

Since the end of a civil war macro-economists have followed inflation targeting without a floating exchange combined with extreme macro-economic policy to target potential output, eventually driving the country into external default.

Budgets went haywire in the early 1980s as the rupee fell, despite then President JR Jayawardene cutting subsidies and ending price controls (administered prices) two years earlier, in reforms that Singapore’s economic architect and one-time Finance Minister Goh Keng Swee said were “economic reforms which most people had considered politically impossible.”

Goh who set up a currency board in Singapore rejecting Cambridge-Saltwater ideology, warned JR not to destroy the rupee.

“Exchange rate policies involve many complicated technical issues which I do want to discuss here,” he said.

“On balance, the disadvantage of a depreciating rupee will, I believe, outweigh the advantages. Most of the products whose prices are administered are ether wholly imported or contain a high import content. About a quarter of rice consumption is imported.

“All wheat from which four and bread are produced is imported. The same holds true of kerosene and milk powder.

“Bus fares ware largely determined by the rupee price of imported oil and spare parts. Fertilizers are also mostly imported.”

At the time Sri Lanka had hydro-electricity.

Capital Injections

Some of the CEB’s dollar loans were been taken over by the central government after the steepest currency collapse in the history of the central bank in 2022 and external default.

The CEB’s contributed capital as at end March 2024 was 991.4 billion rupees up from 865.1 billion rupees.

With the March quarter profits with some financial engineering involving the asset sale and the government equity injection, the CEB’s group accumulated losses reduced to 456 billion rupees from 575 billion rupees.

The CEB ran large losses as the regulator failed to raise tariffs as macro-economists printed money to target potential output over the past decade.

From 2011 to 2022 the rupee fell from 113 to 370 to the US dollars as the central bank ran un-anchored monetary policy the regulator only raised prices in 2022.

Energy Minister Kanchana Wijesekera said the last price cut was also made possible due to rupee appreciation.

With no potential output targeting (no inflationary open market operations), the country has started to recover from the stability that has been provided up to now amid weak private investment credit.

Sri Lanka’s private credit is now starting to recover.

Based on past trends of using statistics instead of classical economic principles (cutting current current interest rates with inflationary open market operations of a money monopoly based on historical inflation rates under ‘data driven monetary policy’ without regard to domestic credit) analysts have warned of a return to monetary instability under potential output targeting. (Colombo/May19/2024)

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