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Monday October 25th, 2021
Energy

Sri Lanka seeks Iran, UAE oil credits to drive external current deficits amid money printing

ECONOMYNEXT – Sri Lanka’s Petroleum Minister has sought suppliers’ credit facilities from the United Arab Emirates and Iran through diplomatic channels, media reports said as money printing is creating forex shortages and depleting forex reserves.

Sri Lanka is seeking the help of the United Arab Emirates (UAE) to buy petroleum on credit to “save foreign exchange so that the money could be used for the purchase of essential food items,” Energy Minister Udaya Gammanpila was quoted as saying in Sri Lanka’s The Sunday Times newspaper.

Sri Lanka’s has been printing large volumes of money, to defend a pattern of interest rates in Treasuries markets, injecting liquidity and triggering forex shortages.

Earlier in August the central bank hiked a de facto 12-month policy rate to 5.93 percent, but unfortunately overnight rates were raised shortly before that to 6.0 percent, leading to another failed Treasuries auction.

External Borrowings

The Petroleum Minister was hoping for a two billion six month US dollar supplier credit facility, the report said.

According to reports the CPC already had a 1.7 billion dollar suppliers credit facility. Whether this is in addition, or to replace them is not clear.

Sri Lanka’s The Island newspaper said the Minister Gammanpila had also met Iranian diplomats.

Energy Ministry Secretary K. D. R. Olga, Chairman, Ceylon Petroleum Corporation Sumith Wijesinghe and Deputy General Manager Mahendra Garusinghe had also met diplomats, the report said.

Sri Lanka’s state-run Ceylon Petroleum Corporation is made to borrow dollars and unhedged open cross-currency positions which then generated massive losses.

In 2018, after printing money to target an ‘output gap’ the CPC was also made to borrow dollars instead of buying dollars and settling oil bills in time.

In 2018 the CPC ended up with 1.8 billion US dollars of Treasury guarantees for loans given as money was printed to target and output gap and a call money rate under discretionary ‘flexible’ inflation targeting regime.

The CPC ran an 80 billion rupee forex loss in that year despite the late Finance Minister Mangala Samaraweera market pricing oil, crowding out non-oil imports and generating dollars to pay the oil bills, if money was not printed in inflationary policy.

In 2017, amid deflationary policy (sterilizing forex inflows) the CPC also repaid earlier loans while settling current loans.

In 2019, again deflationary monetary policy was run at least until July, generating a balance of payments surplus.

In 2020 the Treasury guarantees and against run up to 1.8 billion US dollars.

By June 2021, the CPC owed Bank of Ceylon 1,006 million US dollars and the People’s Ban 1,075 and there and supplier credits backed by letters of credit of 1.74 billion US dollars. In 2021 Sri Lanka is running so-called ‘Modern Monetary Theory’.

Sri Lanka had received a credit from Iran during a past currency crises.

Savings-Investment Behaviour

When the CPC borrows abroad, failing to offset domestic demand (or ‘investing’ in consumption in an oxymoronic move) the country’s external current account widens further, in one of a series of cascading Merncantilist policy errors that has characterised Sri Lanka’s balance of payments crises in the past.

Weimar Republic Germany which experienced severe monetary instability also borrowed abroad under the so-called ‘Young Plan’ to pay reparations as money printing created forex shortages.

Sri Lanka’s current accounts deficits are caused by foreign financed domestic investments and spending including that of the CPC, as well as central bank liquidity injections (net acquisition of domestic assets for reserve money), which are credits.

The current account deficit in Sri Lanka or elsewhere is a residual effect of savings and investment behaviour.

Related

Trade deficits caused by foreign borrowings; Harvard economist at Sri Lanka forum

“Fundamentally a trade balance – basically the current account – is a reflection of the spending patterns of the nation,” Robert Lawrence, a professor at Harvard University told a forum in Colombo shortly before the 2018 liquidity injections started.

“And it tells you that a country with a (current account) deficit is borrowing. So it tells you that it is not saving enough domestically and it can’t finance its domestic investment, it has to borrow.

“One component of that will be fiscal policy. If the government runs a surplus, the country will have a smaller trade deficit. If private citizens save the country will have a smaller trade deficit.”

“One component of that will be fiscal policy. If the government runs a surplus, the country will have a smaller trade deficit. If private citizens save the country will have a smaller trade deficit.

“So when it comes to the (trade) deficit, it seems to be much more about spending patterns in the country, its savings and investment behaviour, than whether it is going to export more or import less.”

In Sri Lanka – and most East Asian countries – private savings are high. The deficits are in the government budget and state enterprises.

Related link: The Strange and Futile World of Trade Wars

“To view the external balance correctly, the focus should be on the domestic economy,” explains Johns Hopkins economist Steve Hanke.

“The external balance is homegrown; it is produced by the relationship between domestic savings and domestic investment. Indeed, it is the gap between a country’s savings (read: income, minus consumption) and domestic investment that drives and determines its external balance.

So, the national savings-investment gap determines the current account balance. Both the public and private sector contribute to the current account balance through their respective savings-investment gaps. (Colombo/Aug28/2021)

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