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Wednesday June 7th, 2023

Sri Lanka seeks to raise more debt, hike spending in vote on account supplement

ECONOMYNEXT – Sri Lanka is seeking parliamentary approval to spend 156 billion rupees more and raise up to 357 billion rupees in gross debt, in a supplement to a vote-on-account or a mini-budget running up to April 2020.

“We request a supplementary estimate of 101 billion rupees for recurrent expenditure and 55 billion rupees for capital expenditure be approved for the vote on account,” Prime Minister Mahinda Rajapaksa who is also Finance Minister told parliament.

Rakapaksa also sought parliamentary approval to raise a debt limit from 721 billion rupees in the original vote on account to 1,078 billion rupees or 357 billion rupees for the four months.

The original vote on account estimated revenues at 745 billion rupees and total outflows including spending and debt repayment at 1,470 billion rupees.

Rajapaksa who took over after President Gotabaya Rajapaksa was elected President in November, said there were payment arrears and a revenue shortfall in 2019.

“In addition, to account for foreign debt, we request 2,011 billion rupees in a supplementary estimate,” Rajapaksa said.

“High interest loans had been taken, and some foreign loans exceeded estimates, so they have still not been accounted,” he said.

In 2019 Sri Lanka raised extra foreign debt, under new debt management law to pay loans in 2020.

Sri Lanka had also slashed taxes in a so-called ‘stimulus’ for 2020 with value added taxes halved, some taxes abolished, the cost of which has been estimated at about 500 to 600 billion rupees for the full year according to government spokesmen.

Rajapaksa blamed the last administration for running large payment arrears for suppliers which he had to pay.

He said out of about 2,400 billion rupees in revenue targets for 2019, collections had reached about 1,600 billion rupees by November, which grew to about 1,800 billion rupees in December, causing a shortfall of about 600 billion rupees.

Rajapaksa said there were arrears suppliers for expenditure incurred in 2019 around 156 billion rupees.

He said the government owed 45.86 billion rupees to banks for an interest bonus given for senior citizens.

Another 25.7 billion rupees were owed to pharmaceutical suppliers for state hospitals.

Road development contractors were owed 18.45 billion rupees, urban development contractors were owed 6.66 billion rupees and construction of schools had a price tag of 2.8 billion rupees, Rajapaksa said.

Election related expenses were 1.2 billion rupees, with another 400 million rupees required for the 2020 general elections.

The government also owed 23.51 billion rupees for fertilizer suppliers, which has caused problems in providing the fertilizer subsidy, Rajapaksa said.

Military and other state-dependent institutions were owed 5.5 billion rupees.

Capital projects at provincial, district and local government levels required 3.9 billion rupees, while Northern rehabilitation and resettlement needed another 3.1 billion rupees, Rajapaksa said.

Higher education and water supply projects had 2 billion rupees in delays while irrigation and rural development contractors were owed 6.6 billion rupees.

Other delayed payments totalled 13.3 billion rupees, Prime Minister Rajapaksa said.

Sri Lanka’s government will present a supplementary estimate to increase spending by 156 billion rupees for 2020 and expand the debt ceiling, as provisioned finances had run out by November, the Prime Minister said.

“The provisions were not enough to repay expenditure in November and December, so funds required for functioning the vote on account for the first four months of 2020 could not be released,” Mahinda Rajapaksa said in parliament on Wednesday.

“In addition, to account for foreign debt, we request 2,011 billion rupees in a supplementary estimate,” he said.

“High interest loans had been taken, and some foreign loans exceeded estimates, so they have still not been accounted,” he said.

An Active Liability Management Act allows for the government to raise extra funds to repay maturing debt.


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Sri Lanka’s shares slip on profit taking and selling pressure

ECONOMYNEXT – Sri Lanka’s shares closed lower on Wednesday after four consecutive gains in previous sessions spiraled into selling interest and profit taking, an analyst said.

The main All Share Price Index was down 0.28 percent or 24.39 points to 8,722.06, this is the lowest the index has been since May 02, while the most liquid index S&P SL20 was down 0.40 percent or 9.92 points to 2,468.44.

“The market was gaining in the previous sessions and there is selling and profit taking present today, due to continuously being on green,” an analyst said.

In the previous sessions the market was seeing gains, due to lowered policy rates and low inflation stimulating buying interest and driving the sentiment up, an analyst said.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

“There are gradual improvements in the market sentiment, with positive sentiments coming in from lowered policy rates and inflation,” an analyst said.

The market generated foreign inflows of 12 million rupees and received a net foreign inflow of 18 million rupees, due to low share prices and discounted shares followed by a dividend announcement.

The market generated a revenue of 554 million rupees, this is the lowest the turnover has been since May 10, while the daily turnover average was 1 billion rupees. From the total generated revenue, the banking sector contributed 120 million rupees, Diversified Banks contributed 115 million rupees and the Capital Goods Industry generated 78 million rupees.

Top losers during trade were Sampath Bank, Commercial Bank and Aitken Spence. (Colombo/June06/2023)

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Sri Lanka Treasuries yields plunge, 12-month down 318bp

ECONOMYNEXT – Sri Lanka’s Treasuries yields plunged across maturities at Wednesday’s auction with the 12-month yield falling 318 basis points, in one of the biggest one day falls, data from the state debt office showed.

The 3-month yield fell 244 basis points to 23.21 percent.

The 6-mont yield fell 339 basis points to 21.90 percent, along with the 12 months to 19.10 percent.

The short-term yield curve is inverted.

The central bank last week cut its policy rate 250 basis points in a signaling move but is not printing money to enforce the rate cut.

The debt office sold all 140 billion rupees of offered securities. (Colombo/June07/2023)

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Sri Lanka forex reserves rise US$722mn in May 2023

ECONOMYNEXT – Sri Lanka’s foreign reserves grew 722 million US dollars to 3,483 million US dollars in May 2023 from 2,761 million US dollars in April, official data showed amid weak credit and better inflows.

Sri Lanka lost almost all its reserve in over two years as the central bank sold reserves and printed money to keep rates down (sterilized reserves sales) including borrowed dollars from India.

Gross official reserves fell to a low of 1,705 million US dollars in September 2022.

Sri Lanka’s central bank hiked rates in April 2022 to slow credit and also stopped printing money after it ran out of borrowed Asian Clearing Union dollars from India.

Sri Lanka’s gross official reserves are made up of both monetary reserves of the central bank and any balances of the Treasury account from loans or grants it gets.

The central bank’s net foreign reserves are still negative after busting up borrowed reserves to suppress rates. By April (before the collection of reserves in May) the central bank’s net reserves were negative by 3.7 billion US dollars.

In May alone 662 million US dollars were bought from the market, Central Bank Governor Nandalal Weerasinghe said.


No pre-determined level to stop Sri Lanka rupee appreciation: CB Governor

Borrowing dollars through swaps and busting them up, was invented by the US Federal Reserve as it was printing money and breaking the Bretton Woods system in the early 1970s.

Sri Lanka received a 350 million US dollar tranche from the Asian Development Bank and 331 million US dollars from the IMF to the Treasury for budget support.

The loans can be sold to the central bank by the government to generate rupees and spend. However, since credit is weak, not all the inflows go out of the country particularly as the central bank is conducting deflationary open market operations on a net basis.

By allowing the rupee to appreciate unlike in previous episodes of recovery in an IMF program, after a bout of money printing, the central bank is bringing down inflation – in some cases absolute prices – and restoring confidence and easing the ‘pain’ of ‘monetary policy’ or stimulus.


Why is Sri Lanka’s rupee appreciating?

Though exports are falling, tourism revenues are also picking up.

The budget support loans, tourism receipts less the reserve collected will widen the trade deficit. Building foreign reserves involves lending money to the US or other western nations and is similar to repaying foreign debt. (Colombo/June07/2023)

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