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Sunday March 26th, 2023

Sri Lanka senior legislators, ex-speaker call for debt-renegotiation, correct policies

ECONOMYNEXT – Senior Sri Lanka opposition figures and an ex-speaker have called for “orderly re-negotiation of sovereign debt” and “correct policies” for sustainable growth as the country heads for currency depreciation and possible default due to money printing.

Sri Lanka’s government external debt has reached nearly 120 percent, interest payments were also excessively high as a share of state revenues and there were forex shortages, the legislators and ex-speaker said.

“In such a context, we recognize the best way forward for Sri Lanka is to immediately initiate a multi-step process towards an orderly negotiated postponement and restructure of repayment of its sovereign debt,” the group said.

“Sri Lanka can then correct its policies towards a path of sustainable economic growth and debt management , while also ensuring access to essential needs and goods for the Sri Lankan economy and Its people.”

“We recognize that undoubtedly the government has a daunting task ahead, and as a country there is a need for us all to come together to overcome this challenge.

“We further acknowledge the need for sound reform to the national economic policy that will address the root causes for this situation and ensure sustainable solutions to steer the country out of this unprecedented economic crisis, and forge an equitable and just solution for our future generations.”

The diplomatically worded statement came following a bi-partisan meeting of legislators called by Northern legislator M A Sumanthiran which included several ruling party members who are concerned about the current economic problems.

Parliamentary committee chiefs Charitha Herath and Anura Yapa had participated in the meeting, while Tissa Vitarana had also placed his signature on the document, Sumanthiran said.

He said the effort was not to “apporting blame” but to arrive at a solution.

The statement also called for the welfare of the poorest communities.

“We acknowledge that Sri Lanka should take immediate measures to ensure strong social welfare for its people so that the poor and vulnerable communities are protected from the adverse impact of this economic crisis,” the statement said.

However unlike other countries that had severe debt problems like Greece which was part of the Euro region or Ecuador which is now dollarized and could not depreciate the currency, Sri Lanka has its own rupee which is weakened by money printed to keep interest rates down.

As a result, a fall of the currency would further push up inflation and destroy the real value of pensions, rupee denominated bank deposits and salaries (a real hair cut) while also pushing up the prices of exported and imported goods including foods.

Analysts had warned for several years that the hardship people face in a soft-pegged country with depreciated money is real and is not budget cuts opposed by the anti-austerity brigade such as in Eurorized Greece, but is that of Latin American collapsing pegged currencies.

The current troubles including the tendency to have power cuts and energy shortages were warned when the central bank was printing money in 2018 mis-using the independence provided by the then administration. (Sri Lanka is not Greece, it is a Latin America style soft-peg: Bellwether)

Sri Lanka had printed money in 2015, 2016, 2018, 2020 and 2021, making it impossible to repay foreign debt on a net basis and adding to the total debt stock, including that of Ceylon Petroleum Corporation.

The anti-austerity brigade had advised Greece to exit the Euro region, depreciate and inflate away the savings of all citizens and pensioners instead of cutting budgets and excessive benefits of state workers, adding fuel to the lack of direction among its pro-state ruling classes.

Related Why Greece Should Leave the Eurozone

Analysts and economists had called for rule based central bank control, which also serves as a hard budget constraint to stop deficit spending.

Sri Lanka’s legislators themselves had given wide powers for the central bank to print money, create forex shortages, depreciate the currency (in the first version of the central bank law the currency could not be depreciated without approval) and also impose exchange controls and interest controls.

Before 1950 money printing and currency depreciation and inflation had been outlawed via a currency board law allowing reserves of 11 months of imports to be collected when the central bank was set up.

Using the central bank’s money printing power, successive governments had engaged in inflationary deficit financing and policy makers have blamed other causes other that monetary policy for both inflation and forex shortages.

Sri Lanka in 2019 slashed taxes for ‘stimulus’ and the central bank printed the highest volume of money in its history to prevent interest rates from going up, leading to a severe external drain.

The central bank itself is now indebted.

Sri Lanka from September 2021 started to use foreign reserves for imports as forex shortages became acute and it is printing money to sterilize interventions, which leads to more reserve losses and inability service external debt.

Related

Sri Lanka spends US$736mn to defend 200 to dollar peg as ‘reserves for imports’ intensify

In the normal course of business foreign reserves are not used for imports but small amounts are collected each month to re-build reserves and repay lumpy debt.

When reserves are depleted the only course of option available is to hike rates and float the currency to stop reserves from being used for imports and sterilized with new money.

The full statement is reproduced below:

11th February 2022

A collective response to our economic crisis:

We the undersigned, recognizing the unprecedented nature of the economic challenges facing us, seek urgent, constructive, and sustainable solutions to this pressing situation.

We note that:

(1) The country’s ratings have fallen to the level of being blacklisted in International credit markets. Since April 2020, Sri Lanka has been locked out of borrowing using International Sovereign Bonds (ISBs) in the International market,

(2) Repaying US dollar debt in this context means that the usable foreign reserves are down to below one month of imports – the lowest on record since independence.

(3) The ratio of interest on debt to government revenue was above 70% in 2020, a historical high for Sri Lanka, and amongst the highest in the world.

(4) The ratio of public debt compared to the value of Sri Lanka’s domestic production (GDP) is also the highest on record, at 120%. It skyrocketed, by almost 2S percentage points, in the last two years. Each of these situations by themselves would spell a serious economic challenge. •
‘ . . .
Occurring simultaneously, this pressing and historic’ e conomic crisis is threatening our future, in both the short term and long term.

We recognize that undoubtedly the government has a daunting task ahead, and as a country there is a need for’ us all to come together to overcome this challenge.

We acknowledge that Sri Lanka should take immediate measures to ensure strong social welfare for its people so that the poor and vulnerable communities are protected from the adverse impact of this economic crisis .

We further acknowledge the need for sound reform to the national economic policy that will address the root causes for this situation and ensure sustainable solutions to steer the country out of this unprecedented economic crisis, and forge an equitable and just solution for our future generations.

We are fully cognizant that Parliament has full control of public finance, and that each member of parliament has a fiduciary responsibility to ensure the proper management of public finances in Sri Lanka .

In such a context, we recognize the best way forward for Sri Lanka is to immediately initiate a multi-step process towards an orderly negotiated postponement and restructure of repayment of its sovereign debt. Sri Lanka can then correct its policies towards a path of sustainable economic growth and debt management , while also ensuring access to essential needs and goods for the Sri Lankan economy and Its people .

This will reduce the pain and hardship that is currently exper ie nced due to the shortage of foreign currency. In any path forward, it is essential that the government takes measures to consider the difficulties of the poorest and the most vulnerable people in the country and provide them with adequate social security, protection, and relief.

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Sri Lanka seeks to settle India ACU debt, credit lines over 5-years

ECONOMYNEXT – Sri Lanka has requested India to settle payments due to the country under the Asian Clearing Union mechanism and credit lines given in 2022 over 5 years, Indrajit Coomaraswamy, an advisor the island’s government said.

Sri Lanka is negotiating with India to settle the money over a 5-year period, Coomaraswamy, a former central bank governor told an online forum hosted by the Central Bank.

“Our request from the Indians is to settle it over five years,” he said. “That I think is still in the early stages of negotiation. The same with the one billion line of credit.”

Sri Lanka’s central bank owed the ACU 2.0 billion US dollars to the Asian Clearing Union according to a year end debt statement, issued by the Finance Ministry.

Sri Lanka owned India, 1,621 million dollars according to ACU data by year end, excluding interest.

India has given a 1 billion US dollar credit line to Sri Lanka as well a credit line for petroleum.

Sri Lanka in March 2024 has paid 121 million US dollar out of a 331 million US dollar IMF tranche to settle an Indian credit line.

Indian credits were given after the country defaulted in April 2022 as budget support/import when most other bilateral lenders halted giving money. (Colombo/Mar26/2023)

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Sri Lanka coconut auction prices up 1.16-pct

ECONOMYNEXT- Sri Lanka’s coconut auction prices went up by 1.16 percent from a week ago at an auction on Thursday, data showed.

The average price for 1,000 nuts grew to 83,219.45 from 82,260.58 a week earlier at the weekly auction conducted by Sri Lanka’s Coconut Development Authority on March 23.

The highest price was 92,500 rupees for 1,000 nuts up from the previous week’s 90,600 rupees, while the lowest was 76,500 also up from 70,000 rupees.

The auction offered 900,010 coconuts and 583,291 nuts were sold. (Colombo/Mar 26/2023)

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Sri Lanka in talks for billion dollar equivalent Indian rupee swap

ECONOMYNEXT – Sri Lanka is in talks with India for a billion US dollar equivalent Indian rupee central bank swap, to facilitate trade, Indrajit Coomaraswamy, ad advisor to the government said.

“The amount is still uncertain it could be up to the equivalent of a billion US dollars,” Coomaraswamy told an online forum hosted by Sri Lanka’s central bank.

The money will be used to facilate India Sri Lanka trade, he said.

India has been trying to popularize the use of Indian rupees for external trade and also encouraged Sri Lanka banks to set up Indian rupee VOSTRO accounts.

However the first step in popularizing a currency for external trade is to get domestic agents, especially exporters, to accept their own currency for trade, like in the case of the US or EU, analysts say.

India’s billion US dollar credit to Sri Lanka given during the 2022 crisis is settled in Indian rupees (transaction need).

However the Indian government itself has chosen to denominate it in US currency for debt purposes (future value).

In most South Asian nations, receivers of remittances are willing to accept domestic currencies, leading to active VOSTRO account transactions.

Sri Lanka is expected to repay a 400 million US dollar swap with the Reserve Bank of India next year under an International Monetary Fund backed program for external stability and debt re-structuring.

Central bank swap proceeds sold to banks, which are then sterilized with inflationary open market operations, can trigger forex shortages and currency crises, analysts warn.

Sri Lanka went to the International Monetary Fund after two years of inflationary monetary operations by the central bank’s issue department (money printed to suppress interest rates) triggered the biggest currency crisis in its history and external sovereign default.

Sri Lanka had gone to the IMF 16 times with similar external troubles except for the April 2003 extended fund facility under Central Bank Governor A S Jayewardene which was a purely reform-oriented program with the World Bank (PRGF/PRSP) program at a time when he was collecting reserves with deflationary monetary policy and perhaps the lowest inflation since the Bretton Woods collapsed. (Colombo/Mar26/2023)

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