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Saturday June 3rd, 2023

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

ECONOMYNEXT – Sri Lanka’s foreign reserves sales to commercial banks defend a 200 to the US dollar peg soared to 736 million dollars from September to November 2021 official data shows, forcing money to be printed to maintain a fixed policy interest rate.

In November and December alone 664 million dollars of reserves were sold to commercial banks.

The injection of money after such ‘reserves for imports’ to defend a peg (sterilization of interventions) prevents the contraction of reserve money, prevents a rise in short term interest rates, prevents a required slowdown in private credit and re-ignites demand for imports.

In a remarkable descent in to Mercantilist ideology, calls were made in Sri Lanka to spend more reserves on imports while simultaneously claims were made that a 200 to the US dollar peg was unsustainable.


Sri Lanka use of reserves for imports is a deadly false choice: Bellwether

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Any reserve sales for imports is a defence of the peg, which commits a central bank with a fixed policy rate to print more money through ‘open market operations’, triggering yet more imports.

If reserves are used for imports without allowing the monetary base to fall, sovereign as well as private foreign debt default may become inevitable even if debt is re-structured, analysts have warned.

The injection of money after giving reserves for imports is the hallmark of a soft or unstable peg (now called a ‘flexible’ exchange rate), that trigger currency crises and balance of payments deficits.

A clean float (suspension of convertibility) is required to stop the cycle of sterilized interventions.

Sri Lanka required structurally higher interest rates as soon as the country was locked out of bond markets in 2020 to generate resources to repay debt. However rates were cut in 2020 amid downgrades.

Sri Lanka’s market rates have risen after yield controls were lifted, though mostly three month bills are being bought, and deficit monetization is minimal.

In sterilizing reserves for imports, liquidity is injected into commercial banks (private sector) but to later observers it appears as deficit finance, since money is printed not against private securities but government debt.

For centuries, during the gold standard era, the Bank of England used to operate its discount rate (which was not fixed) against private debt (bankers’ acceptances) which were tradable in the secondary market.

Open market operations as known today was invented by the Federal Reserve in the course of firing the ‘Roaring 20s’ bubble that led to the Great Depression. A part of the bubble involved firing up stocks with margin credit.

In the way Sri Lanka’s central bank engages in reserve sales for debt repayments against newly created Treasury bills it is possible to appropriate reserve for debt repayment without changing rupee reserves in individual banks through a series of back-to-back transactions (no reserve pass-through).

Sri Lanka created a soft-peg in 1950 ending floating short term rates and a fixed exchange rate that had protected the population from a Great Depression and two World Wars. Sri Lanka has reserves worth 11 months of imports when the soft – peg was created.

The UK around the time was facing severe currency troubles due to Keynesianism.

In November the central bank sold 310 million US dollars to commercial banks on a net basis which rose to 353 million US dollars by December.

The interventions are the highest seen since the 2018 currency crisis.

Sri Lanka’s past currency crises up to around 2005, which sent the rupee careening down from 4.70 to the US dollar to around 110 were intensified with sterilized reserve sales to defend a peg, though the crisis may have been initially triggered by budget finance or rural credit.

Amid more discretionary and contradictory monetary policy after the end of a 30-year war, involving a ‘flexible’ exchange rate and ‘flexible’ inflation targeting Sri Lanka has faced currency crises and depreciation in quick succession and the rupee is now at 200 to the US dollar.

Parallel exchange rates are around 248 to the US dollar.

The central bank has also imposed surrender requirement for exporter and remittance dollars, despite the peg being weak and requiring tighter monetary policy. A surrender requirement pushes the currency down through liquidity creation. A reserve sale can strengthen the currency as long as it is not sterilized.

In the nine months to September the central bank bought 228 million dollars on a net basis from commercial banks under a surrender requirement despite a peg having already weakened. (Colombo/Feb08/2022 – Update II)

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Sri Lanka to ramp up weekend fuel deliveries after petrol price cut

More deaths reported at Sri Lanka fuel queues

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Petroleum Corporation will be operating on the weekend to complete all fuel deliveries to end vehicle queues forming outside fuel stations after the price revision earlier in the week, Energy Minister Kanchana Wijesekera said.

“Instructions have been given to CPC and Ceylon Petroleum Storage Terminals to continue fuel deliveries on Saturday and Sunday this week to supply sufficient stocks to all fuel stations,” Minister Wijesekera said in a TWITTER.COM MESSAGE

“To reduce expenses on overtime, CPC and CPSTL have not been operating on Sundays and public holidays in the last 4 months,” Wijesekera said.

“Non-placement of orders by fuel stations from last Saturday, anticipating a price reduction, not maintaining minimum stocks, immediate increase in demand by consumers after the price revision, and quota increase have created shortages in the fuel stations.”

The Minister in April 2023 said all fuel stations would be required to maintain a minimum of 50 percent of stock tank capacity.

“I have asked CPC to review and suspend the license of fuel stations that had not maintained minimum stocks.” (Colombo/ June 02/ 2023)

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Sri Lanka bonds yield up at close, rupee at 291.75/292.50 against the US dollar

ECONOMYNEXT – Sri Lanka’s bonds closed steady on Friday, dealers said, following the central bank’s decision to cut its main policy rate by 250 basis points.

The Spot US dollar closed at 291.75/292.50 rupees, dealers said.

The rupee opened at 290.25/75 to the US dollar Thursday and closed at 292.50/295.50 to the US dollar.

A bond maturing on 15.09.2027 closed at 24.70/90 percent up from 24.50/90 percent a day earlier, dealers said.

A bond maturing on 15.05.2026 closed at 25.75/26.25 percent up from 25.00/26.00 percent a day earlier.

A bond maturing on 01.05.2025 closed at 27.00/30 percent, up from 26.30/27.00 per cent at last close.

A bond maturing on 01.07.2032 closed at 20.25/21.00 percent, up from 20.00/40 per cent at last close.
(Colombo/ June 02/2023)

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Sri Lanka’s shares edge up on positive macroeconomic sentiments

ECONOMYNEXT – Sri Lanka’s shares closed higher in trade on Friday, over positive macro-sentiments encouraging investors to redeem their interest towards buying, an analyst said.

The main All Share Price Index was up 0.72 percent or 62.19 points to 8,753.80,  while the most liquid index S&P SL20 was up 0.68 percent or 16.87 points to 2,487.29.

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.

Prior to the Monetary Policy investors were quite optimistic that inflation is to lower and interest rates will decrease and since exp, an analyst said.

Sri Lanka Central Bank is waiting for the government proposal on the domestic debt restructuring (DDR), the central bank governor Nandalal Weerasinghe said amid uncertainty over DDR and speculations over instability in the banking sector.

“On debt restructuring, the borrower is the ministry of finance’s treasury. Certainly we will announce what the strategy will be. We are waiting for a government proposal,” Weerasinghe said.

Sri Lanka’s investors are waiting on assurances to be made on debt restructuring and optimization, Central Bank Governor Nandalal Weerasinghe said, “It is up to the government to clear the uncertainty, because from our side we have done that part.”

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.

The speculation of DDR has hit the market and the risk premium has kept the market lending rates well above the central bank’s policy rates. The government has yet to present its plans on DDR.

Weerasinghe said the central bank has done its best to reduce the risk premium through bringing down the market lending rates while keeping the policy rates unchanged.

Sri Lanka’s President Ranil Wickremesinghe has discussed progress of International Monetary Fund program and debt restructuring during a visit of Deputy Managing Director Kenji Okamura, statement said.

“The discussion primarily focused on the progress of the IMF program between Sri Lanka and the IMF,” a statement from President’s office said.

“Attention was also paid to the on-going debt restructuring negotiations.”

However Officials from IMF have said Sri Lanka has to focus on expanding taxes.

“We discussed the importance of fiscal measures, in particular revenue measures, for a return to macroeconomic stability,” Deputy Managing Director Kenji Okamura said in a statement.

The finance ministry this week issued rules requiring everyone above 18 year of age to register to pay income tax.

“I was encouraged by the authorities’ commitment to negotiate a debt strategy in a timely and transparent manner.

The market generated a revenue of 738 million rupees, while the daily average was 1 billion rupees.

Top gainers in trade were Vallibel One, LOLC Finance and Browns Investment. (Colombo/June02/2023)

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