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Sunday December 10th, 2023

Sri Lanka stabilized faster than other countries in crisis: Minister

ECONOMYNEXT – Sri Lanka’s economy has stabilized faster than some other countries that went into crisis recently, State Minister for Finance Shehan Semasinghe said.

“Our economy is on a progressive trajectory,” Semasinghe told parliament in a debate to pass a tax linked to domestic debt restructuring.

“Compared to other countries’ whose economies collapsed we have been able to in the shortest time stabilize the economy.

“Other countries are commending our progress.”

Sri Lanka’s inflation is near zero, and the exchange rate has appreciated from March, when a surrender rule was relaxed, though there is uncertainty under a so-called flexible exchange rate.

Bangladesh is also facing currency depreciation as interventions are sterilized to maintain a fixed policy rate and the monetary base.

READ MORE Sri Lanka has managed to bring inflation down tenfold. Why are we still struggling with ours?

Currencies issued by central banks with anchor conflicts (flexible exchange rates or soft-pegs which neither clean floats nor hard pegs but are highly unstable intermediate regimes) depreciate and collapses when rates are cut and enforced with liquidity injections claiming that inflation is low, analysts say.

The higher the inflation target of an intermediate regime central bank, the more likely the currency will collapse when rates are cut with open market operations (printed money) and end up in the International Monetary Fund.

As the currency comes under pressure from OMO money, dollars are sold to stabilize the currency (which should make rates go up) but interventions are sterilized (money is printed) to fix a policy rate, or gilt yields, preventing the exchange rate from stabilizing.

Governor Nandalal Weerasinghe in 2022 jacked up policy rates and allowed free market gilt yields, leading to a credit and economic contraction but possibly ending a further meltdown of the currency and full blown hyperinflation. The move however possibly prevented market dollarization, which would have ended Sri Lanka’s monetary woes forever, analysts say.

A couple of months later Sri Lanka ran out of reserves to intervene and sterilize. A peg was enforced with a surrender rule and selling back the same dollars, while high rates slowed credit.

The surrender rule (a convertibility rule), which analysts blamed for a failed float, was removed in March 2022 several months after the BOP turned into surplus allowing the currency to appreciate, a departure from usual IMF-prone central banks.

In a floating rate regime, rate hikes lead to automatic currency appreciation, reversing the effects of commodity bubbles trigggered under ‘macro-economic policy’, but it’s not common in IMF style intermediate regime central banks.

Sri Lanka’s 12-month  inflation was only 4.0 percent in August, with the Colombo Consumer Price Index growing only 0.42 percent from September 2022. The BOP turned into a surplus in September.

Supermarkets are offering foods at discounted prices in Sri Lanka, as global commodity prices including wheat, sugar and also tea have fallen from last year’s highs.

The Sri Lanka rupee appreciated from 368.00 in December 2022 to 322.50 levels by September 2023. The central bank has largely refrained from engaging in inflationary open market operations.

Analysts have warned that based on past IMF programs, if the central bank cuts rates as domestic credit recovers, and enforce them with inflationary open market operations under so-called flexible inflation targeting, the currency will fall, reforms will be discredited and IMF reserve targets will be missed.

In a reserve collecting central bank, the IMF reserve target (essentially the BOP) determines the interest rate, not inflation, analysts have warned, and any attempts to target a domestic anchor will end up in tragedy.

RELATED Sri Lanka interest rates are dictated by the IMF reserve target, not inflation

Flexible inflation targeting (targeting a domestic anchor without a floating rate) is the latest dual anchor conflicting monetary regime peddled to hapless third world countries without a doctrinal foundation in sound money, critics have said.

In the 1980s it was a money supply (another domestic anchor) targeting a without clean floating exchange rate. At the time floating central banks, struggling to find an anchor to replace gold after the collapse of the Bretton Woods, had resorted to targeting money supply, with partial success.

In a reserve collecting central bank, the IMF reserve target (essentially the BOP) determines the interest rate, not inflation, analysts have warned, and any attempts to target a domestic anchor will end up in tragedy.

Pakistan’s 3-month Treasury bill yield rose to 24.4 percent at this week’s auction from 22.8 percent last week, The News reported.

The 12-month yield rose to 25.08 percent from 22.94 percent. In Pakistan inflation is at 27.4 percent. The policy rate is 22 percent.

The Pakistan rupee has collapsed from 227.18to the US dollar in January 2023 to 307.2385 yesterday within an IMF program. In Sri Lanka there have been statements made that the rupee collapsed due to the lack of an IMF program.

Pakistan has been in an IMF program for several years and jumped into a new one in 2023 with the earlier one halted mid-way after reserve losses from money printed to maintain its fixed policy rate as well as refinancing private credit.

In Ghana, a country which has defaulted, the cedi fell from 10.22 in December 2023 to 11.39 to the US dollar yesterday. The currency has since shown signs of stabilizing in recent weeks.

The Suriname dollar fell from 7.45 in December 2019 to 31.8749 in Dec 2022. The Suriname dollar collapsed further to 38.1810 this month within an IMF program.

Suriname is trying to target reserve money. Classical economists including David Ricardo explained as far back as in 1809 that it was not possible to fix reserve money with inflationary open market operations without losing the backing reserve, which is a law of nature.

“..[i]f the Bank assuming, that because a given quantity of circulating medium had been necessary last year, therefore the same quantity must be necessary this, or for any other reason, continued to re-issue the returned notes, the stimulus which a redundant currency first gave to the exportation of the coin would be again renewed with similar effects; gold would be again demanded, the exchange would become unfavourable.”  

Any central bank that sterilizes interventions (uses reserves for imports under an ARA metric or any other statistical idea) under a fixed policy rate, is also implicitly targeting reserve money.

Most East Asian central banks collect foreign reserves by under-supplying reserve money using deflationary open market operations.

The central bank of Sri Lanka has also been operating broadly deflationary open market operations, but concerns have been raised on complex two way operations. (Colombo/Sept07/2023)

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ADB USD200mn loan for Sri Lanka economic stabilization efforts

ECONOMYNEXT – The Asian Development Bank (ADB) has approved a US 200 million dollar concessional loan to Sri Lanka to help stabilize the country’s finance sector.

The Financial Sector Stability and Reforms Program comprises two subprograms of IS 200 million dollars each, according to a statement by the ADB.

“The program’s overarching development objective is fully aligned with the country’s strategy of maintaining finance sector stability, while ensuring that banks are well-positioned for eventual recovery,” ADB Country Director for Sri Lanka Takafumi Kadono was quoted as saying in the statement.

“The expected development outcome is a stable financial system providing access to affordable finance for businesses in various sectors of the economy.”

The ADB statement continues:

“Subprogram 1 targets short-term stabilization and crisis management measures that were implemented in 2023, while subprogram 2 is planned to be implemented in 2024 and focuses on structural reforms and long-term actions to restore growth in the banking sector.

The program will help strengthen the stability and governance of the country’s banking sector; improve the banking sector’s asset quality; and deepen sustainable and inclusive finance, particularly for women-led micro, small, and medium-sized enterprises.

According to the International Monetary Fund’s (IMF) latest review, Sri Lanka’s economy is showing tentative signs of stabilization, although a full economic recovery is not yet assured.

The program is a follow-on assistance from ADB’s crisis response under the special policy-based loan that was approved for Sri Lanka in May 2023.

It is aligned with the fourth pillar of the IMF’s Extended Fund Facility provided to Sri Lanka to help the country regain financial stability.

It is also in line with the government’s reform agenda, including strengthening the operational independence of the Central Bank of Sri Lanka (CBSL) and its designation as the country’s macroprudential authority.

In designing this subprogram 1 loan, ADB has maintained close coordination and collaboration with the IMF to design targeted regulatory reforms for the banking sector—including the asset quality review—and with the World Bank on strengthening the deposit insurance scheme.

“The loan is accompanied by a $1 million grant from ADB’s Technical Assistance Special Fund to provide advisory, knowledge, and institutional capacity building for Sri Lanka’s Ministry of Finance and CBSL.”

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Sri Lank in blackout as power grid hit by cascading failure

ECONOMYNEXT – Sri Lanka suffered a blackout as Saturday evening as the state-run Ceylon Electricity Board grid was hit by a cascading power failure.

The cascading failure is believed to have been triggered by the failure of the Kothmale-Biyagama transmission line.

“The Ceylon Electricity Board wishes to inform our customers that due to the failure of Kotmale – Biyagama main transmission line, an island wide power failure has occurred,” CEB Spokesman Noel Priyantha said.

“Step by step restorations are underway and it may take few hours to completely restore the power supply.”

With hydro plants running flat out, a outage of the line tends to create a big imbalance in the demand and supply, leading to tripping of more lines and generators.

Lines can trip due to lightening strikes, or equipment failures.

Sri Lanka last suffered a cascading failure in December 2021, due to the failure of the same transmission line.

RelatedSri Lanka power blackout as grid hit by cascading failure

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Sri Lanka to host regional Food and Agriculture Organization conference

ECONOMYNEXT – Sri Lanka will host the 37th session of the Asia Pacific Regional Conference (APRC) of the United Nations Food and Agriculture Organization (FAO), from February 19-22, 2024 in Colombo.

The Conference will bring together agriculture ministers and officials from 46 countries across the region to discuss challenges in food and agriculture.

“The 37th APRC will provide a vital platform for regional collaboration, benefitting the agricultural landscape, fisheries sector and environment of Sri Lanka,” Minister Mahinda Amaraweera said at a press briefing on Friday (8) to announce the conference.

FAO has had an active presence in Sri Lanka for over 40 years. “FAO has supported the country in the implementation of Good Agricultural Practices (GAP), and the development of the fisheries sector for growth and climate resilience,” Vimlendra Sharan, FAO Representative for Sri Lanka and the Maldives said.

“The APRC conference will be an opportunity to highlight the innovative approaches introduced in partnership with the government.”

By hosting APRC, Sri Lanka hopes to demonstrate the country’s dedication to the growth of sustainable agriculture, and showcase its commitment to sustainable agricultural development.

The APRC agenda will include a forum on agritourism, especially requested by the Sri Lankan government.

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