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Saturday June 15th, 2024

Sri Lanka targeting US$32bn inflows to repay debt: Minister

ECONOMYNEXT – Sri Lanka is expecting 32 billion US dollars in inflows from exports of goods and services and financial inflows and outflows of 27.6 billion US dollars leaving a 4.4 billion surplus to service debt, State Minister for Money and Capital Markets, Nivard Cabraal said.

“We can comfortably repay all the debt that is falling due,” Minister Cabraal said. “We are monitoring that carefully to ensure that they happen.”

Sri Lanka’s central bank Governor W D Lakshman said there was 3.7 billion US dollars of net debt to be paid, after discounting dollar debt held by residents.

Inflows

Sri Lanka is targeting exports of 13 billion US dollars in exports in 2021 up from 10.7 billion dollars in 2020 when shipments dropped 15 amid a Coronavirus shutdown.

Strong growth is expected in boat building, minerals and gems, he said.

Sri Lanka exported about 300 million dollars in gems but most were getting re-exported out of Thailand which had 12 billion in exports, he said.

“We have removed export taxes it will be tax free,” he said. “That will be a proper incentive we will have exports of around one billion dollars each year.”

A committee under Basil Rajapaksa, brother of President Gotabaya Rajapaksa was working to help achieve export targets.

With a 2 rupee per dollar incentive for remittances, Sri Lanka is expecting 8.0 billion dollars in 2021 up from 7.1 billion dollars.

Services, including tourism, shipping and information technology is expected to bring in 6.1 billion US dollars, he said.

Though Sri Lanka’s tourism receipts were 4.5 billion US dollars in 2018, only 1.5 billion dollars are expected in 2021 he said.

In 2021, 2.5 billion US dollars of foreign direct investment was targeted.

A committee under Treasury Secretary S R Attygalle was clearing impediments and fast-tracking the investments.

“If here are problem we will solve the problems,” Cabraal said.

In addition to inflows into the Port City and industrial zone in Hambantota, there was strong interest in a pharmaceutical industrial zone in the area, he said.

Outflows

Imports are expected to go up to 17.5 billion US dollars in 2021. FDIs will also trigger about a billion US dollars in imports.

There are expected to be about 4 billion dollars in service outflows. About 1.4 billion US dollars are expected to flow out as dividends and returns on capital he said.

Oil imports are expected to increase by billion dollars more in 2021, he said.

Outflows of around 27.6 billion dollars will leave 4.4 billion in excess allowing Sri Lanka to service the 3.7 billion dollars in debt owed to external parties.

Domestic debt holders will be repaid in dollars, he said.

The numbers will be adjusted to take into account changes and “diligently” reach the target he said.

“We will be more liberal or tighten it,” he said.

Sri Lanka recently tightened exporter repatriation rules and imposed surrender requirements on remittances and exports.

Treasury Secretary Attygalle said many imports had already been liberalized.

Sri Lanka has controlled imports in a bid to ‘save foreign exchange’.

In 2020 Sri Lanka printed over 650 billion rupees and 2.3 billion dollars flowed out as debt repayments in the biggest balance of payments deficit in the island’s history, though credit was muted after April allowing imports to fall amid a lockdown.

In 2020, bond auctions are failing.

Analysts have warned that as long bond auctions fail and new money is injected into the banking system as rupee reserves, outflows will tend to outpace inflows and interventions in trade and the payment system will worsen regime uncertainty.

Under Sri Lanka’s soft-pegged monetary set up of injecting rupees when credit picks up to keep rates down, the credit system is vulnerable to currency pressure and balance of payments deficits, payment deficits.

Sri Lanka has also fixed oil retail prices which means total imports will not be crowded out through consumption and disposal income.

Instead the adjustment has to come through the credit system as the government cuts taxes and borrows more which may trigger more money printing as the yield curve is targeted with failed Treasuries auctions leading to forex losses. (Colombo/Feb26/2021)

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  1. Ashok Swamy says:

    Why discount dollar debt held by residents. Whats the effect to the loyal citizens. Need more transparency on this statement.

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  1. Ashok Swamy says:

    Why discount dollar debt held by residents. Whats the effect to the loyal citizens. Need more transparency on this statement.

Sri Lanka beats key IMF program targets for March 2024 amid rupee stability

ECONOMYNEXT – Sri Lanka has exceeded key quantitative targets set in an International Monetary Fund program for March 2024, based on preliminary data the Washington based agency said in a report.

The March data are not performance criteria on which reviews are conducted but are indicative targets which shows the progress of the program and are a stepping stone for a September review based on June data.

An indicative target for the primary balance (roughly overall deficit minus interest costs), was assessed at 316 billion rupees more than four times the 70 billion rupee target set in the program.

Primary balance can be a big surplus if the interest bill is high and capital expenditure is cut and is a type of crisis management tool after a central bank triggers a currency crisis by cutting rates with inflationary liquidity tools.

However, Sri Lanka’s Treasury has also kept a lid on most current spending. A state salary hike is however due after the currency collapse made life difficult for everyone.

Meanwhile more taxes have been collected from the people to finance the island’s bloated state.

A 750 billion rupees central government tax revenue floor has been exceeded to reach 837 billion rupees.

Central bank credit to government (outstanding stock) has been reduced to 2,691 billion rupees in March compared to a target of 2,800 billion rupees. In December the CB credit was calculated 2,742 billion rupees.

Net international reserves of the central bank were brought up to a negative 1,268 million US dollars exceeding the target of a negative 2,035 by almost 700 million dollars.

In order to collect foreign reserves, which is a type of appropriation of domestic savings of the people by the central bank (taking in deposits) and exporting it to the US and other countries to finance their deficits or by other agency debt in reserve currencies.

In order to collect such ‘deposits’ the central bank has to prevent them from being invested domestically.

It is achieved with deflationary policy through sell-downs of down its Treasuries holding to domestic banks or others, at a market rate, collecting interest from the government or repayments of re-finance credits, subject to any nominal changes in reserve money at a given exchange rate.

In 2024 the central bank allowed the exchange rate to appreciate, which can also reduce prices of traded goods boost real and nominal savings and make it easier to collect foreign reserves.

When domestic credit is weak it is easier to collect reserves. Reduced domestic credit and collection of reserves, including by private banks which then cannot be invested domestically, can push the external current account into surplus.

The central bank also met a 5 percent 12-month inflation target, with an achievement of 4.3 percent.

Sri Lanka’s economy grew 5.3 percent despite reserve collections, amid the stability provided by the central bank.

There were no central bank purchases of Treasuries from the primary market.

However the central bank injected overnight and term money to banks (not on a net basis) showing how easy it is for a rate-obsessed monetary authority to get around the requirement and create external instability again as soon as private credit recovered.

The central bank also allowed excess liquidity from dollar purchase to remain unsterilized for an extended period under its ad hoc pegging arrangement, getting a short term falls in rates, but triggering pressure on the rupee as a result in May and June.

It is not possible to collect reserves with a free floating exchange rate. (Colombo/June15/2024)

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Sri Lanka GDP grows 5.3-pct in first quarter of 2024 amid monetary stability

ECONOMYNEXT – Sri Lanka’s gross domestic product grew 5.3 percent in the first quarter of 2024 data from the state statistics office showed as the central bank continued to refrain from generating monetary instability.

Instead of printing money to cut rates under ‘flexible inflation targeting’ and printing money to boost growth by taking into account ‘potential output’ as permitted by its new monetary law, the central bank ran deflationary policy and also allowed the rupee to appreciate.

“The Sri Lanka economy experienced a more favorable economic condition[s] in the first quarter 2024, when compared to the first quarter in the year 2023,” the Department of Census and Statistics said.

“The high inflation had prevailed in the first quarter of year 2023, gradually reduced to a lower level by the first quarter of 2024 and this low inflation incentivized the economy by providing inputs at [a] much lower price.

The agriculture sector grew 1.1 percent in the first quarter of 2024, after also growing 1.6 percent last year.

Industry grew 11.8 percent in the first quarter, against a 24.3 percent last year.

The economy grew amid falling prices, the statistics office said in sharp contrast to the Anglophone macroeconomic claim that inflation is needed to boost growth, on which Sri Lanka has 5-7 inflation target has apparently been set.

Related Sri Lanka central bank pushing for high inflation target to boost growth

“Among ‘Industrial activities’, coinciding with the decline in input prices, the ‘Construction industry’ grew by 14.2 percent, parallel to this, the ‘Mining and quarrying’ industry too expanded by 18.3 percent during this quarter,” the Statistics Department said.

Sr Lanka’s services sector grew 2.6 percent, against a decline of 4.6 percent recorded last year.

The International Monetary Fund has also urged the central bank to give priority to stability.

Sri Lanka dropped the stability mandate in the earlier monetary law which was violated after the end of a civil war to push the country into serial currency crises especially after the International Monetary Fund gave technical assistance to calculate potential output.

Related Sri Lanka has a corrupted inflation targeting, output gap targeting not in line with monetary law: Wijewardena

Sri Lanka survived a 30-year civil war by giving priority to a stability mandate despite shortcomings in its operational framework but defaulted in peacetime amid activist monetary policy which denied monetary stability to the people. (Colombo/June12/2024)

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Sri Lanka’s NPP notes five-point crisis for economic growth sans details

Former JVP MP Sunil Handunneththi

ECONOMYNEXT — The leftist National People’s Power (NPP) has identified five crises that need resolving for Sri Lanka’s economy to progress, much of which emphasise a production economy targeting export growth though sparse on the detail on resource allocation.

NPP spokesman and former parliamentarian Sunil Handunneththi speaking at an event in Mulaitivu on Thursday June 13 said Sri Lanka is grappling with firstly, a collapse of the production economy, second, a budget deficit, third, a balance of payment crisis which has, fourthly, created a debt crisis, and finally, a resultant gap between haves and have-nots.

“We must first understand the crisis. We reocgnise five main crises that have the same impact irrespective of differences between the north and south.

“The first is the collapse of the production economy. We can see this historically. Agriculture that used to be some 30 percent of gross domestic product (GDP) has now fallen to 8 percent. Essential food is imported. We cannot produce the rice needed for the small population here. Things that can be made here are also imported.

“Second is the income crisis. For the people, their expenses are twice their income. The budget deficit is two or three-fold every day. Banks cannot give loans to businesses and industries because the government takes funds to address the budget deficit. The government takes most of the people’s savings for this,” he said.

The balance of payment crisis Sri Lanka is facing the third crisis, according to Handunneththi, which has triggered a debt crisis, in turn leading to a crisis of income disparity among the people.

“Third is the balance of payments crisis. Imports are two or three fold export income. The government has to take 11 to 12 billion US dollars in loans from foreign countries. When GDP is 80 billion US dollars, debt has gone over 100.”

“All this creates a massive gap between haves and have-nots. Without finding solutions to these crisis, there is no point distributing goods,” he said.

Handunnethi’s remarks appear to be departure from the NPP’s anti-corruption rhetoric which had centred its economic development policy agenda primarily on fighting corruption.

‘Fighting corruption’ and ‘recovering stolen assets’ have been popular slogans since the Aragalaya protests in Sri Lanka and the NPP has made it its central theme in its bid for power. The leftist outfit had also adopted a position that’s cautiously critical of the International Monetary Fund (IMF) and the reforms the international lender has prescribed for Sri Lanka in exchange for a 2.9 billion-dollar bailout.

However, NPP leadership had recently acknowledged the need to continue the IMF programme since the agreement has already been signed.

The Marxist-Leninist Janatha Vimukthi Peramuna, which controls the NPP, though it was never in government barring a brief stint in an Sri Lanka Freedom Party (SLFP)-led coalition in the early 2000s, has been instrumental in driving popular support against privatisation.

Three key policy pillars articulated by the JVP from 2001-2004 and embraced by mainstream politician Mahinda Rajapaksa’s administration in 2005 onward have been highlighted by experts.

From 2005, Sri Lanka halted privatisation, started recruiting tens of thousands of unemployed graduates into the public service every year with lifetime pensions, expanding an already bloated public sector and denying any benefit of a peace dividend to the country.

Sri Lanka also abandoned a price formula for fuel that had helped keep the rupee stable and inflation low from 2001 to 2003 even as global commodity prices went up from the ‘mother of all liquidity bubbles’ fired by the Federal Reserve from 2001.

From 2001 to 2003, state workers fell from 1.164 million to 1.043 million. By 2020, the public sector cadre has grown to 1.58 million with another batch of 53,000 unemployed graduates being paid tax money. (Colombo/Jun14/2024)

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