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Monday December 11th, 2023

Sri Lanka to cut foreign debt, ride Modern Monetary Theory: CB Governor

ECONOMYNEXT – Sri Lanka will cut the share of foreign debt to 40 percent by 2021, raise more domestic debt and repay foreign debt, riding on Modern Monetary Theory to solve debt problems, Central Bank Governor W D Lakshman said.

“Our strategy is going to pay off foreign debt,” Governor Lakshman told an annual economic forum organized by Sri Lanka’s Ceylon Chamber of Commerce.

“This and the stated policy of not pursuing debt creating investments will help manage the fiscal situation.”

The domestic to foreign share of debt will 60 to 40 in 2021 from 55 to 45 in 2020.

In 2019, the domestic share was 51 percent and foreign 49 percent, State Minister for Finance Nivard Cabraal had said earlier.

Sri Lanka’s ratio of non-concessional debt is 23 percent, he said. The remainder is domestic debt or long term concessional debt.

“The fears around debt sustainability appear to be unfounded,” he said.

As rupee-denominated bonds were within the ‘sovereign powers’ money could be printed to repay them as indicated by ideas like Modern Monetary Theory, he said.

“One of the factors we are depending heavily on in terms of government debt is to increase the proportion of domestic debt,” Governor Lakshman said.

“The domestic currency debt – if I may also use the term – in a country with sovereign powers of money printing as the modern monetary theorists would argue – is not a huge problem.

“The debt can be rolled over. That is when it is mostly the domestic debt.”

However concerns have been raised that the debt is not being rolled over but paper debt is being turned in to reserve money through failed bill auctions.

Countries like Japan, Singapore, US also had large domestic debt shares exceeding the gross domestic product, he said.

Countries with strong exchange rates tended to have low-interest rates.

Singapore, which borrows to give returns to it Central Provident Fund, and also build a risk free yield curve, invests the proceeds through Government Investment Corporation, with the Monetary Authority of Singapore converting the funds to foreign exchange.

The MAS law prohibits money printing, and has a floating policy rate.

Sri Lanka is following a form of austerity on its own terms through import compression, he said.

“This year we have reduced imports by four billion dollars which is equal to total debt repayment,” he said.

Sri Lanka’s imports are driven by merchandise exports, services exports, tourism as well as government foreign borrowing and foreign direct investment.

A trade or current account deficit is driven by a savings-investment gap, which is financed from abroad. (Colombo/Dec01/2020 – Update III)

Comments (7)

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  1. Asanka Nonis says:

    MMT is a theory peddled by fringe economists for the U.S. Dollar. Not even those fringe economists apply it to any other currency than the U.S. Dollar, now here we have this WD Jonson applying it to the Sri Lankan rupee. Inflation will destroy the SLR and his contemporaries, old retries with fixed income suffer. May he suffer with them.

  2. Nadi Karunaratne says:

    Instead of hoping for salvation from money printing and relying on the kindness of strangers it would be better to focus on tax, labour market and SOE reforms, streamlining bureaucracy and fighting endemic graft. These are tough but necessary steps that require sophistication, would be unpopular and enrage vested interests. There is no short-cut to solvency let alone prosperity.

  3. Gayantha says:

    Well said proff. First man to admit mmt in sri Lanka. Remember low cost funding needed to boost domestic production and full employment

    1. Damayanthi says:

      There is no point talking aboug boosting “local production” which involves massive investment on technology we don’t have, followed by minimal local demand. Persuing a manfacturing based strategy in a country renowned for corruption is a fools errand. Good to fool the masses I guess

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Comments (7)

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Your email address will not be published. Required fields are marked *

  1. Asanka Nonis says:

    MMT is a theory peddled by fringe economists for the U.S. Dollar. Not even those fringe economists apply it to any other currency than the U.S. Dollar, now here we have this WD Jonson applying it to the Sri Lankan rupee. Inflation will destroy the SLR and his contemporaries, old retries with fixed income suffer. May he suffer with them.

  2. Nadi Karunaratne says:

    Instead of hoping for salvation from money printing and relying on the kindness of strangers it would be better to focus on tax, labour market and SOE reforms, streamlining bureaucracy and fighting endemic graft. These are tough but necessary steps that require sophistication, would be unpopular and enrage vested interests. There is no short-cut to solvency let alone prosperity.

  3. Gayantha says:

    Well said proff. First man to admit mmt in sri Lanka. Remember low cost funding needed to boost domestic production and full employment

    1. Damayanthi says:

      There is no point talking aboug boosting “local production” which involves massive investment on technology we don’t have, followed by minimal local demand. Persuing a manfacturing based strategy in a country renowned for corruption is a fools errand. Good to fool the masses I guess

Sri Lanka rupee opens at 327.00/50 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee opened at 327.00/50 to the US dollar on Monday, from 327.00/30 Friday, dealers said.

On the Colombo Stock Exchange, both indices opened up: The All Share Price Index 0.28 percent at 10,823, and the S&P SL20 0.35 percent at 3,113.85.

Bond yields were up.

A bond maturing on 01.08.2026 was quoted at 14.05/20 percent from 14.05/15 percent.

A bond maturing on 15.01.2027 was quoted at 14.05/20 percent from 14.10/25 percent.

A bond maturing on 01.07.2028 was quoted at 14.20/50 percent from 14.20/35 percent.
(Colombo/Dec11/2023)

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Sri Lanka promoting Buddhist tourism from Vietnam, ASEAN

ECONOMYNEXT – Sri Lanka is planning to boost Buddhist tourism by linking temples in the country with those in East Asia, Foreign Minister Ali Sabry said after to welcoming a delegation of monks from Vietnam.

President Ranil Wickremesinghe, and Minister Sabry have initiated a temple-to-temple program where 100 Sri Lanka temples will be linked with counterparts in the Association of South East Asian Nations region.

“Tourism development will get a lot of growth with the temple-to-temple program,” Minister Ali Sabry said.

Along with the delegation of monks, five travel agents from Vietnam were also invited.

Under the first phase of the Temple-to-temple programs, several monks from Sri Lanka had received invitations from Indonesia, Malaysia, South Korea and Vietnam the Foreign Ministry said.

The Temple-to-Temple diplomacy program will be extended to Singapore, Japan, Thailand and Cambodia during the second phrase of the program.

Sri Lanka is targeting 2.3 million tourists in 2023, after getting about 1.5 million this year. (Colombo/Dec10/2023)

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ADB $200mn 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.”
(Colombo/Dec9/2023)

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