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Sunday January 29th, 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 operators seek higher renewable tariffs, amid exchange rate expectations

ECONOMYNEXT – Sri Lanka’s renewable companies say they need tariff of 40 to 45 rupees a unit to sell power to the Ceylon Electricity Board and the agency owes them tens of billions of rupees for power sold in the past.

The association has strong exchange rate expectations based on the country’s dual anchor conflicting monetary regimes involving flexible inflation targeting with a reserve collecting target.

“In the coming year of course because of the rupee devaluation, I think the solar energy sector might require tariffs closer to RS 40 or RS 45, hydropower will also require tariffs on that scale,” Prabath Wickremasinghe President of the Small hydropower Developers Association told reporters.

“I think right now what they pay us is averaging around RS 15 to RS 20.”

Some of the earlier plants are paid only 9 rupees a unit, he said. The association there is potential to develop around 200 Mega Watts of mini hydros, 700 to 1000MW of ground mounted soar and about 1,000 rooftop solar.

In addition to the rupee collapse, global renewable energy costs are also up, in the wake of higher oil prices in the recent past and energy disruption in Europe.

The US Fed and the ECB have tightened monetary policy and global energy and food commodity price are now easing.

However in a few years the 40 to 45 rupee tariffs will look cheap, Wickremesinghe pointed out, given the country’s monetary policy involving steep depreciation.

From 2012 to 2015 the rupee collapsed from 113 to 131 to the US dollar. From 2015 to 2019 the rupee collapsed from 131 to 182 under flexible inflation targeting cum exchange rate as the first line of defence where the currency is deprecated instead of hiking rates and halting liquidity injections.

From 2020 to 2022 the rupee collapsed from 182 to 360 under output gap targeting (over stimulus) and exchange rate as the first line of defence.

“The tariffs are paid in rupees,” Wickremasinghe said. With the rupee continuing to devalue in other 5 years 40 rupees will look like 20 rupees.”

Sri Lanka has the worst central bank in South Asia after Pakistan. Both central banks started with the rupee at 4.70 to the US dollars, derived from the Reserve Bank of India, which was set up as a private bank like the Bank of England.

India started to run into forex shortages after the RBI was nationalized and interventionist economic bureaucrats started to run the agency. Sri Lanka’s and Pakistan’s central bank were run on discretionary principles by economic bureaucrats from the beginning.

The Central Bank of Sri Lanka was set up with a peg with gold acting as the final restraint on economic bureaucrats, but it started to depreciated steeply from 1980 as the restraint was taken away.

Now under so-called ‘exchange rate as the first line of defence’ whenever the currency comes under pressure due to inflationary policy (liquidity injections to target an artificially low policy rate or Treasuries yields) the currency is depreciated instead of allowing rates to normalize.

Eventually rates also shoot up, as attempts are made to stabilize the currency which collapses from ‘first line of defence’ triggering downgrades along the way.

After the currency collapse, the Ceylon Electricity Board, finances are shattered and it is unable to pay renewable operators.

Unlike the petroleum, which has to stop delivery as it runs out of power, renewable operators continue to deliver as their domestic value added is higher.

However they also have expenses including salaries of staff to pay.

The CEB which is also running higher losses after the central bank printed money and triggered a currency collapse, has not settled renewable producers.

“In the meantime, we have financial issues with the investors and CEB owns more than 45 million rupees in the industry,” Warna Dahanayaka, Secretary of Mini Hydro Association, said at the conference.

“We can’t sustain because we can’t pay the salaries and we can’t sustain also because of the bank loans. Therefore, we are requesting the government to take the appropriate action for this matter.”

Sri Lanka and Pakistan have identical issues in the power sector including large losses, circular debt, subsidies due to depreciating currencies.

In Sri Lanka there is strong support from the economists outside government for inflationary policy and monetary instability.

The country’s exporters, expatriate workers, users of unofficial gross settlement systems, budget deficits and interbank forex dealers in previous crises have been blamed for monetary instability rather than the unworkable impossible trinity regime involving conflicting domestic (inflation target) and external targets (foreign reserves).

The country has no doctrinal foundation in sound money and there is both fear of floating and hard peg phobia among opinion leaders on both sides of the spectrum regardless of whether they are state or private sector like any Latin American country, critics say.

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Sri Lanka top chamber less pessimistic on 2023 GDP contraction

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“The forecast of 2023 is quite negative in terms of the international forecasters,” Shiran Fernando Chief Economist of Ceylon Chamber of Commerce told a business forum in Colombo.

“Our view is that there will be some level of contraction, may be zero to two percent. But I think as the year progresses in particular the second half, we will see consumption picking up.”

The World Bank is projecting a 4.2 percent contraction in 2023.

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Acuity Knowledge Partners with Sri Lanka office to be bought by Permira

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Equistone Partners Europe, from which Permira is buying the stake will remain a minority investor, the statement said.

In 2019, Equistone backed a management buyout of Acuity from Moody’s Corporation.

Acuity Knowledge Partners says it serves a global client base of over 500 financial services firms, including banks, asset managers, advisory firms, private equity houses and consultants.

“Despite the current challenges for the financial services sector, we have experienced continued growth and a strong demand for our solutions and services,” Robert King, CEO of Acuity Knowledge Partners, said.

“Given the significant demand within the financial services sector for value-added research and analytics, and the need for operational efficiency, with Permira’s deep experience in tech-enabled services and its global network, I am confident the business will continue to flourish.”

London headquartered Acuity has offices in the UK, USA, India, Sri Lanka, Costa Rica, China and Dubai, UAE.

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