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Saturday May 18th, 2024

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 suffers over $138mn foreign outflow from govt bonds in 2024 after rate cuts

ECONOMYNEXT – Foreign investors have dumped 41.6 billion-rupee ($138.6 million) worth of Sri Lanka government securities in the first 20 weeks of 2024, the central bank data showed, after reduction in the key policy interest rates.

The foreign holding in Sri Lanka’s treasury bills and treasury bonds fell to 75.9 billion rupees on the week ended on Friday (17), May 2024, from 117.4 billion rupees on the week ended on December 29.

The central bank rate has reduced the key policy rates by 50 basis points so far in 2024, extending the rates cut by 700 basis points since June last year.

The rupee appreciated 9.1 percent in the first four months, but the gain failed to attract foreign investors amid a dragged debt restructuring negotiation with external private creditors.

Currency dealers said lackluster demand for dollars due to dampened imports with heavy controls, boom in both tourism revenue and remittances have helped to increase the dollar liquidity in the market, leading to the appreciation of the local currency.

The dealers said foreign investors can earn capital gain if they had bought government securities before the appreciation and now the offshore investors might be selling their bonds.

“They are also discouraged by policy rate cut because that will reduce their returns from the rupee bond investments,” a currency dealer said.

The yield in 12-month T-bills has fallen 336 basis points in the first four months of this year, the central bank data showed.

The central bank also reduced the Statutory Reserve Ratio (SRR) of commercial banks by 200 basis points in August last year to boost liquidity in the market with an aim to reduce market interest rates.

Under tough International Monetary Fund (IMF) conditions for its $3 billion loan program, the central bank raised key monetary policy rates in 2022 and last year to bring down inflation which hit over 70 percent in 2022. The inflation has fallen to the lower single digit now.

The rupee has appreciated to around 300 against the US dollar this week from around 330 level early in November. The local currency was at 365 rupees against the US dollar in early 2022. Depreciation causes capital loss for foreign investors. (Colombo/May 18/2024)

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Sri Lanka’s ‘Sancharaka Udawa’ tourist fair seeks to involve universities

ECONOMYNEXT – Sri Lanka’s ‘Sancharaka Udawa’ tourism fair kicked off this week to promote interaction between industry stakeholders and relevant Government bodies, including the Tourist Police, and also universities.

“Several universities, including Colombo, Uva Wellasa, Kelaniya, Sabaragamuwa and Rajarata were given free stalls to facilitate student interaction with industry professionals,” Chairman of the Sancharaka Udawa Organising Committee, Charith De De Alwis said in a statement.

The event takes place today (18) at the BMICH and houses stalls for hoteliers, tour and transport services, with a goal of attracting 10,000 visitors.

Organized by the Sri Lanka Association of Inbound Tour Operators (SLAITO) and the Sri Lanka Tourism Promotion Bureau (SLTPB), the 11th edition of Sancharaka Udawa offers a platform for both B2B and B2C sectors.

“Sancharaka Udawa houses over 170 exhibitors and a footfall of more than 10,000 visitors,” De Alwis said.

This year’s edition will include participants from outbound tourism sectors to facilitate capacity building. The event provides networking opportunities for industry newcomers and veterans.

“The networking platform offers opportunity for small and medium-sized service providers integrating them into the broader tourism landscape. The anticipated outcome is a substantial increase in bookings particularly for regional small-scale tourism service providers.” (Colombo/May18/2024)

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Sri Lanka’s CEB sells LTL shares to West Coast IPP for Rs26bn

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Board has sold shares of an affiliate to West Coast Power Company Limited, an independent power producer giving profits of 25.9 billion rupees in the March 2024 quarter, interim accounts showed.

The sale has been carried out as a transfer.

“Twenty-eight percent (28-pct) of share ownership of CEB within LTL Holding’s equity capital has been transferred to West Coast Power Company Ltd for a total consideration of Rs 26 billion as part of a partial settlement of outstanding dues…” the March interim accounts said.

“This transaction resulted in a net gain of Rs25.9 billion rupees which has been recognized and reflected in the ‘Gain from Share Disposal’ in the individual financial statement in CEB.”

LTL Holdings is a former transformer making unit of the CEB set up with ABB where the foreign holding was sold to its management.

The firm has since set up several IPPs.

West Coast Power operates a 300MW combined cycle IPP in Kerawalapitiya promoted by LTL group liked firms in which both the Treasury and Employees Provident Fund also have shares.

Its operational and maintenance contract is with Lakdhanavi, another private IPP. The firm has been paying dividends.

The capital gain from the transfer of shares helped the CEB post profits to 84 billion rupees for the March 2024 quarter.

CEB reported gross profits of 62.7 billion rupees from energy sales and 30.6 billion rupees in other income and gains in the March 2024 quarter. Other income was only 3.1 billion rupees in last year. (Colombo/May18/2024)

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