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Thursday September 29th, 2022

Sri Lanka to have central bank run credit scheme for SOEs amid forex trouble

ECONOMYNEXT – Sri Lanka’s cabinet of ministers had cleared a proposal to extend a central bank credit scheme for Covid hit small and medium enterprises to provide working capital for state enterprises.

Covid-19 had hit working capital of 282 state or partially state owned entities or para-statals.

The central bank finance Covid-19 credit facility had given 156 billion rupees of loans to 53,200 businesses, a government statement quoting a cabinet memo said.

“Therefore, the ventures have confronted a difficulty to supply working capital required for day today operations,” the statement said.

“Accordingly, the Cabinet of Ministers granted approval to the resolution furnished by the Minister of Finance for providing the opportunity to accomplish the working capital requirements of state ventures under that loan scheme.”

The scheme is coming despite rising forex shortages and with the country’s forex reserves running dangerously low due to money printed to finance state worker salaries and other expenses.

Zimbabwe Style re-financing?

If re-financed by the central bank, the new SOE Saubagya credit scheme would be similar to the Parastatals and Local Authorities Reorientation Programme (PLARP) of the Reserve Bank of Zimbabwe that funded state enterprise and sub-national agencies and contributed to a monetary collapse.

In 2020 central bank had printed 111 billion rupees for the loan scheme and also provided more than 20 billion rupees of credit guarantees to give more loans without printing money and losing forex reserves.

Central bankers were summoned to the President’s office in 2020 and berated in public for delaying the scheme, which was expected to be 150 billion rupees.


Sri Lanka central bank not yet trippled Zimbabwe style quasi-fiscal facility

It is not clear whether the new scheme will be from central bank credit (printed money) or through a credit guarantee without printed money.

Sri Lanka’s existing Covid scheme was similar to the Reserve Bank of Zimbabwe’s Productive Sector Facility (PSF) commercial firms, and Agricultural Sector Enhancement Facility (ASPEF) aimed at private sector firms.

The central bank also re-financed some contractor bills in a scheme similar to Hitler’s Mefo bills program, analysts have said.

Central bank re-finance of SOEs have led to currency collapses and high inflation in multiple countries including the People’s Republic of China in the late 1980s when foreign reserves fell to around 20 billion US dollars.

The People’s Bank of China reformed its monetary law in the late 1980s and kept a fixed peg from 1993 to 2005 by prohibiting the under-writing of debt issues (buying Treasury bills from failed auctions) (Article 29), providing guarantees and restricting SOE finance (Article 30) which had led to previous currency collapses.

After stopping money printing at the 7.2 Yuan peg, China collected three trillion in forex reserves which returned to the country as import demand, through US deficit spending, until the peg was broken under US and IMF pressure.

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