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Thursday June 8th, 2023

Sri Lanka to lend US$2.5bn to US and top-rated borrowers in 2023 under IMF deal: analysis

ECONOMYNEXT – Sri Lanka is projected to lend 2,533 million US dollars mainly to the US and Euro areas during an International Monetary Fund deal in 2023 including a mandatory 1.4 billion US dollars collected from exports and remittances, according to official documents.

Sri Lanka is expected to get two tranches of 331.2 million dollar (254 million special drawing rights each) in March and September 2023 from the IMF.

In 2023 Sri Lanka has to repay 256.4 million dollars from an earlier IMF loan taken during an earlier currency crisis triggered by inflationary open market operations to target artificially low policy rates under flexible inflation targeting.

Net inflows from the IMF would be 406.12 million US dollars in 2023 if the first review is completed in September 2023.

Sri Lanka has committed to collect at least 1.4 billion US dollars from remittances and exports and lend to the US and other developed nations during 2023 under the IMF deal.

A large volume has already been collected after a credit collapse and liquidity trap conditions in the domestic banking system, after a defined surrender rule which determined a transparent exchange peg was lifted.

An ad hoc peg is now operated under the IMF deal to buy dollars and export to the West, as ‘below-the-line outflows. Sri Lanka’s foreign reserves are usually loaned to highly rated sovereign or sovereign linked borrowers, mainly in the US.

But there have been amounts of Euro assets in Sri Lanka’s foreign reserves at times, triggering forex losses when the dollar to Euro parity changed.

Under the IMF program there is a performance criterion to increase net international reserves by 1,948 million dollars during 2023.

Sri Lanka is also expected to repay a 200 million US dollar swap to Bangladesh during 2023, which will also raise the NIR.

At the moment Sri Lanka’s central bank is in debt after borrowing from India, Bangladesh, India including on Asian Clearing Union dues as well as the IMF. Year end net international reserves would still be negative.

Sri Lanka’s gross reserves are expected to rise by 2.5 billion US dollars to 4.4 billion US dollars in 2023 indicating that the Indian Ocean island will lend 2.5 billion US dollars to the US and other highly rated borrowers. It may include re-invested interest coupons.

Sri Lanka is also expected to get 650 million dollars from the Asian Development Bank and 250 million dollars from the World Bank as part of partner support for the IMF deal. Outside of core monetary reserves linked to reserve money, balances in Treasury accounts are also counted as forex reserves.

A country can build reserves or repay loans – which are identical operations – long as there is a market interest rate to curtail domestic investment and consumption and there is no inflationary domestic operations by the central bank which are in conflict with the balance of payments to destroy the credibility of the peg.

Under the IMF program a new monetary law with overt money and exchange policy conflicts and legalizing inflationary open market operations for stimulus (output gap targeting) which critics had blamed for recent serial currency crises and default are to be legalized.

Though an intermediate regime central bank can maintain a strong exchange rate and collapse inflation and amid negative credit, under modern IMF programs due to conflicts coming from inflation targeting (the monetary policy consultation clause) currency crises come within programs.

A NIR target which is not complemented by falling ceiling on net domestic assets of the central bank can also lead to depreciation and inflation taxes on the poor, analysts have warned. (What Sri Lanka’s IMF program should look like).

The current program has a ceiling on domestic assets of the central bank but it is not downward sloping to complement the NIR target and maintain currency stability.

In the current IMF program, there is also a provision to use Fund credit for the budget after ‘converting rupees’, according to officials.

Questions by journalists whether the operation is likely to lead to changes in reserve money was not immediately answered by IMF officials.

IMF transactions in the past have been reserve-money-neutral and did not cause inflation or currency trouble.

In third world so-called ‘basket case countries’ with output gap targeting stimulus and inflationary open market operations, central banking is barely understood, critics say.

Monetary troubles in South Asia, Africa and the Middle East (outside of GCC pegged countries which have no money and exchange policy conflicts without active inflationary open market operations or a policy rate), is due to lack of knowledge of note issue banking, critics say.

Classical economists have pointed out that Western policy circles (mainly the US) lost the plot in the 1920 after John Maynard Keynes’ Economic Consequences of Peace which legitimized the activities of the Reichsbank after the First World War and the subsequent hyperinflation and default as a problem of the current account deficit and war obligations (the so-called ‘transfer problem’).

Read more: Transfer problem debate

German (as well as Swedish and French) economists tried without success to change the return to mercantilism in US and UK official policy circles (at least one economist called it the ‘spurious monetary doctrines of the Allies’) but failed.

Sri Lanka also sought ‘bridging finance’ and borrowed heavily in recent years under similar conditions amid inflationary open market operations, critics have said.

After World War II, the German economists rejected the premise and built the new Deutsche Bank. The theoretical backing for the German monetary policy came from the Austrian economic tradition, including Wilhelm Ropke.

Sri Lanka has gone to the IMF 16 times, earlier mostly after targeting artificially low interest rates or operating re-financing schemes and getting into external trouble, which are then blamed on ‘budget deficits’ and has hardly learned anything, critics say.

A notable exception was the IMF Extended Credit Facility in 2003, under then-central bank Governor A S Jayewardene, probably one of two greatest economists in South Asia, who had knowledge of monetary policy, along with BR Shenoy of India analyst say.

It may perhaps be the only occasion when Sri Lanka entered an IMF deal when foreign reserves were climbing. (Colombo/Mar25/2023)

Comments (4)

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  1. Don says:

    According to Buddhist priests in Sri Lanka, there are 33 million gods looking after the interests of the 2.2 million population, this is too much, almost 16 gods to look after a single person, we could sell at least 30 million gods for a good price such as 300000 Billion US dollars to have a big reserve in CB.

  2. sacre blieu says:

    That’s funny, when we are in dire need of funds and our stratospheric debt is projected to be settled in eternity, we have to lend to foreign banks. Worse, who will decide, the President, Finance Minister, or the Central Bank? Most American banks are in a spion with some having to be rescued, and some likely to collapse. Ironically, we are selling good assets, bankrupted by dirty, dishonest politicians and bureaucrats, for a pittance. Most people have been driven into poverty and bankruptcy by the protected corrupt and fraudsters. Not a single rupee has been recovered so far.

  3. Bryan Ekenaike says:

    can anybody out there explain the statement in this report which says “that SL will LEND USD2.5 bill to the US and Euro under the IMF deal in 2023”?
    Does it mean ‘pay back’ to the US and Euro under previous loan arrangements? SL cannot be a lender in its present bankrupt status, or am I reading this wrong?

  4. Kumar says:

    If this is a requirement, usually these loans are guaranteed by the government.

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Comments (4)

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

  1. Don says:

    According to Buddhist priests in Sri Lanka, there are 33 million gods looking after the interests of the 2.2 million population, this is too much, almost 16 gods to look after a single person, we could sell at least 30 million gods for a good price such as 300000 Billion US dollars to have a big reserve in CB.

  2. sacre blieu says:

    That’s funny, when we are in dire need of funds and our stratospheric debt is projected to be settled in eternity, we have to lend to foreign banks. Worse, who will decide, the President, Finance Minister, or the Central Bank? Most American banks are in a spion with some having to be rescued, and some likely to collapse. Ironically, we are selling good assets, bankrupted by dirty, dishonest politicians and bureaucrats, for a pittance. Most people have been driven into poverty and bankruptcy by the protected corrupt and fraudsters. Not a single rupee has been recovered so far.

  3. Bryan Ekenaike says:

    can anybody out there explain the statement in this report which says “that SL will LEND USD2.5 bill to the US and Euro under the IMF deal in 2023”?
    Does it mean ‘pay back’ to the US and Euro under previous loan arrangements? SL cannot be a lender in its present bankrupt status, or am I reading this wrong?

  4. Kumar says:

    If this is a requirement, usually these loans are guaranteed by the government.

Sri Lanka’s shares slip on profit taking and selling pressure

ECONOMYNEXT – Sri Lanka’s shares closed lower on Wednesday after four consecutive gains in previous sessions spiraled into selling interest and profit taking, an analyst said.

The main All Share Price Index was down 0.28 percent or 24.39 points to 8,722.06, this is the lowest the index has been since May 02, while the most liquid index S&P SL20 was down 0.40 percent or 9.92 points to 2,468.44.

“The market was gaining in the previous sessions and there is selling and profit taking present today, due to continuously being on green,” an analyst said.

In the previous sessions the market was seeing gains, due to lowered policy rates and low inflation stimulating buying interest and driving the sentiment up, an analyst said.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

“There are gradual improvements in the market sentiment, with positive sentiments coming in from lowered policy rates and inflation,” an analyst said.

The market generated foreign inflows of 12 million rupees and received a net foreign inflow of 18 million rupees, due to low share prices and discounted shares followed by a dividend announcement.

The market generated a revenue of 554 million rupees, this is the lowest the turnover has been since May 10, while the daily turnover average was 1 billion rupees. From the total generated revenue, the banking sector contributed 120 million rupees, Diversified Banks contributed 115 million rupees and the Capital Goods Industry generated 78 million rupees.

Top losers during trade were Sampath Bank, Commercial Bank and Aitken Spence. (Colombo/June06/2023)

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Sri Lanka Treasuries yields plunge, 12-month down 318bp

ECONOMYNEXT – Sri Lanka’s Treasuries yields plunged across maturities at Wednesday’s auction with the 12-month yield falling 318 basis points, in one of the biggest one day falls, data from the state debt office showed.

The 3-month yield fell 244 basis points to 23.21 percent.

The 6-mont yield fell 339 basis points to 21.90 percent, along with the 12 months to 19.10 percent.

The short-term yield curve is inverted.

The central bank last week cut its policy rate 250 basis points in a signaling move but is not printing money to enforce the rate cut.

The debt office sold all 140 billion rupees of offered securities. (Colombo/June07/2023)

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Sri Lanka forex reserves rise US$722mn in May 2023

ECONOMYNEXT – Sri Lanka’s foreign reserves grew 722 million US dollars to 3,483 million US dollars in May 2023 from 2,761 million US dollars in April, official data showed as deflationary policy and weak credit reduced ‘above the line’ outflows.

Sri Lanka lost almost all its reserve in over two years as the central bank sold reserves and printed money to keep rates down (sterilized reserves sales) including borrowed dollars from India.

Gross official reserves fell to a low of 1,705 million US dollars in September 2022.

Sri Lanka’s central bank hiked rates in April 2022 to slow credit and also stopped printing money after it ran out of borrowed Asian Clearing Union dollars from India.

Sri Lanka’s gross official reserves are made up of both monetary reserves of the central bank and any balances of the Treasury account from loans or grants it gets.

The central bank’s net foreign reserves are still negative after busting up borrowed reserves to suppress rates. By April (before the collection of reserves in May) the central bank’s net reserves were negative by 3.7 billion US dollars.

In May alone 662 million US dollars were bought from the market, Central Bank Governor Nandalal Weerasinghe said.

Related

No pre-determined level to stop Sri Lanka rupee appreciation: CB Governor

Borrowing dollars through swaps and busting them up, was invented by the US Federal Reserve as it was printing money and breaking the Bretton Woods system in the early 1970s.

Sri Lanka received a 350 million US dollar tranche from the Asian Development Bank and 331 million US dollars from the IMF to the Treasury for budget support.

The loans can be sold to the central bank by the government to generate rupees and spend. However, since credit is weak, not all the inflows go out of the country particularly as the central bank is conducting deflationary open market operations on a net basis.

By allowing the rupee to appreciate unlike in previous episodes of recovery in an IMF program, after a bout of money printing, the central bank is bringing down inflation – in some cases absolute prices – and restoring confidence and easing the ‘pain’ of ‘monetary policy’ or stimulus.

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Why is Sri Lanka’s rupee appreciating?

Though exports are falling, tourism revenues are also picking up.

The budget support loans, tourism receipts less the reserve collected will widen the trade deficit. Building foreign reserves involves lending money to the US or other western nations and is similar to repaying foreign debt. (Colombo/June07/2023)

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