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Monday February 6th, 2023

Sri Lanka to monetize billions of rupees of contractor bills

PAPER: Instead of keeping a piece of paper, it can be turned into money Information Minister Bandula Gunewardene said.

ECONOMYNEXT – Sri Lanka will turn billions of rupees worth contractors bills due from government into money at 4 percent, by re-financing them though the central bank, Information Minister Bandula Gunewardene has said.

There were 240 billion rupees of arrears due to contractors for work carried out for the government in the past, Minister Gunewardene said.

The contractors were ‘completely stuck’ due to payment delays he said.

Turning Paper into Money

“If the government has approved work done by your company – lets say for 50 billion rupees – for that a bill is given,” Minister Gunewardene explained.

“A bill that has to be settled (nirawul kala yuthu bill pathak). Against this concessionary credit is given.

“Until the government settles those bills in a future budget, instead of keeping a paper, the opportunity to turn the paper into money has been given (kadadasiya deelar mudal tikker ganna).

“Then they can start their business again.”

It is not clear how much of the bills would be discounted at the central bank.

Sri Lanka’s central bank said on June 16 that a total of 150 billion rupees of re-finance (printed money) would be provided to banks at 01 percent to on-lend to Coronavirus affected businesses at 4 percent raising an original 50 billion rupee facility.

“In addition, the construction sector enterprises will be provided with a facility to borrow from LCBs, using guarantees issued by the government equivalent to the amount due on account of contracts carried out in the past, under a new dedicated credit scheme funded by the Central Bank and made available at the aforementioned concessionary rates,” the central bank said.

Related

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

Earlier in June the monetary authority came under fire from President Gotabaya Rajapaksa for not increasing the 50 billion rupee facility to 150 billion rupees when it was first ordered to do so.

The central bank then tripp;ed the facility and said also cut the reserve ratio by another 2 percent releasing another 115 billion rupees in to money markets.

Similar schemes to finance state enterprises, local authorities and also private firms were started by the Reserve Bank of Zimbabwe contributing to severe monetary instability.

Auction yields of Sri Lanka rupee bonds have fallen below that of dollar bonds since then.

Budget Constraints

Minister Gunewardene said the scheme to re-finance bills into money was made due to the inability to immediately pay contractors through the budet.

“The government once tried to increase the vote-on-account to pay for the contractors and that was not allowed,” Minister Gunewardene said.

“So we have started a new system.”

He said the new re-finance schemes would increase money circulation and give new life to the economy.

Soon after the then-parliament which was controlled by the opposition refused to expand the limits of the vote-on-account, it was dissolved for elections. Since then spending has been allocated by a budget using a constitutional provision.

A similar scheme of discounting bills through the central bank was started in 1932 by the then Reichsbank President Hans Luther for public works called OFFA bills, economic analysts say.

To circumvent budget rules bills were issued through a company called Deutsche Gesellschaft für öffentliche Arbeiten AG, (OFFA) which were to be re-financed by discounting with the central bank.

In 1933, when the Reichsbank was pressed to increase OFFA bill operations to finance arms production, Luther refused.

He was replaced by Hjalmar Schacht as the President of Reichsbank. Schacht issued bills through another company called MEFO to defence contractors. MEFO bills carried an interest rate of 4 percent.

“MEFO led to monetary instability and foreign exchange problems for Germany and Schacht tried to reduce the impact by trying to extend the maturity up to five years,” says ENs economic columnist Bellwether says.

“Due to foreign exchange problems Germany then struck deals with various countries including later Axis powers like Romania to import raw materials.”

By re-financing bills from a different company, Schacht also circumvented Reichsbank rules against printing money for the budget.

Sri Lanka’s central bank, like several central banks promoted by US New Dealers after the end of World War II, has no such strict limitations and has regularly monetized government debt leading to high inflation and currency depreciation.

Mercantilism

The rupee has fallen from 4.70 to 186 to the US dollar since the creation of the central bank in 1950, abolishing a currency board which was in operation until then.

Due to classical economic illiteracy and strong beliefs in Mercantilism many in Sri Lanka believe that monetary instability in the form of currency depreciation and balance of payments troubles are due to trade and not money and credit.

Data released by the central bank this week showed that about 203 billion rupees had been printed in March and April, not counting about another 175 billion rupees released to the banking system though reserve ratio cuts.

Up to June 28 billion had been given through 1-percent re-finance, at time when the reverse repo rate is 6.5 percent.

About 1.3 billion dollars in reserves had been lost to mop up the liqudity. Another 200 billion rupees of excess liquidity (about 1.1 billion US dollars) is sloshing about in the banking system.

The excess money (until they are mopped up through currency defence) is parked at the central bank at 5.5 percent, which analysts say may help avert some mal-investments. However stock prices are rising.

Sri Lanka has been undner strict import controls and exchange controls from April. Private credit had begun to fall in April after the economy was locked down to fight Coronavirus data showed, easing pressure on the currency.

Minister Gunewardene said the exchange controls would be extended for another 6 months from July. (Colombo/June27/2020)

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Sri Lanka to address SME tax problems at first opportunity: State Minister

ECONOMYNEXT – Problems faced by Sri Lanka’s small and medium enterprises from recent tax changes will be addressed at the first opportunity, State Minister for Finance Ranjith Siyambalapitiya said.

Business chambers had raised questions about hikes in Value Added Tax, Corporate Income Tax and the Social Security Contribution Levy (SSCL) that’s been imposed.

It should be explored on how to amend the Inland Revenue Act, Siyamabalapitiya said, adding that the future months should be considered as a period where the country is being stabilized.

Both the VAT and SSCL are effectively paid by customers, but the SSCL is a cascading tax that makes running businesses difficult.

In Sri Lanka SMEs make up a large part of the economy, accounting for 80 per cent of all businesses according to according to the island’s National Human Resources and Employment Policy.

(Colombo/ Feb 05/2023)

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Sri Lanka revenues Rs158.7bn in Jan 2023 up 51-pct

ECONOMYNEXT – Sri Lanka’s government revenues were 158.7 billion rupees in January 2023 but expenditure and debt service remained high, Cabinet spokesman Minister Bandula Gunawardana said.

In January 2022 total revenues were Rs104.5 billion according to central bank data.

Sri Lanka’s tax revenues have risen sharply amid an inflationary blow off which had boosted nominal GDP while President Ranil Wickremesinghe has also raised taxes.

Departing from a previous strategy advocated by the IMF expanding the state and not cutting expenses, called revenue based fiscal consolidation, he is attempting to do classical fiscal consolidation with spending restraint.

President Ranil Wickremesinghe has presented a note to cabinet requesting state expenditure to be controlled, Gunawardana told reporters.

State Salaries cost 87.4 billion rupees.

Pensions and income supplements (Samurdhi program) were29.5 billion rupees.

Other expenses were 10.8 billion rupees.

Capital spending was   21 billion rupees.

Debt service was 377.6 billion rupees for January which has to be done with borrowings from Treasury bills, bonds and a central bank provisional advance of 100 billion rupees, Gunawardana said.

Interest costs were not separately given. (Colombo/Feb05/2023)

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Sri Lanka’s Ceylon Tea prices down for second week

ECONOMYNEXT – Sri Lanka’s Ceylon Tea prices fell for the second week at an auction on January 31, with teas from all elevations seeing a decline, data showed.

“In retrospect, the decline in prices would be a price correction owing to the overall product quality and less interest from some key importers due to the arrival of cargo at destinations ahead of schedule,” Forbes and Walker tea brokers said.

The weekly sale average fell from 1475.79 rupees to 1465.40 rupees from a week ago, according to data from Ceylon Tea Brokers.

The tea prices are down for two weeks in a row.

High Growns

The High Grown sale average was down by 20.90 rupees to 1380.23 rupees, Ceylon Tea Brokers said.

High grown BOP and BOPF was down about 100 rupees.

“Ex-Estate offerings which totalled 0.75 M/Kg saw a slight decline in quality over the previous week” Forbes and Walker said.

OP/OPA’s in general were steady to marginally down.

Low Growns

In Low Grown Teas, FBOP 1 was down by 100 rupees and FBOP was down by 50 rupees while PEK was up by 150 rupees.

The Low Growns sale average was down by 8.55 rupees to 1547.93 rupees.

A few select Best BOP1s along with Below Best varieties maintained.

OP1                     Select Best OP1’s were steady, whilst improved/clean Below Best varieties maintained.   Others and poorer sorts were easier.

PEKOE                 Well- made PEK/PEK1s in general were steady, whilst others and poorer sorts were down.

Leafy and Semi Leafy catalogues met with fair demand,” Forbes and Walker brokers said.

“However, the Small Leaf and Premium catalogues continued to decline.

“Shippers to Iran were very selective, whilst shippers to Türkiye and Russia were fairly active.”

This week  2.2 million Kilograms of Low Growns were sold.

Medium Growns

Medium Grown BOP and BOPF fell by around 100 rupees

The Medium Growns sale average was down by 33.40 rupees to 1199.4 rupees.

“Medium CTC teas in the higher price bracket witnessed a similar trend, whilst teas at the lower end were somewhat maintained subject to quality,” Forbes and Walker brokers said.

“Improved activity from the local trade and perhaps South Africa helped to stabilize prices to some extent.”

OP/OPA grades were steady while PEKOE/PEKOE1 were firm, while some gained 50-100 rupees at times.

Well-made FBOP/FBOPF1’s were down by 50-100 rupees per kg and more at times.

(Colombo/Feb 5/2023)

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