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Friday December 9th, 2022

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.

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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 shares fall on profit taking after nine sessions

ECONOMYNEXT – Sri Lanka shares slipped on Friday after gaining for nine straight sessions reverting from its highest gain in more than seven weeks on profit taking, brokers said.

“Bourse regressed to red ending the 9-day winning streak as investors resorted to book profits in blue chip counters,” First Capital Market Research said in it’s daily note.

The main All Share Price Index (ASPI) closed 0.54 percent or 47.84 points lower at 8,843.90.

The market witnessed a turnover of 1.6 billion rupees, lower than this year’s daily average turnover of 2.9 billion rupees.

The market saw a net foreign inflow of 1 million rupees. The total net foreign inflow stood at 22 billion rupees so far for this year.

The Paris Club group of creditor nations has proposed a 10-year debt moratorium on Sri Lankan debt and 15 years of debt restructuring as a formula to resolve the island nation’s prevailing currency crisis.

The government is in discussions with Asian Development Bank (ADB) and World Bank to get loans of 1.9 billion US dollars after a reform program with the International Monetary Fund is approved.

A policy loan now being discussed with the World Bank may bring around 700 million US dollars, Coomaraswamy told a business forum organized by CT CLSA Securities, a Colombo-based brokerage.

The Asian Development Bank may also give around 1.2 billion US dollars most of which will be budget support, he said.

In the last few sessions, market gained after the Central bank governor said interest rates should eventually ease despite the fears of a domestic debt restructuring as inflation falls, increased liquidity in dollar markets, and the inter-bank liquidity improves.

The more liquid index S&P SL20 closed 0.59 percent or 16.77 points lower at 2,827.72.

So far in December ASPI gained 2.2 percent.

The ASPI gained 0.5 percent in November after losing 13.4 percent in October.

It has lost 27.6 percent year-to-date after being one of the world’s best stock markets with an 80 percent return last year when large volumes of money were printed.

John Keells Holdings pulled the index down to close at 1.5 percent lower at 147 rupees.

Aitken Spence lost 2.0 percent to close at 141 rupees and Commercial Bank closed 1.4 percent down at 50.50 rupees a share. (Colombo/Dec09/2022)

 

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Sri Lanka bond yields end higher, kerb dollar Rs370/371

ECONOMYNEXT – Sri Lanka bonds yields ended up and the T-bills eased on active trade on Friday, dealers said.

The US dollar was 370/371 rupees in the kerb.

“The bond rates went up, however more interest was seen in the short term bills by the investors” dealers said.

A bond maturing on 01.05.2024 closed at 31.90/32.20 percent on Friday, up from 31.25/70 percent at Thursday’s close.

A bond maturing on 15.05.2026 closed at 30.30/31.30 percent steady from 30.30/31.00 percent.

The three-month T-bills closed at 30.75/31.30 percent, down from 32.00/32.25 percent.

The Central Bank’s guidance peg for interbank transactions was at 363.18 rupees against the US dollar unchanged.

Commercial banks offered dollars for telegraphic transfers between 371.78 and 372.00 for small transactions, data showed.

Buying rates are between 361.78 – 362.00 rupees. (Colombo/Dec 09/2022)

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Foreign minister, US ambassador discuss future assistance to crisis-hit Sri Lanka

ECONOMYNEXT — In a meeting in Colombo, Sri Lanka Foreign Minister Ali Sabry and US Ambassador to Sri Lanka Julie Chung discussed ways in which the United States can continue to support Sri Lanka going forward, the Ambassador said.

Chung tweeted Friday December 09 afternoon that the two officials had reflected on the “twists and turns” of 2022, at the meeting.

Minister Sabry was recently in Washington D.C. where he US Secretary of State Antony Blinken.

A foreign ministry statement said the two officials held productive discussions at the Department of State on December 02 on further elevating bilateral relations in diverse spheres, including the 75th anniversary of diplomatic relations which will be marked in 2023.

Incidentally, Sri Lanka also celebrates the 75th anniversary of its independence from the British in 2023, and President Ranil Wickremesinghe has given himself and all parties that represent parliament a deadline to find a permanent solution to Sri Lanka’s decades-long ethnic issue.

The US has been vocal about Sri Lanka addressing concerns about its human rights record since the end of the civil war in 2009 and was a sponsor of the latest resolution on Sri Lanka passed by the United Nations Human Rights Council. Unlike previous resolutions, this year’s iteration makes specific reference to the country’s prevailing currency crisis and calls for investigations on corruption allegations.

In the lead up to the UNHRC sessions in Geneva, Minister Sabry Sri Lanka’s government under then new president Wickremesinghe does not want any confrontation with any international partner but will oppose any anti-constitutional move forced upon the country.

On the eve of the sessions on October 06, Sabry said countries such as the United States and the United Kingdom, who led the UNHRC core group on Sri Lanka, are greatly influenced by domestic-level lobbying by pressure groups from the Sri Lankan Tamil diaspora.

These pronouncements notwithstanding, the Wickremesnghe government has been making inroads to the West as well as India and Japan, eager to obtain their assistance in seeing Sri Lanka through the ongoing crisis.

The island nation has entered into a preliminary agreement with the International Monetary Fund (IMF) for an extended fund facility of 2.9 billion dollars to be disbursed over a period of four years, subject to a successful debt restructure programme and structural reforms.

Much depends on whether or not China agrees to restructure Sri Lanka’s 7.4 billion dollar outstanding debt to the emerging superpower. Beijing’s apparent hesitance to go for a swift restructure prompted Tamil National Alliance MP Shanakiyan Rasamanickam to warn of possible “go home, China” protests in Colombo, similar to the wave of protests that forced the exit of former pro-China President Gotabaya Rajapaksa.

The TNA will be a key player in upcoming talks with the Wickremesinghe government on a solution to Sri Lanka’s ethnic issue. (Colombo/Dec09/2022)

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