An Echelon Media Company
Friday March 1st, 2024

Sri Lanka transfers balance CPC forex crisis bank debt to government

ECONOMYNEXT – Sri Lanka has transferred the balance remaining of Ceylon Petroleum Corporation bank debt to the central government, official data shows, as part of restructuring state enterprise balance sheets under an International Monetary Fund program

State-run banks gave over loans to the Ceylon Petroleum Corporation as forex shortages emerged from inflationary rate cuts (rates suppressed with reverse repo operations or sterilized dollar sales interventions).

In December 2023 credit to state corporations went down by 350 billion rupees to 769.8 billion rupees (about a billion US dollars) while credit to government, which includes new debt taken (mostly to roll over interest), went up 562.5 billion rupees to 8,285 million dollars, central bank data showed.

In April 2023 SOE credits went down by 516 billion rupees.

State banks gave loans to the CPC when rates were cut with printed money under a flexible inflation targeting framework, including when fuel was market priced under as formula by then Finance Minister Mangala Samaraweera under the nose of an IMF program.

Under flexible inflation targeting cum potential output targeting, money is printed to cut rates as soon as inflation falls to near zero, which coincides with a recovery in private credit from the previous crisis, leading to a fresh round of forex shortages.

The CPC is then made to borrow first through dollar supplier credits, though the agency has miniscule dollar revenues (mostly aviation fuel) which are then converted to state bank loans, usually after the currency collapses, triggering large losses to the entity.

RELATED Shock revelation on how Sri Lanka’s CPC ended up with billions of dollar debt

When fuel is market priced, CPC’s own cash balances end up as deposits including repo transactions in state banks which are loaned to private creditors, to make investments and more imports, nullifying any benefits from market pricing fuel.

In the absence of central bank inflationary monetary operations, non-oil imports should fall to match the real incomes of the country. The borrowings on the other hand also widens the current account deficit.

Analysts have pointed out that inflation targeting with a de facto pegged exchange rate (a central bank in which net foreign assets go up and down with corresponding changes in net domestic assets), and the belief that rates can be cut when inflation falls, is a fundamental flaw in recent IMF programs, which shunts countries into repeated cycles of external crises.

CPC borrowings after rate suppression (macro-economic policy) has been a recurring policy error in the country.

Before 2018 foreign loans partly or fully financed CPC losses. CPC losses and borrowings should lead to a rise in market rates, but due to a fixed policy rate, liquidity is injected to suppress rates. Under a fixed policy rate, a drought which leads to fuel imports financed by bank credit, without a hike in tariffs, can lead to forex shortages.

Loans it was made to take from Iran in a currency crisis around 2000 is still outstanding.

In that crisis, Sri Lanka’ economy also contracted.

When rates are cut with reverse repo injections or standing facilities, central government net foreign debt also soars in the same way as the CPC, reserves being run down to repay installments or new debt taken to pay up maturing debt, outside of the annual deficit financing requirement.

As rates are hiked to stabilize the external sector and restore the lost confidence in the money of the state central bank, the deficit and debt to GDP ratio goes up, tax revenues get hit and the incumbent government usually loses office in the stabilization period.

Budget deficits in the stabilization year are usually higher than the year in which the crisis was triggered, with nominal interest rates also soaring, though ‘deficits’ are eventually blamed for the problem.

After several cycles of flexible inflation targeting and potential output targeting (printing money to push growth), which led to a rapid rise in net foreign debt Sri Lanka defaulted in 2022 after running out of reserves.

Countries with reserve-collecting central banks that do not try to cut rates with reverse repo injections but allows rates to market-price, end up with low nominal interest rates comparable to developed nations, as well as steady growth without frequent external crises or currency depreciation.

At the moment rate cuts have been ‘paused’ by central bank governor Nandalal Weerasinghe and monetary policy has been largely deflationary, except for several outright purchases of longer term bonds. (Colombo/Feb05/2024)

Leave a Comment

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

Leave a Comment

Leave a Comment

Cancel reply

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

Sri Lanka’s RAMIS online tax collection system “not operatable”: IT Minister

ECONOMYNEXT – Sri Lanka’s online tax collection system RAMIS is “not operatable”, and the Ministry of Information Technology is ready to do for an independent audit to find the shortcomings, State IT Minister Kanaka Herath said.

The Revenue Administration Management Information System (RAMIS) was introduced to the Inland Revenue Department (IRD) when the island nation signed for its 16th International Monetary Fund (IMF) programme in 2016.

However, trade unions at the IRD protested the move, claiming that the system was malfunctioning despite billions being spent for it amid allegations that the new system was reducing the direct contacts between taxpayers and the IRD to reduce corruption.

The RAMIS had to be stopped after taxpayers faced massive penalties because of blunders made by heads of the IT division, computer operators and system errors at the IRD, government officials have said.

“The whole of Sri Lanka admits RAMIS is a failure. The annual fee is very high for that. This should be told in public,” Herath told reporters at a media briefing in Colombo on Thursday (29)

“In future, we want all the ministries to get the guidelines from our ministry when they go for ERP (Enterprise resource planning).”

President Ranil Wickremesinghe’s government said the RAMIS system will be operational from December last year.

However, the failure has delayed some tax collection which could have been paid via online.

“It is not under our ministry. It is under the finance ministry. We have no involvement with it, but still, it is not operatable,” Herath said.

“So, there are so many issues going on and I have no idea what the technical part of it. We can carry out an independent audit to find out the shortcomings of the software.”

Finance Ministry officials say IRD employees and trade unions had been resisting the RAMIS because it prevents direct interactions with taxpayers and possible bribes for defaulting or under paying taxes.

The crisis-hit island nation is struggling to boost its revenue in line with the target it has committed to the IMF in return for a 3 billion-dollar extended fund facility. (Colombo/Feb 29/2024) 

Continue Reading

Sri Lanka aims to boost SME with Sancharaka Udawa tourism expo

ECONOMYNEXT – Sri Lanka is hosting Sancharaka Udawa, a tourism industry exhibition which will bring together businesses ranging from hotels to travel agents and airlines, and will allow the small and medium sector build links with the rest of the industry, officials said.

There will be over 250 exhibitors, with the annual event held for the 11th time expected to draw around 10,000 visitors, the organizers said.

“SMEs play a big role, from homestays to under three-star categories,” Sri Lanka Tourism Promotion Bureau Chairman, Chalaka Gajabahu told reporters.

“It is very important that we develop those markets as well.”

The Sancharaka Udawa fair comes as the Indian Ocean island is experiencing a tourism revival.

Sri Lanka had welcomed 191,000 tourists up to February 25, compared to 107,639 in February 2023.

“We have been hitting back-to-back double centuries,” Gajabahu said. “January was over 200,000.”

The exhibition to be held on May 17-18, is organized by the Sri Lanka Association of Inbound Tour Operators.

It aims to establish a networking platform for small and medium sized service providers within the industry including the smallest sector.

“Homestays have been increasingly popular in areas such as Ella, Down South, Knuckles and Kandy,” SLAITO President, Nishad Wijethunga, said.

In the northern Jaffna peninsula, both domestic and international tourism was helping hotels.

A representative of the Northern Province Tourism Sector said that the Northern Province has 170 hotels, all of which have 60-70 percent occupancy.

Further, domestic airlines from Colombo to Palali and the inter-city train have been popular with local and international visitors, especially Indian tourists. (Colombo/Feb29/2024)

Continue Reading

Sri Lanka rupee closes at 309.50/70 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 309.50/70 to the US dollar Thursday, from 310.00/15 on Wednesday, dealers said.

Bond yields were slightly higher.

A bond maturing on 01.02.2026 closed at 10.50/70 percent down from 10.60/80 percent.

A bond maturing on 15.09.2027 closed at 11.90/12.10 percent from 11.90/12.00 percent.

A bond maturing on 01.07.2028 closed at 12.20/25 percent.

A bond maturing on 15.07.2029 closed at 12.30/45 percent up from 12.20/50 percent.

A bond maturing on 15.05.2030 closed at 12.35/50 percent up from 12.25/40 percent.

A bond maturing on 01.07.2032 closed at 12.55/13.00 percent up from 12.50/90 percent. (Colombo/Feb29/2024)

Continue Reading