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Sunday June 16th, 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)

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Sri Lanka state airport agency swimming in cash after sovereign default

ECONOMYNEXT – State-run Airport and Aviation Services (Sri Lanka) Ltd is swimming in cash after a sovereign default halted debt repayments allowing it to post a profit of 29.7 billion rupees with 10.4 billion rupees in interest income, official data showed.

In April 2022 Sri Lanka declared a sovereign default after printing large volumes of money over more than two years to enforce rate cuts and blowing the biggest hole in the balance of payments in the history of the island’s money printing central bank.

Interest earnings of Airport and Aviation Services also shot up to 10.4 billion rupees in 2023 from 6.1 billion in 2022 and 3.3 billion rupees in 2021 before the sovereign default.

Under the terms of the default or ‘debt suspension’, state agencies like the Airport and Aviation Services, and Sri Lanka Port Authority were also not required to service loans, even if they had the cash to repay loans.

AASL’s finance income shot up in 2023 “mainly because the company has invested surplus cash saved by not servicing the foreign loans obtained by the company due to the temporary debt moratorium policy of the country,” the Finance Ministry said in a report.

Sri Lanka’s rupee and foreign currency interest rates also shot up in 2022 and 2023 as rate cuts enforced by money printing were lifted to clear anchor conflicts.

After inflationary rate cuts kill confidence in a currency triggering capital flight and parallel exchange rates, excessively high rates are needed to kill domestic credit and stabilize the currency.

Countries with such flawed operating frameworks in central banks tend to have chronic high nominal interest rates in any case.

AASL’s rupee revenues went up to 48.8 billion rupees in 2023 from 32.2 billion rupees in 2022 as passenger movements increased to 7.5 million from 5.5 million with a recovery in tourism and local traffic.

Sri Lanka’s currency crisis hit in 2022 just as the island was recovering from Coronavirus pandemic triggering fuel shortages and power cuts as money printing triggered forex shortages.

From 2022 March the rupee collapsed from 200 to 370 levels an attempt to float the rupee was failed by a surrender rule (a type of buy-side pegging which pushes the exchange rate down).

In 2023, after hiking rates to kill credit, the surrender rule was removed, leading to a currency appreciation.

The airport agency also made an exchange gain of 6.1 billion rupees in 2023 against an exchange loss of 10.5 billion rupees in 2022 the rupee appreciated. (Colombo/June16/2024)

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Sri Lanka car import relaxing roadmap given to IMF: State Minister

ECONOMYNEXT – Sri Lanka has submitted a roadmap on relaxing vehicle imports to the International Monetary Fund, State Minister of Finance Ranjith Siymabalapitiya said as the country recovers from the worst currency crises in the history of its central bank.

The import relaxation will allow vehicles for public transport, goods transport, then motor cycles and cars use by private individuals and after that, luxury cars, Minister Siyambalapitiya said.

Luxury cars however attract the highest taxes for each dollar spent on imports.

Economic analysts have characterized vehicle import controls as a ‘cascading policy error’ that follows inflationary rate cuts, which then deprive taxes to the state and triggers more money printing and more forex shortages, requiring even higher corrective interest rates and a contraction of economic activities to save the rupee.

According to the latest IMF report car import controls may have led to revenue losses of 0.7 to 0.9 percent of GDP.

Sri Lanka started controlling imports few years after a central bank was set up in 1950 and also tightened exchange controls progressively, so that macroeconomists using post-1920 spurious monetary doctrines taught at Anglophone universities could print money through various mechanisms to suppress rates.

Sri Lanka is working with the IMF as a guide on many issues and the roadmap was submitted to the agency on June 14, Minister Siyambalapitiya said.

The IMF in an economic report released last week the plan was expected to be submitted by June 15.

Whatever the IMF’s faults, which some wags have called ‘progressive Saltwaterism’, the agency does not advocate import controls as solution to balance of payments problems, despite a Mercantilist fixation with the current account deficit in countries with reserve collecting central banks, analysts say.

Import controls have the same effect as import substation on the balance of payments, which is none, classical economists have pointed out and is now mainly a problem associated with macro economists and economic bureaucrats of so-called basket case countries.

Any pressure on the currency or missed reserves targets in the IMF program has come in the past only if the central bank printed money to suppress rates as credit growth picked up from car imports.

Sri Lanka had 3,000 items under import controls when rates were suppressed with printed money from 2020 to 2022 but eventually ended up with the worst currency crisis triggered by macro economists in the history of the country and eventual external default.

A committee made up of the Department of Trade and Fiscal Policy of the Finance Ministry, the Department of Registration of Motor Vehicles, the Central Bank and two associations representing vehicle imports were appointed to come up with the roadmap, he said. (Colombo/June15/2024)

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Chitrasiri Committee presents draft constitution for Sri Lanka Cricket

ECONOMYNEXT – A draft constitution for Sri Lanka Cricket, the governing body for cricket in the island, prepared by a committee headed by retired Supreme Court judge K T Chitrasiri, was presented to President Ranil Wickremesinghe today (15).

The Sri Lanka team were ignominiously knocked out of the Men’s T20 World Cup tournament this week, sparking renewed criticism of the team and the governing body.

Last November, a cabinet sub-committee was appointed to address challenges faced by Sri Lanka Cricket and provide recommendations after consecutive losses became a hot topic in parliament.

After parliament decided to remove the administrators of the sport, the International Cricket Council (ICC) Board suspended Sri Lanka Cricket’s membership.

Based on the sub-committee’s recommendations in its report, the Cabinet then appointed an expert committee to draft a new constitution for Sri Lanka Cricket.

The committee headed by judge K T Chitrasiri includes President’s Counsel Harsha Amarasekara, Attorney-at-Law Dr Aritha Wickramanayake and Chairman of the Sri Lanka Chamber of Commerce Duminda Hulangamuwa.

Deputy Solicitor General Manohara Jayasinghe, and Shamila Krishanthi, Assistant Draftsman representing the Legal Draftsman’s Department, and Loshini Peiris, Additional Secretary to the President were also on the committee. (Colombo/Jun14/2024)

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