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Tuesday December 5th, 2023

Sri Lanka would be able to use new IMF funding for budget: CB Governor

ECONOMYNEXT – Sri Lanka would be allowed to use funds from the next International Monetary Fund for budget finance, and not only to boost foreign reserves, Central Bank Governor Nandalal Weerasinghe said.

Sri Lanka has gone to the IMF 16 times in the past after printing money to boost domestic demand and losing foreign reserves.

“In all the earlier programs IMF money was available to the Central Bank for balance of payments purposes,” Governor Weerasinghe told Sri Lanka’s Newsfirst television.

“Those funds were not available to the government to finance the fiscal deficit.

“But this time, because of this special situation that money can be used to finance the fiscal deficit as well.”

IMF disbursements are usually made directly into the central bank’s balance sheet without disturbing domestic reserve money. The money is invested in US securities (effectively the US budget deficit) in the case of a dollar peg.

By the time IMF money comes, the economic activity and credit had been slowed by higher interest rates and a float of the currency is done to end sterilized interventions (money/exchange policy conflicts) and restore monetary stability.

This is the reason why IMF programs work and borrowing or bridging finance only makes the problem worse.

Budget finance usually comes from other development partners such as the World Bank and Asian Development Bank.

Strong reform programs in the past have qualified Sri Lanka for program loans, where disbursements are made when growth-promoting reforms are done.

This time the IMF is expected to give 2.9 billion US dollars over 4 years roughly averaging 750 million US dollars.

“So that is an additional support IMF is giving directly into budget finance by which the government can bring down the domestic borrowing requirement,” Governor Weerasinghe said.

“Now 100 percent of the deficit is financed through domestic borrowings.

“Whereas once we get this IMF money, the government can reduce domestic borrowings. The government can get less debt from the domestic market so that more money would be available for private sector development.”

However IMF funds given for central bank reserves also technically ease pressure on the domestic market, analysts familiar with the IMF theoretical process say.

Foreign reserves, under Net International Reserve Target, are savings taken away from the domestic credit system through a higher interest rate by blocking domestic credit.

An IMF program reverses the process a pegged central bank engages in to create a currency crisis, which is to inject liquidity into a banking system by purchasing Treasury bills, allowing banks to give loans without raising deposits, making outflows more than inflows.

To rebuild reserves typically current inflows are taken away from the domestic credit system by selling down the central bank holdings of Treasury bills into the banking system after floating the currency and re-pegging the currency to allow the central bank to buy dollars.

By making disbursements into the central bank, especially front-loaded disbursements, the sell downs of bills into the banking system can be reduced, creating space for either budget finance or private sector credit.

Instead, foreign reserves can be built over a longer period, including after other external flows also resume with increased confidence.

However, in the current crisis, investors have been spooked over fears that domestic debt would be re-structured exposing a weak link in the current IMF strategy to restore debt sustainability to countries with monetary instability.

Related</b.

Sri Lanka ‘radio silence’ on domestic debt restructuring after IMF deal: CB Governor

Sri Lanka sells only 14-pct of bill auction amid re-structure concerns

Unlike foreign bond investors, investors in domestic bonds had continued to finance the deficit even more than senior creditors like World Bank and Asian Development Bank.

Fears of restructuring have led to higher rates. (Colombo/Sept08/2022-M)

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Sri Lanka rupee closes stronger at 327.40/90 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 327.40/90 to the US dollar on Tuesday, from 328.10/30 the previous day, dealers said.

Bond yields were stable.

A bond maturing on 01.06.2025 closed at 13.60/70 percent from 13.70/14.00 percent.

A bond maturing on 01.08.2026 closed at 13.90/14.00 percent from 13.90/14.10 percent.

A bond maturing on 15.01.2027 closed at 14.00/15 percent from 14.00/14.10 percent.

A bond maturing on 01.07.2028 closed at 14.10/20 percent from 14.20/35 percent.

A bond maturing on 15.05.2030 closed at 14.20/35 percent, from 14.25/45 percent.

A bond maturing on 01.07.2032 closed at 14.10/35 percent, from 14.05/40 percent. (Colombo/Dec5/2023)

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Sri Lanka stocks close down as investor sentiment dips

ECONOMYNEXT – The Colombo Stock Exchange closed down on Tuesday, CSE data showed.

The All Share Price Index was down 0.40 percent, or 43.50 points, at 10,700.09.

The S&P SL20 index was up 0.43 percent, or 13.32 points, at 3,054.41.

Turnover was at 711 million. The capital goods sector contributed 172 million, the food, beverage and tobacco sector contributed 140 million, and banks 113 million of this.

Top positive contributors to the ASPI in the day were John Keells Holdings Plc (up at 193.00), Richard Pieris And Company Plc (up at 19.80), and Nation Lanka Finance Plc, (up at 0.40).

Negative contributors were Commercial Bank of Ceylon Plc (down at 89.70), Sampath Bank Plc (down at 71.00), and Central Finance Company Plc, (down at 106.00). (Colombo/Dec5/2023).

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Sri Lanka plans to reduce number of school grades from 13 to 12

ECONOMYNEXT – The Ministry of Education proposes to reduce the number of school grades from 13 to 12, according to a government information department statement.

“Every child will be given the opportunity to finish school in 17 years through the proposed new education reforms,” education officials were quoted as saying after a discussion on budget allocations.

Under the proposed system, pre-school education will be at the age of 4 years, the primary section between grades 1-5, junior section between grades 6-8, and senior section between grades 9-12.

The General Certificate of Education Ordinary Level Exam (GCE O/L) is proposed to be conducted in grade 10, and the Advanced Level Examination in grade 12.

It has also been decided to reduce the number of mandatory subjects at the GCE O/L Exam from 9 to 7.

Three new subjects, information and communication technology (ICT), technical and professional skills, and religion and values will be made mandatory and included in those 7 subjects. (Colombo/Dec5/2023)

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