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Wednesday December 7th, 2022

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.


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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Despite losses, Sri Lanka to resume “park & ride” transport after complaints  

ECONOMYNEXT –  Sri Lanka’s state-run Transport Board will resume its loss-making City Bus service from January 15, 2022 Cabinet Spokesman Bandula Gunawardena said, after the service abruptly discontinued with the state-run firm’s director board citing losses.

The City Bus service was introduced in 2021, under the government of former President Gotabaya Rajapaksa, from Makubura to Pettah and Bambalapitiya.

The service was started to reduce the number of automobiles travelling to and from Colombo and suburbs by providing a comfortable, convenient and safe public bus transportation for passengers and riders who use cars and motorcycles as their means of transportation.

During the time period in which the service was initiated, there were 800 hundred vehicles that would be parked and would use the system, Gunawardena, who is also the Transport Minister, said.

The service was later collapsed due to inconsistencies in scheduling and it was completely stopped after

“Without informing the Secretary or the Minister of the relevant Ministry, the Board of Directors have come to a conclusion that this is loss making route and must be halted,” Gunawardena said.

“The users of the City Bus service brought to our notice and therefore I gave the Secretary to the Ministry of Transport the approval to start the City Bus service from January 15.”

“If we stop all loss making transport services then massive inconveniences will occur to the people in far parts of the island.”

The chairman of the state run Ceylon Transport Board has been asked to handover the resignation letter by the Minister Gunawardana citing that the head has failed to implement a policy decision approved by the government. (Colombo/ Dec 06/2022)

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Sri Lanka may see rates falling next year: President

ECONOMYNEXT – Sri Lanka’s interest rates are high and hurting small businesses in particular but interest rates are required to maintain stability, President Ranil Wickremesinghe said.

“One is, all of you want to know what’s going to happen to the interest rates?,” President Wickremesinghe told an economic policy forum organized by the Ceylon Chamber of Commerce.

“I wish I know. The governor has told me that the inflation has peaked. It’s coming down. You all understandably want some relief with the interest rates to carry business on.”

“I understand that and appreciate the viewpoint. It’s not easy to carry business on with such high interest rates. On the other hand, the Central Bank also has to handle the economy. So maybe sometimes early next year we will have a meeting of minds of both these propositions.”

Sri Lanka’s interest rates are currently at around 30 percent but not because the central bank is keeping it up. The central bank’s overnight policy rate is only 15.5 percent but the requirement to finance the budget deficit and roll over debt is keeping rates up.

Rates are also high due to a flaw in the International Monetary Fund’s debt workout framework where there is no early clarity on a whether or not domestic debt will be re-structured.

After previous currency crises, rates come down after an IMF deal is approved and foreign loans resume and confidence in the currency is re-stabilished following a float.

This time however there has been no clear float, though the external sector is largely stable and foreign funding is delayed until a debt re-structure deal is made.

Sri Lanka’s external troubles usually come because the bureaucrats do not believe market rates are correct when credit demand picks up and mis-uses monetary tools given in 1950 by the parliament to suppress rates, blowing the balance of payments apart.

The result of suppressed rates by the central bank are steep spikes in rates to stop the resulting currency crisis.

A reserve collecting central bank has little or no leeway to control interest rates (monetary policy independence) without creating external troubles, which is generally expressed as the ‘impossible trinity of monetary policy objectives’.

However, it has not prevented officials from trying repeatedly to suppress rates, perhaps expecting different results.

After suppressed rates – supposedly to help businesses – trigger currency crises, the normalization combined with a currency collapse leads to impoverishment of the population.

The impoverishment through depreciation leads to a consumption shock, which also leads to revenue losses in businesses.

The suppressed rates then lead to bad loans.

In the 2020/2022 currency crisis the sovereign default has also led to more problems at banks. Several state enterprises also cannot pay back loans.

“…[T]he bad debt that is being carried by the banks is mainly from the private sector or the government sector,” President Wickremesinghe said.

“Keep the government sector aside. We’re dealing with it. How do you handle it? Look, one of our major areas of are the small and medium industries. You can’t allow them to collapse, but they’re in a bad way.”

Classical economists and analysts have called for new laws to block the ability to central bank to suppress rates in the first place so that currency crises and depreciation does not take place in the first place.

Then politicians like Wickremesinghe do not have to take drastic and unpopular measures to fix crises and there will be stability like in East Asia.

Sri Lanka had stability until 1950 when the central bank was created by abolishing an East Asia style currency board. The currency board kept the country relatively stable through two World Wars and a Great Depression.

In 1948 after the war (WWII) was over “we stood second to Japan” Wickremesinghe said.

“But we started destroying it from the sixties and the seventies,” he said. :We started rebuilding an economy, which was affected by a (civil) war, and thereafter the way we went, is best not described here.”

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Crisis-hit Sri Lanka sees recovery in cruise ship tourism from zero

ECONOMYNEXT – Seventeen cruise ships are scheduled to arrive in Sri Lanka next year with
Queen Mary 2, one of the largest and popular ships, Colombo’s harbor master said, as the island nation is looking for alternative avenues to boost its faltered tourism sector.

The rise is expected to bring thousands of high end tourists with higher spending capacity after two years. The island nation saw a record high 54 ships in 2019, rising from the previous year’s 42, Nimal Silva, Colombo Port Harbor Master said.

“The 2019 was one of the best years and in 2020 there were more than 60 scheduled vessels to
call but with COVID pandemic all hell broke loose,” Silva told EconomyNext.

Fourteen cruise ships are scheduled to call from January-May next year and another three are scheduled to arrive in Colombo in November, when the peak tourism season begins.

Cruise tourism cycle begins in Sri Lanka from October to May with a dip during the monsoon

Sri Lanka welcomed two cruise ships in November after almost two years.

Three ships are scheduled to arrive in December and Azamara Quest, carrying at least 722 tourists, arrived in Colombo on December 3 and is now heading to Hambantota.

On December 18, Le Champion carrying 264 will arrive in Colombo and depart to Mumbai and the third vessel, Silver Spirit will arrive in Colombo on December 23 carrying up to 648 passengers.

There are two scheduled in January, one in February, and four in March next year, according to the harbormaster.

“Next year more ships could schedule, so far these are the confirmed ones now,” he said.

This also generates income for the port and the prices are charged according to the size of the

Silva said the first medium sized-cruise vessel, 229 meters long, generated about 14,000 dollars
for docking in the port for a day.

He said Queen Mary 2, a 325 meter long ship and one of the largest cruise ships in the world, is also
scheduled to call at Colombo in February. It can carry up to 3200 passengers.

Silva said almost all the ships that were scheduled have arrived on the island and therefore, he is
confident all the ships including Queen Mary 2 will arrive in Sri Lanka.

“Only one ship has been canceled thus far. There are no last minute cancellations if there were some they would have informed us by now,” Silva said. (Colombo/Dec07/2022)

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