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Sunday December 10th, 2023

Sri Lanka’s BOP deficit creating ability wanes

ECONOMYNEXT – Sri Lanka’s central bank is gradually losing its ability to create balance of payments, after running out reserves and counterparties and foreign central banks no longer willing to loan foreign currency, data show.

Balance of payments deficits are problem associated with soft-pegged central banks which prints money to drive up credit and sells dollars to stop the currency falling when its peg comes under pressure from the newly minted cash.

In the latter stages of a balance of payments crisis when private or state credit picks up, a central bank will intervene and print money to control rates (sterilize the intervention).

Sri Lanka’s central bank ran out of reserves (some of which were borrowed) in April 2022, but was able to continue to intervene with money loaned by the Reserve Bank of India through delayed Asian Clearing Union money.

Sri Lanka’s central bank created the biggest BOP deficits in its history after printing money from 2020 to target an output gap after cutting taxes in the style of UK’s Barber Boom or Prime Minister Liz Trusts stimulus attempts (now abandoned in apparently new found wisdom).

Money printing was taught as macro-economics (John Law garnished with statistical functions) in most UK and US universities after the 1930s with the notable exceptions of London School of Economics and University of Chicago.

Sri Lanka’s central bank created a BOP deficit of 2.3 billion US dollars in 2020, 3.6 billion US dollars in 2021 and 2,986 million US dollars up to July 2022. Up to August the BOP deficit was officially calculated as 3,035 million US dollars.

After creating expanding the BOP deficit by 219 million US dollars in June, and 172 million in July, a 49 million US dollar BOP deficit (as calculated by the central bank) was created in August.

A BOP deficit roughly corresponds to a fall in net international reserves. The BOP deficits from January 2020 to August 2023 totaled 9.3 billion US dollars.

By December 2019 Sri Lanka gross official reserves 7.6 billion US dollars (which includes fiscal balances) but the central bank managed to bust up over 9.3 billion US dollars by borrowing from other central banks through swaps.

The RBI and Bank of Bangladesh had loaned money through swaps for the central bank to intervene and print money to mis-target rates after the intervention.

China fortunately did not allow its swaps to be used for interventions and subsequently mis-target rates by printing money.

Currency crises hit countries where policy makers apparently do not know the difference between a sterilized and unsterilized intervention and there is also no strong doctrinal foundation in classical economics or sound money.

A World Bank survey found that only 2 percent of experts surveyed in the region pointed to monetary policy for monetary instability. (Sri Lanka, South Asia currency crises, World Bank survey in shock revelation.)

Soft-pegs usually float after running out of reserves.

Unlike a soft-pegged central bank (a monetary authority with a flexible exchange rate) a floating exchange rate central bank will not create BOP deficits or forex shortages as it does not intervene in the forex market to give reserves for imports.

Soft-pegs with fixed policy rates were cooked up by US Mercantilists (the policy rate was also accidentally discovered by the Fed in the process of creating roaring 20s bubble which led to the great depression – Sri Lanka, world’s poor suffers from Fed’s accidental discovery) who built the Bretton Woods system of failed pegs.

A central bank which runs out of reserves can still depreciate the currency by printing money, though it large loses the ability create BOP deficits.

Mercantilists have cooked up a regime called flexible inflation targeting where floating rate style open market operations are used to bombard a peg until it collapses and then the policy error is compensated by depreciation.

Soft-pegs that create BOP deficit loses the ability not only to pay for imports (convert domestic currency to US dollars) but also settle debt leading to a borrowing spree which is called ‘bringing finance’ in Sri Lanka.

Singapore’s ex-Prime Minister Lee Kwan Yew called such loans ‘cover up loans’ in the process of explaining the people why the country decided to make unsterilized interventions and not have a policy rate. (Colombo/Oct21/2022)

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ADB USD200mn loan for Sri Lanka economic stabilization efforts

ECONOMYNEXT – The Asian Development Bank (ADB) has approved a US 200 million dollar concessional loan to Sri Lanka to help stabilize the country’s finance sector.

The Financial Sector Stability and Reforms Program comprises two subprograms of IS 200 million dollars each, according to a statement by the ADB.

“The program’s overarching development objective is fully aligned with the country’s strategy of maintaining finance sector stability, while ensuring that banks are well-positioned for eventual recovery,” ADB Country Director for Sri Lanka Takafumi Kadono was quoted as saying in the statement.

“The expected development outcome is a stable financial system providing access to affordable finance for businesses in various sectors of the economy.”

The ADB statement continues:

“Subprogram 1 targets short-term stabilization and crisis management measures that were implemented in 2023, while subprogram 2 is planned to be implemented in 2024 and focuses on structural reforms and long-term actions to restore growth in the banking sector.

The program will help strengthen the stability and governance of the country’s banking sector; improve the banking sector’s asset quality; and deepen sustainable and inclusive finance, particularly for women-led micro, small, and medium-sized enterprises.

According to the International Monetary Fund’s (IMF) latest review, Sri Lanka’s economy is showing tentative signs of stabilization, although a full economic recovery is not yet assured.

The program is a follow-on assistance from ADB’s crisis response under the special policy-based loan that was approved for Sri Lanka in May 2023.

It is aligned with the fourth pillar of the IMF’s Extended Fund Facility provided to Sri Lanka to help the country regain financial stability.

It is also in line with the government’s reform agenda, including strengthening the operational independence of the Central Bank of Sri Lanka (CBSL) and its designation as the country’s macroprudential authority.

In designing this subprogram 1 loan, ADB has maintained close coordination and collaboration with the IMF to design targeted regulatory reforms for the banking sector—including the asset quality review—and with the World Bank on strengthening the deposit insurance scheme.

“The loan is accompanied by a $1 million grant from ADB’s Technical Assistance Special Fund to provide advisory, knowledge, and institutional capacity building for Sri Lanka’s Ministry of Finance and CBSL.”

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Sri Lank in blackout as power grid hit by cascading failure

ECONOMYNEXT – Sri Lanka suffered a blackout as Saturday evening as the state-run Ceylon Electricity Board grid was hit by a cascading power failure.

The cascading failure is believed to have been triggered by the failure of the Kothmale-Biyagama transmission line.

“The Ceylon Electricity Board wishes to inform our customers that due to the failure of Kotmale – Biyagama main transmission line, an island wide power failure has occurred,” CEB Spokesman Noel Priyantha said.

“Step by step restorations are underway and it may take few hours to completely restore the power supply.”

With hydro plants running flat out, a outage of the line tends to create a big imbalance in the demand and supply, leading to tripping of more lines and generators.

Lines can trip due to lightening strikes, or equipment failures.

Sri Lanka last suffered a cascading failure in December 2021, due to the failure of the same transmission line.

RelatedSri Lanka power blackout as grid hit by cascading failure

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Sri Lanka to host regional Food and Agriculture Organization conference

ECONOMYNEXT – Sri Lanka will host the 37th session of the Asia Pacific Regional Conference (APRC) of the United Nations Food and Agriculture Organization (FAO), from February 19-22, 2024 in Colombo.

The Conference will bring together agriculture ministers and officials from 46 countries across the region to discuss challenges in food and agriculture.

“The 37th APRC will provide a vital platform for regional collaboration, benefitting the agricultural landscape, fisheries sector and environment of Sri Lanka,” Minister Mahinda Amaraweera said at a press briefing on Friday (8) to announce the conference.

FAO has had an active presence in Sri Lanka for over 40 years. “FAO has supported the country in the implementation of Good Agricultural Practices (GAP), and the development of the fisheries sector for growth and climate resilience,” Vimlendra Sharan, FAO Representative for Sri Lanka and the Maldives said.

“The APRC conference will be an opportunity to highlight the innovative approaches introduced in partnership with the government.”

By hosting APRC, Sri Lanka hopes to demonstrate the country’s dedication to the growth of sustainable agriculture, and showcase its commitment to sustainable agricultural development.

The APRC agenda will include a forum on agritourism, especially requested by the Sri Lankan government.

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