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Thursday May 23rd, 2024

Sri Lanka’s central bank buys $715mn from fx markets in March

ECONOMYNEXT – Sri Lanka’s central bank has bought 715 million US dollars from forex markets in March 2024, up from a net 239.5 million US dollars in February, taking the total so far this year to 1,199 million dollars, official data show.

Gross official reserves went up by 431 million US dollars in March as debt was repaid from domestic savings.

A central bank is able to collect reserves when domestic credit is moderated by an appropriate interest rate (reducing domestic investments), and the rupees created by dollar purchases are mopped up by central bank securities sales to commercial banks.

The action constitutes a raising of ‘deposits’ by the central bank (a note-issue bank) from the domestic economy and lending it to the US or other reserve currency nations to finance their deficits.

The sale of central bank held securities to banks to mop up dollar generated liquidity is similar to the issue of ‘passbook’ or a fixed deposit certificate to customers of a commercial bank, the sale of a central bank security by an East Asian central bank or the issue of certificate of deposit by a currency-board-like GCC central bank in the recent past.

The commercial banks then end up holding the security and cannot give loans to customers for investment or other credits, leading to a balance of payments surplus.

The central bank had also allowed the exchange rate to appreciate from around 320 to about 298 amid deflationary policy, offsetting recent rises in tax and oil prices in the inflation index and costs of companies.

When the exchange rate appreciates importers have a tendency to cover their bills late.

Meanwhile exporters are under forced sale requirements, which they have protested.

As the currency appreciates, commercial banks also tend to cut their net open forex positions and run negative NOPs, to prevent losses, leading to further sales of dollars.

Sri Lanka operates a so-called flexible exchange rate, an ad hoc pegging arrangement to collect reserves which is neither a consistent hard peg nor a consistent float, which can lead to large swings in the exchange rate in a credit spike, if dollar sales are not made.

Due to its policy rate and narrow policy corridor, the exchange rate has also collapsed in the past, when interest rates are mis-targeted with inflationary open market operations or outright purchase of bonds to target the yield curve.
Analysts have warned that the required market interest rate is determined by domestic credit made up of the private credit demand, budget deficit, SOE credit and the IMF’s reserve target which is essentially a reserve currency country deficit and not the inflation.

Analysts have warned that ‘flexible’ inflation targeting without a clean float is a fundamentally flawed operational framework, as are ‘flexible’ exchange rates, though stability can be maintained as long as private credit is weak and no attempt is made to target potential output.

Mis-targeting has gained momentum in February of the year in past currency crises, with the combined liquidity releases of provisional advances and central bank profits transfers driving up credit, and sometimes in May when April liquidity injections provide room for excess credit by banks, analysts say. (Colombo/Apr11/2024)

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Sri Lanka plans to expand Bingiriya export zone to 1,100 acres

ECONOMYNEXT – Sri Lanka is expanding an export processing zone in Bingiriya in Kurunegala and plans to link the area with Puttalam with roads and other infrastructure, Minister Bandula Gunawardana said.

A task force of ministerial secretaries will be appointed to carry out the tasks speedily, following a cabinet paper submitted by President Ranil Wickremesinghe said.

The Bingiriya zone already has 157 acres and another 282 acres is being developed by the Board of Investment, he said.

Steps would also be taken to acquire 666 acres.

There was no information whose lands would be acquired. (Colombo/May23/2024)

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Sri Lanka has power breakdowns amidst extreme weather

ECONOMYNEXT – The state-owned power utility, the Ceylon Electricity Board has reported over 36,900 breakdowns resulting in power interruptions to more than 300,000 consumers in the last three days due to inclement weather in the island, the power minister said.

“Additional service staff has been assigned to attend the breakdowns and the CEB management & service staff are working 24 hours to restore power to the affected consumers,” Minister of Power and Energy, Kanchana Wijesekera said on social media platform X (twitter).

Wijesekera said consumers could report power interruptions through the CEB hotline 1987, via SMS to 1987 with BD and the electricity consumer number to follow, or use the CEB Care app, or through http://cebcare.ceb.lk.

The South-East monsoon has seen floods, landslides and strong winds do damage to the utility provider’s infrastructure in the last week. (Colombo/May23?2024)

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Sri Lanka President calls for unity, sacrificing for a better tomorrow on Vesak day

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe has recalled a sermon from the Buddha about sacrificing for a better tomorrow, and called for unity to heal and rebuild the country, as Buddhists celebrate Vesak.

Buddhists celebrate Vesak as commemorating the birth, enlightenment and passing away of the Buddha.

“At this challenging moment, we as a nation should cultivate the same great zeal for enlightenment that Buddha exemplified, inspired by his sermon, “Maththasukha parichchaga- passé che vipulan sukhan” – to sacrifice today for a better tomorrow,” President Wickremesinghe said in his Vesak day message.

“We must remember the advice of Lord Buddha, “Sabbattha Sammanaso,” to treat everyone equally and ensure we put it into practice as a country. This is the greatest offering we can present to the Buddha on this Vesak day.

“Regardless of race, religion, caste, or political affiliation, we must all unite to heal and rebuild our country. ”

The full statement is reproduced below:

The Vesak festival is a profoundly sacred day for Buddhists worldwide, commemorating the Buddha’s birth, enlightenment, and passing. Buddhists in Sri Lanka, along with their brethren around the globe, celebrate Vesak with deep devotion. They spend this period engaging in religious observances and venerating the Buddha with fervent devotion.

At this challenging moment, we as a nation should cultivate the same great zeal for enlightenment that Buddha exemplified, inspired by his sermon, “Maththasukha parichchaga- passé che vipulan sukhan” – to sacrifice today for a better tomorrow.

We must remember the advice of Lord Buddha, “Sabbattha Sammanaso,” to treat everyone equally and ensure we put it into practice as a country. This is the greatest offering we can present to the Buddha on this Vesak day. Regardless of race, religion, caste, or political affiliation, we must all unite to heal and rebuild our country. The principles of Lichchavi Raja Dharmaya will guide us in this endeavour.

Let us keep in mind that the primary aim of the Vesak festival is to foster spiritual growth and character development in a world rapidly advancing physically. I wish everyone a blessed Vesak festival.

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