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Monday March 4th, 2024

Sri Lanka’s central bank collects US$1.8bn from fx markets in 2023

ECONOMYNEXT – Sri Lanka’s central bank has bought 113 million US dollars from forex markets in December 2023, taking the total collected in the year to 1.895 billion US dollars, backed by deflationary policy, official data shows.

The central bank allowed rates to go up from April 2022, in the first step to correcting a balance of payments crisis, triggered by rates cuts enforced with aggressive open market operations involving multiple liquidity tools.

Rate cuts enforced with liquidity injections by a reserve collecting central bank trigger forex shortages, then a rapid loss of confidence as the so-called ‘flexible’ exchange rate regime flips and attempts to float (exchange rate as the first line of defence).

After a massive confidence shock is delivered including credit downgrades, steep rate hikes and an economic contraction to kill credit is needed to restore the confidence in the currency and stabilize the monetary system.

Sri Lanka’s monetary stability was restored around August/September 2023, and the central bank has been able to buy dollars and mop up the liquidity generated by dollar purchases.

In part, the exercise was helped by counterparty limits on bank access to central bank printed money through standing facilities.

In Sri Lanka most banks are addicted to central bank windows, due to long standing easy money practices, and a few foreign banks and a couple of local banks which usually have excess rupee liquidity are net sellers in the interbank forex market, analysts say.

In Sri Lanka standing facilities or intra-day liquidity is not provided at a premium to the policy rate, (UK +2, Vietnam +1) encouraging banks to overtrade and trigger forex shortages and monetary instability, critics say.

Sri Lanka’s central bank this week lifted the counterparty limit, which analysts say may have contributed to end the worst currency crisis triggered by liquidity tools, since the central bank was set up in 1950 allowing aggressive ‘macro-economic policy’ to be implemented by denying monetary stability.

However, in over 2023, amid the monetary stability provided by deflationary policy, the economy has started to recover and interest rates to fall.

Despite the collection of large volumes of reserves by the central bank and private banks which collect even more dollars (export of capital) the economy has started go through the usual cyclical recovery with the central bank also allowing the exchange rate to appreciate.

In the first year of an IMF program, with reserves being collected in the de-leveraging period, the exchange rate is under upward pressure and can allow the exchange rate to appreciate if it wished.

The central bank allowed the rate to appreciate from around 362 to 320-30 levels over 2023 and to around 315 in the first month of 2024.

Analysts had warned that after the end of a 30-year war, the central bank has started to trigger forex shortages in the second year of an IMF program as the economy recovered, by moving back to inflationary policy, in the belief that a reserve collecting central bank can cut rates with liquidity injections.

The IMF also encourages the practice with ‘monetary policy modernization’ by transplanting floating rate style liquidity operations developed in the West to reserve collecting central banks, rejecting classical economic principles, critics say.

Floating rate central banks with a positive inflation target, do not go into forex shortages from inflationary rate cuts, but only price inflation and if rates are mis-targeted long enough, asset price bubbles, especially in property which end in banking crises. (Colombo/Feb9/2024)

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Sri Lanka’s CEB reports Rs61bn profit for 2023 with Dec quarter gains

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Bord has reported a profit of 61.2 billion rupees for the year to December 2023, turning around from a loss of 298 billion last year, with all the profits coming in the last year amid heavy rain and price hike, interim accounts show.

The CEB reported profits of 77.9 billion rupees for the December quarter, compared to a loss of 182 billion rupees last year.

About 94 billion rupees in losses were forex losses, coming from the central bank, which printed money to suppress rates and triggered a steep currency collapse in a failed float with a surrender rule.

CEB revenues rose 55 percent to 156 billion rupees in the December quarter, cost of sales fell 45 percent to 78 billion rupees amid heavy rains, giving a gross profit of 78.2 billion rupees for the quarter.

In the year to December, CEB revenues were 606.6 billion rupees, up 96 percent from 308 billion rupees, while cost of sales rose from 444 billion rupees to 506 billion rupees. Gross profits were 99.6 billion rupees.

At group level, which includes LTL Holdings, profits were 75 billion rupees for the year, with income taxes of 6.3 billion rupees, provided.

CEB consolidated profits were 68.4 billion rupees, with other shareholders of subsidiaries accounting for 7.2 billion rupees.

Equity was 498 billion rupees at company level by December 31, with 126 billion rupee capital contribution as well as profits earned in the last quarter. (Colombo/Mar05/2024)

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Sri Lanka rupee opens at 308.20/50 to the US dollar

Sri Lanka stocks reversed its falling trend and gained for the first time in six sessions on Tuesday closed stronger on Tuesday (21).

ECONOMYNEXT – Sri Lanka’s rupee opened at 308.20/50 to the US dollar Monday, from 308.80/90 on Friday, dealers said.

Bond yields were broadly steady.

A bond maturing on 01.08.2026 was quoted stable at 10.90/11.00 percent.

A bond maturing on 15.09.2027 was quoted at 11.90/12.00 percent from 11.90/12.05 percent.

A bond maturing on 01.07.2028 was quoted at 12.20/30 percent from 12.15/35 percent.

The Colombo Stock Exchange opened up; The All Share was up 0.60 percent at 10,755, and the S&P SL20 was up 1.24 percent at 3,077. (Colombo/Mar4/2024)

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Sri Lanka central bank swaps top $3.2bn by December

ECONOMYNEXT – Sri Lanka’s central bank borrowed US dollars from various counterparties through swap transactions, which had topped 3.2 billion US dollars by December 2024, official data show.

The net short position, including swaps disclosed by the central bank, grew by over almost 1.28 billion US dollars from December 2022 to 3,280 million dollars.

The gross position grew from 2,263 million dollars to 3,280 million US dollars over the year.

The central bank supported some state banks with dollars to cover their dollar exposures, which had since been paid back.

By December reported gross reserves of the central bank was 4,491 million US dollars, against swaps of 3,280 billion US dollars.

Swaps of around 1500 related to the People Bank of China.

Swaps allow a central bank to increase gross reserves, without raising domestic interest rates.

Swaps with domestic counterparties lead to liquidity being injected into money markets, which can be mopped if domestic credit growth is moderate.

At the moment many private banks have large dollar positions invested outside the country, which cannot be used for transactions domestically because of a money monopoly given to macro-economists. (Sri Lanka repays debt or collects reserves of U$5bn via banking system since rate correction)

However unwinding swaps after private credit has picked, or engaging in swaps after private credit has picked up, may lead to money being injected to maintain the policy rate, leading to excess credit by banks and balance of payments deficits and or currency collapses, analysts say.

Central bank swaps in the third quarter of 2018 led to a collapse of the currency under the ‘exchange rate as the first line of defence’ policy peddled to Sri Lanka, critics have said earlier.

Domestic currency proceeds of swaps were the primary ammunition to bust East Asian currencies in 1997-98.

Any depreciation after the swap proceeds have been used for imports (effectively mis-targeting rates) a central bank will run a forex loss.

The PBOC however had put a rule, preventing the use of the swap after gross reserves fell below 3 – months of imports, preventing Sri Lanka from getting into further trouble through the use of official reserves for private imports.

Sri Lanka’s central bank also used borrowings from the Reserve Bank of India, via the Asian Clearing Union to run BOP deficits.

Losses from exposed dollar positions of central banks which have gained ‘independence’ from fiscal rules and parliaments and engaged in macro-economic policy, including the Fed, have led to taxpayers bearing the losses in the end.

Swaps were invented by the Fed in the early 1960s, as it deployed macro-economic policy (printed money for growth) threatening its gold reserves and the Bretton Woods system.

Sri Lanka has other borrowings also, including from the IMF, which has made net foreign assets of the central bank negative. (Colombo/Mar05/2024)

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