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Sunday May 26th, 2024

Sri Lanka’s foreign exchange reserves are still low despite IMF SDR: Moody’s

ECONOMYNEXT – Sri Lanka’s foreign reserves are still low despite an 800 million US dollar special drawing rights allocation from the International Monetary Fund in August, Moody’s, a rating agency said.

“Some modest amount of inflows materialised in August, while Sri Lanka also received an International Monetary Fund Special Drawing Rights allocation of around $800 million,” Moody’s said in a credit update.

“However, such inflows are piecemeal and boost FX reserves only temporarily and marginally given the government’s external repayment schedule. ”

By end August, Sri Lanka’s forex reserves were around 3.0 billion US dollars (Moody’s does not count SDRs or gold as reserves) which were 43 percent down from a year earlier and 600 million dollars down from June.

Sri Lanka’s forex reserves were a credit negative Moody’s which placed the country’s Caa1 rating on review for downgrade said.

Analysts had who had warned against continued liquidity injections by the central bank had said while rating agencies did not understand the liabilities side of central banking and its domestic assets (note issue and loans to the domestic economy) they understood foreign reserves.

When a central bank – which is note-issue banks – lends to the domestic economy creating new bank-notes, they come up for redemption through the credit system and depletes foreign reserves when convertibility is provided.

In order to re-build reserve a central bank must curtail its note issue by selling down domestic assets and curb credit in the domestic banking system.

Borrowing reserves from abroad or the domestic economy through swaps, creates a foreign exchange liability for the bank.

If liquidity is continue to be injected to keep rates low, and convertibility provided either for trade or for loan repayments, they will also become a net liability, analysts have warned.

Moody’s said Sri Lanka had 4-5 billion US dollars of foreign debt repayments each year for the next few years.

The full statement is reproduced bewlo.

Sri Lanka’s foreign exchange reserves are still low, a credit negative

Sri Lanka (Caa1 review for downgrade) published details of its foreign currency (FX) reserves position1, which was nearly $3 billion as of the end of August 2021, 43% lower than at the beginning of the year and around $600 million lower compared to the end of June.

On 10 September, Sri Lanka (Caa1 review for downgrade) published details of its foreign currency (FX) reserves position1, which was nearly $3 billion as of the end of August 2021, 43% lower than at the beginning of the year and around $600 million lower compared to the end of June.

Foreign exchange reserves covered less than two months of imports at the end of August, a credit negative.

The reserves are also well below the government’s annual external debt repayments of around $4-$5 billion through at least 2025.

Coupled with its limited external financing options and the ongoing pandemic-related lockdown weighing on the recovery of non-debt generating inflows, the FX reserves data points to a rising risk of debt default (see exhibit).

Without sizeable external financing that is relatively secure and long term, we expect foreign exchange reserves to continue declining over the next two to three years.

FX reserves adequacy declined sharply over the past year

To shore up FX reserves and gain financing support, the government and the Central Bank of Sri Lanka (CBSL) have tapped projectrelated multilateral loans, official sector bilateral assistance in the form of central bank swaps, commercial bank loans, divestment of some state-owned assets and most recently, calls for a new foreign currency term financing facility.

Some modest amount of inflows materialised in August, while Sri Lanka also received an International Monetary Fund Special Drawing Rights allocation of around $800 million.

However, such inflows are piecemeal and boost FX reserves only temporarily and marginally given the government’s external repayment schedule.

CBSL measures, such as the required sale of a share of all inbound remittances and export proceeds to the central bank, generate additional reserves, while measures restricting imports and outbound remittances and investment help retain some foreign exchange resources in the country.

Although these measures may be effective in the short term, they could weigh on economic activity and deter investment inflows.

Prospects for a swift increase in non-debt generating inflows through international tourism and foreign direct investment (FDI), including the government divesting assets to nonresidents, are further constrained by Sri Lanka’s ongoing lockdown and the slow recovery in international travel.

While the development of the Colombo Port City, new commercial agreements with the government, and the privatisation or divestment of government assets would yield foreign exchange inflows, pandemic-related delays in these projects are likely to weigh on the pace of these FDI inflows. The government recently reached an agreement with New Fortress Energy to invest in a liquefied natural gas terminal, which it expects will be operational by the second half of 2022.

We expect net FDI inflows to average $1 billion in 2021-22, compared to a peak of around $2.2 billion pre-pandemic in 2018.

Recovery in the tourism sector – another key source of non-debt generating inflows – also depends on how quickly the appetite for travel overcomes cautious behaviour.

Sri Lanka has already reopened its borders to fully vaccinated travellers from India (Baa3 negative) without any quarantine requirement.

However, Sri Lanka’s still high new coronavirus cases at around 2,000-3,000 daily and the extension of island-wide lockdown measures, through 21 September currently, may deter tourists.

Current restrictions on public gatherings include a 10 PM-4 AM curfew and limits on operating hours or capacity for businesses such as restaurants and hotels. At its peak, the tourism sector generated $3-$4 billion of net foreign currency receipts in 2018.

Nearly 50% of Sri Lanka’s total population was vaccinated as of 12 September, and authorities aim to inoculate 70% of the population by the end of this year. If effective, the government’s vaccination strategy will support the reopening of the economy and borders in 2022, and has the potential to boost the tourism sector and non-debt generating inflows.

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Sri Lanka power outages from falling trees worsened by unfilled vacancies: CEB union

HEAVY WINDS: Heavy rains and gusting winds have brought down trees on many location in Sri Lanka.

ECONOMYNEXT – Sri Lanka’s power grid has been hit by 300,000 outages as heavy winds brought down trees, restoring supply has been delayed by unfilled vacancies of breakdown staff, a union statement said.

Despite electricity being declared an essential service, vacancies have not been filled, the CEB Engineers Union said.

“In this already challenging situation, the Acting General Manager of CEB issued a circular on May 21, 2024, abolishing several essential service positions, including the Maintenance Electrical Engineer in the Area Engineer Offices, Construction Units, and Distribution Maintenance Units,” the Union said.

“This decision, made without any scientific basis, significantly reduces our capacity to provide adequate services to the public during this emergency.

“On behalf of all the staff of CEB, we express our deep regret for the inconvenience caused to our valued customers.”

High winds had rains have brought down trees across power lines and transformers, the statement said.

In the past few day over 300,000 power outages have been reported nationwide, with some areas experiencing over 30,000 outages within an hour.

“Our limited technical staff at the Ceylon Electricity Board (CEB) are making extraordinary efforts to restore power as quickly as possible,” the union said.

“We deeply regret that due to the high volume of calls, there are times when we are unable to respond to all customer inquiries.

“We kindly ask consumers to support our restoration teams and to report any fallen live electrical wires or devices to the Electricity Board immediately without attempting to handle them.

The union said there were not enough workers to restore power quickly when such a large volume of breakdowns happens.

“We want to clarify that the additional groups mentioned by the minister have not yet been received by the CEB,” the union said.

“Despite the government’s designation of electricity as an essential service, neither the government, the minister in charge, nor the CEB board of directors have taken adequate steps to fill the relevant vacancies or retain current employees.

“We believe they should be held directly responsible for the delays in addressing the power outages due to the shortage of staff.”

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Melco’s Nuwa hotel to open in Sri Lanka in mid-2025

ECONOMYNEXT – A Nuwa branded hotel run by Melco Resorts and Entertainment linked to their gaming operation in Colombo will open in mid 2025, its Sri Lanka partner John Keells Holdings said.

The group’s integrated resort is being re-branded as a ‘City of Dreams’, a brand of Melco.

The resort will have a 687-room Cinnamon Life hotel and the Nuwa hotel described as “ultra-high end”.

“The 113-key exclusive hotel, situated on the top five floors of the integrated resort, will be managed by Melco under its ultra high-end luxury-standard hotel brand ‘Nuwa’, which has presence in Macau and the Philippines,” JKH told shareholders in the annual report.

“Melco’s ultra high-end luxury-standard hotel and casino, together with its global brand and footprint, will strongly complement the MICE, entertainment, shopping, dining and leisure offerings in the ‘City of Dreams Sri Lanka’ integrated resort, establishing it as a one-of-a-kind destination in South Asia and the region.”

Melco is investing 125 million dollars in fitting out its casino.

“The collaboration with Melco, including access to the technical, marketing, branding and loyalty programmes, expertise and governance structures, will be a boost for not only the integrated resort of the Group but a strong show of confidence in the tourism potential of the country,” JKH said.

The Cinnamon Life hotel has already started marketing.

Related Sri Lanka’s Cinnamon Life begins marketing, accepts bookings


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Sri Lanka to find investors by ‘competitive system’ after revoking plantations privatizations

ECONOMYNEXT – Sri Lanka will revoke the privatization of plantation companies that do not pay government dictated wages, by cancelling land leases and find new investors under a ‘competitive system’, State Minister for Finance Ranjith Siyambalapitiya has said.

Sri Lanka privatized the ownership of 22 plantations companies in the 1990s through long term leases after initially giving only management to private firms.

Management companies that made profits (mostly those with more rubber) were given the firms under a valuation and those that made losses (mostly ones with more tea) were sold on the stock market.

The privatized firms then made annual lease payments and paid taxes when profits were made.

In 2024 the government decreed a wage hike announced a mandated wage after President Ranil Wickremesinghe made the announcement in the presence of several politicians representing plantations workers.

The land leases of privatized plantations, which do not pay the mandated wages would be cancelled, Minister Siyambalapitiya was quoted as saying at a ceremony in Deraniyagala.

The re-expropriated plantations would be given to new investors through “special transparency”

The new ‘privatization’ will be done in a ‘competitive process’ taking into account export orientation, worker welfare, infrastructure, new technology, Minister Siyambalapitiya said.

It is not clear whether paying government-dictated wages was a clause in the privatization agreement.

Then President J R Jayewardene put constitutional guarantee against expropriation as the original nationalization of foreign and domestic owned companies were blamed for Sri Lanka becoming a backward nation after getting independence with indicators ‘only behind Japan’ according to many commentators.

However, in 2011 a series of companies were expropriation without recourse to judicial review, again delivering a blow to the country’s investment framework.

Ironically plantations that were privatized in the 1990s were in the original wave of nationalizations.

Minister Bandula Gunawardana said the cabinet approval had been given to set up a committee to examine wage and cancel the leases of plantations that were unable to pay the dictated wages.


Sri Lanka state interference in plantation wages escalates into land grab threat

From the time the firms were privatized unions and the companies had bargained through collective agreements, striking in some cases as macro-economists printed money and triggered high inflation.

Under President Gotabaya, mandating wages through gazettes began in January 2020, and the wage bargaining process was put aside.

Sri Lanka’s macro-economists advising President Rajapaksa the printed money and triggered a collapse of the rupee from 184 to 370 to the US dollar from 2020 to 2020 in the course of targeting ‘potential output’ which was taught by the International Monetary Fund.

In 2024, the current central bank governor had allowed the exchange rate to appreciate to 300 to the US dollar, amid deflationary policy, recouping some of the lost wages of plantations workers.

The plantations have not given an official increase to account for what macro-economists did to the unit of account of their wages. With salaries under ‘wages boards’ from the 2020 through gazettes, neither employees not workers have engaged in the traditional wage negotiations.

The threat to re-exproriate plantations is coming as the government is trying to privatize several state enterprises, including SriLankan Airlines.

It is not clear now the impending reversal of plantations privatization will affect the prices of bids by investors for upcoming privatizations.

The firms were privatized to stop monthly transfers from the Treasury to pay salaries under state ownership. (Colombo/May25/2024)

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