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Wednesday June 7th, 2023

Sri Lanka’s freedom of navigation initiative aims for platform to resolve issues: PM

ECONOMYNEXT – Sri Lanka’s freedom of navigation initiative is to create a rules based mechanism where Indian Ocean littoral states and major users can discuss and resolve issues amid a changing world order, Prime Minister Ranil Wickremesinghe said.

"Sri Lanka’s initiative on the freedom of navigation in the Indian Ocean is primarily aimed at maintaining a rules-based order," Prime Minister Wickremesinge said in Ha Noi, Vietnam.

"Our aim is not to draft a new code but initiate a process."

Wickremesinghe was addressing the third Indian Ocean Conference, which is backed by India and has Sri Lanka, Singapore and Bangladesh.

"China’s economic expansion has led to a specific focus on the Indian Ocean," Wickremesinghe said.

"The Indian Ocean sea routes are vital to the economic interests of China.

"The USA has been in the Indian Ocean in Diego Garcia and has been a key stakeholder.

"A free and open Indian Ocean is vital to Japan and its economy. India is the territorial power, with a direct stake in the Indian Ocean."

The US and Japan is pushing for free and open navigation in the ‘Indo-Pacific’ region which runs from the US coast to India.

China is pushing a Belt and Road initiative.  Wickremesinghe says small states bordering the Indian Ocean do not want world powers to dominated them.

"Security and economic challenges arise from both the complementary and competing interests of these large stakeholders as they interact with each other in the Indian Ocean region," he said.

"Littoral states especially  the smaller states, oppose domination of the Indian Ocean by the Great Powers.

"Such states have an important role to play in managing great power competition."

Wickremesinghe said the building of military bases by great and middle powers was taking place in the Indo Pacific region.

Wickremesinghe said existing mechanism do not have the capacity to deal with current developments.

Analysts have also said there is a power vacuum with US President Donald Trump taking a nationalist line which is inward looking.

Meanwhile Wickremesinghe said Sri Lanka has in the past played a role in developing the United Nations Convention on the Law of the Sea (UNCLOS).
Sri Lanka planned to host a track 1.5 conference in Colombo and also a diplomatic conference in 2019 in a bid to speed up the initiative.

"Historical events have demonstrated that Sri Lanka’s location can impact the security not only of the Indian Ocean but also other areas such as South East Asia, the Middle East and even the Pacific," he said.

Sri Lanka has leased a port to China for joint management in Hambantota and has said it will only be used for commercial activities.

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Sri Lanka’s shares slip on profit taking and selling pressure

ECONOMYNEXT – Sri Lanka’s shares closed lower on Wednesday after four consecutive gains in previous sessions spiraled into selling interest and profit taking, an analyst said.

The main All Share Price Index was down 0.28 percent or 24.39 points to 8,722.06, this is the lowest the index has been since May 02, while the most liquid index S&P SL20 was down 0.40 percent or 9.92 points to 2,468.44.

“The market was gaining in the previous sessions and there is selling and profit taking present today, due to continuously being on green,” an analyst said.

In the previous sessions the market was seeing gains, due to lowered policy rates and low inflation stimulating buying interest and driving the sentiment up, an analyst said.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

“There are gradual improvements in the market sentiment, with positive sentiments coming in from lowered policy rates and inflation,” an analyst said.

The market generated foreign inflows of 12 million rupees and received a net foreign inflow of 18 million rupees, due to low share prices and discounted shares followed by a dividend announcement.

The market generated a revenue of 554 million rupees, this is the lowest the turnover has been since May 10, while the daily turnover average was 1 billion rupees. From the total generated revenue, the banking sector contributed 120 million rupees, Diversified Banks contributed 115 million rupees and the Capital Goods Industry generated 78 million rupees.

Top losers during trade were Sampath Bank, Commercial Bank and Aitken Spence. (Colombo/June06/2023)

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Sri Lanka Treasuries yields plunge, 12-month down 318bp

ECONOMYNEXT – Sri Lanka’s Treasuries yields plunged across maturities at Wednesday’s auction with the 12-month yield falling 318 basis points, in one of the biggest one day falls, data from the state debt office showed.

The 3-month yield fell 244 basis points to 23.21 percent.

The 6-mont yield fell 339 basis points to 21.90 percent, along with the 12 months to 19.10 percent.

The short-term yield curve is inverted.

The central bank last week cut its policy rate 250 basis points in a signaling move but is not printing money to enforce the rate cut.

The debt office sold all 140 billion rupees of offered securities. (Colombo/June07/2023)

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Sri Lanka forex reserves rise US$722mn in May 2023

ECONOMYNEXT – Sri Lanka’s foreign reserves grew 722 million US dollars to 3,483 million US dollars in May 2023 from 2,761 million US dollars in April, official data showed amid weak credit and better inflows.

Sri Lanka lost almost all its reserve in over two years as the central bank sold reserves and printed money to keep rates down (sterilized reserves sales) including borrowed dollars from India.

Gross official reserves fell to a low of 1,705 million US dollars in September 2022.

Sri Lanka’s central bank hiked rates in April 2022 to slow credit and also stopped printing money after it ran out of borrowed Asian Clearing Union dollars from India.

Sri Lanka’s gross official reserves are made up of both monetary reserves of the central bank and any balances of the Treasury account from loans or grants it gets.

The central bank’s net foreign reserves are still negative after busting up borrowed reserves to suppress rates. By April (before the collection of reserves in May) the central bank’s net reserves were negative by 3.7 billion US dollars.

In May alone 662 million US dollars were bought from the market, Central Bank Governor Nandalal Weerasinghe said.


No pre-determined level to stop Sri Lanka rupee appreciation: CB Governor

Borrowing dollars through swaps and busting them up, was invented by the US Federal Reserve as it was printing money and breaking the Bretton Woods system in the early 1970s.

Sri Lanka received a 350 million US dollar tranche from the Asian Development Bank and 331 million US dollars from the IMF to the Treasury for budget support.

The loans can be sold to the central bank by the government to generate rupees and spend. However, since credit is weak, not all the inflows go out of the country particularly as the central bank is conducting deflationary open market operations on a net basis.

By allowing the rupee to appreciate unlike in previous episodes of recovery in an IMF program, after a bout of money printing, the central bank is bringing down inflation – in some cases absolute prices – and restoring confidence and easing the ‘pain’ of ‘monetary policy’ or stimulus.


Why is Sri Lanka’s rupee appreciating?

Though exports are falling, tourism revenues are also picking up.

The budget support loans, tourism receipts less the reserve collected will widen the trade deficit. Building foreign reserves involves lending money to the US or other western nations and is similar to repaying foreign debt. (Colombo/June07/2023)

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