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Tuesday August 16th, 2022

Sri Lanka’s JVP economic pillars questioned as forex shortages, default risks worsen

ECONOMYNEXT – Three key policy pillars articulated by the Janatha Vimukthi Peramuna from 2001-2004 and embraced by a mainstream politician Mahinda Rajapaksa’s administration in 2005 are being questioned, as the country runs out of forex reserves amid money printing.

From 2005, Sri Lanka halted privatization, started recruiting tens of thousands of unemployed graduates into the public service every year with lifetime pensions, bloating an already bloated public sector and denying any benefit of a peace dividend to the country.

Sri Lanka also abandoned a price formula for fuel that had helped keep the rupee stable and inflation low from 2001 to 2003 even as global commodity prices went up from the ‘mother of all liquidity bubbles’ fired by the Federal Reserve from 2001.

From 2001 to 2003, state workers fell from 1.164 million to 1.043 million. By 2020, the public sector cadre has grown to 1.58 million with another batch of 53,000 unemployed graduates being shovelled tax money.

Now the country has been downgraded ‘CC’ by Fitch and the central bank has printed so much money that it’s close to having no foreign reserves as its foreign assets are negative.

Privatization

Privatization, which was carried out by then-President R Premadasa administration in 1992 as ‘peoplisation’ with 10 percent of the stock given free to employees and also by the Sri Lanka Freedom Party administration of Chandrika Kumaratunga, was abandoned.

Under the pro-state ideology which was hailed as ‘anti-neoliberal’, an agenda of state interventions, import protection that gave billions to so-called cronies engaging in import substitution at the expense of less affluent classes, emerged, which was also topped with periodic expropriations.

Under anti-privatization not only were state firms expanded despite mounting losses but SriLankan Airlines and Shell Gas, both privatized under Sri Lanka Freedom Party administrations were taken back to the state by then President Mahinda Rajapaksa.

The JVP and statist-nationalists mainstreamed the ideology by describing privatization as ‘selling national assets’ and as the public became more aware of SOE and corruption of political appointees and consultants running them, ‘selling to foreigners’.

The idea was also embraced by a United National Party-led administration from 2015 which failed to privatize SriLankan Airlines, which the JVP did not actively oppose, attempted to de-list Property Development Ltd a unit of state-run Bank of Ceylon, and also failed to attract investors to port or power sectors through build operate transfer deals.

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What went wrong; Sri Lanka’s illiberal economics and unsound money : Bellwether

It however sold part of a Hambantota port to a Chinese state firm.

The current administration is also trying to engage in public-private partnerships and land sales to bring in private investment.

National Liabilities

State enterprises are a burden to the people, Finance Minister Basil Rajapaksa boldly said in the 2022 budget speech.

“There are approximately 300 state-owned enterprises in our country,” Minister Rajapaksa said.

“These enterprises are engaged in the provision of various products and services. The government has invested over Rs. 670 billion in these state-owned enterprises.

“In addition, annually about Rs. 75 billion is spent to maintain these entities. Most of these institutions do not provide returns on the investments made by the government.”

Every year about 30,000 persons retire from the public sector. However, under a strategy pushed by the Janatha Vimukthi Peramuna, unemployed graduates, having learnt at public expense, are given jobs and lifetime pensions at the expense of society.

It was also part of the Rata Perata economic framework of 2005.

“Those detractors who failed to see the wisdom of our policies, will one day thank the UPFA Government for having the foresight to invest in training for the recently recruited 42,000 young graduates,” then Finance Minister Sarath Amunugama said in presenting the 2005 budget.

In 2020, 86 cents of every tax rupee collected went to pay state workers. Despite a pandemic hitting taxpayers, 50,000 unemployed graduates were recruited who would be paid 20 billion rupees in 2021 alone.

But soon after the budget, Minister Rajapaksa said the public service was also difficult for the people to bear.

“The public sector has expanded so rapidly that they have become an unbearable (uhu-lun-ner barry) burden,” Finance Minister Rajapaksa said told reporters soon after the budget.

“There is no need to give them lozenges. We must honestly accept, that this public sector is a burden (ba-ruck) to the country. To give benefits to the public sector we have to take money from the public.”

He said there was one public servant for 113 citizens at the time of Sri Lanka gaining independence from Britain in 1948, but the civil service has expanded and the ratio was now 1 state worker for 13 citizens.

Opposition Samagi Jana Balawegaya jumped on Finance Minister for admitting the truth claiming he was insulting the public servants.

The World Bank Plug

A key policy plank of the JVP was the opposition to formula-based pricing of fuel.

Minister Wimal Weerawansa then in the JVP said it was a World Bank plug when the UNP was formula pricing fuel every month up to 2004.

Unlike food, energy use goes up with income with higher income brackets consuming more.

On November 23, energy Minister Udaya Gammanpila, said Sri Lanka should have a fuel price formula if there was no ‘fuel price stabilization fund’ as promised in President Gotabaya Rajapksa’s manifesto.

“The super-rich of this country own vehicles that do only 3 or 4 kilometres per litre,” he told parliament.

“The weight of this is borne by the value-added tax (VAT) paid by villagers in remote areas who might not have even seen such vehicles. This isn’t fair.”

Sri Lanka Justice Minister Ali Sabri also made similar comments backing a price formula.

Prime Minister Ranil Wickremesinghe’s Regain Sri Lanka strategy in 2001-2004 recovery program came after a massive currency crisis in 2000/2001, which pushed up the national debt to 100 percent of gross domestic product.

Subsdies

The JVP also called for chemical fertilizer subsidies.

Wickremesinghe had complained in 2004 September that he had to rescue an economy that was hit by policies of the so-called ‘pariwasa administration’ in which JVP was also a partner.

“While we were engaged in this arduous task, the JVP went around the country saying that had they been in the government they would have given more benefits to the people,” Wickremesinghe was quoted as saying by Infolanka, a news portal in September 2004.

“They said that the UNP was dancing to the tune of the World Bank and promised to remove the ‘World Bank’ plug to reduce prices of goods at lightning speed. They pledged a salary increase of 70% for public servants.

“Farmers were promised all kinds of fertilizers at a flat rate of Rs. 350. Not only graduates even the Ordinary Level and Advanced Level qualified youths were promised permanent government jobs.

“They categorically said that petroleum prices would not be increased under any circumstances.”

The rupee appreciated to 95 to the US dollar by November 2004 from 98 in March with prudent central bank policy and low inflation. At the time the JVP said people did not feel it (angater danennay na).

Wickremesinghe in a 2015 administration in a so-called 100-day program gave sweeping subsidies.

Critics have said the administration suffered from policy fright and continued illiberal economic policies including price controls, money printing and currency depreciation with predictable results.

Sri Lanka has now come a full circle. The fertilizer subsidy has also been taken off and the country is in the midst of another currency crisis.

The rupee was about 100 to the US dollar at the time and under pressure mostly with money printed for fuel subsidies. About 60 billion rupees was printed in 2004 until the tsunami led to a private credit collapse.

Now the rupee is 200 and counting and in November alone 113 billion rupees were printed mostly to sterilize interventions and maintain a 6.0 percent policy rate. The rupee was 4.70 to the US dollar when a money-printing central bank was set up, creating forex shortages. (Colombo/Jan03/2022)

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Sri Lanka sovereign rating at SD but ISBs downgraded to ‘D’ by S&P

ECONOMYNEXT – Sri Lanka’s sovereign rating remains at Selective Default (SD), but the country’s sovereign bonds were downgraded to ‘D’ after missed interest payments, Standard and Poor’s, a rating agency said.

“The Sri Lanka government remains in default on some foreign currency obligations, including international sovereign bonds (ISBs),” the S&P said.

“We do not expect the government to make the payments within 30 calendar days after their due dates.

“We lowered the ratings on the affected bonds to ‘D’, following missed interest payments due on June 3, June 28, and July 18, and a missed principal payment due July 25.”

Sri Lanka is still paying senior creditors with money coming from deferred payments from the Asian Clearing Union.

Sri Lanka started to borrow heavily in foreign bond markets from 2015 after battering its currency peg with extraordinary liquidity injections under ‘flexible inflation targeting and the country lost the ability to roll-over maturing rupee bonds at gross financing level.

From 2015 to 2019, the country had monetary stability only in 2017 and 2019 as the pegged exchange rate regime was shattered with liquidity injections to target an ‘output gap’.

However the targeting the output gap led to currency crises (balance of payment deficit) and growth fell as stabilization measures were slammed.

From 2020 to 2022 even more aggressive liquidity injections were made and taxes were also cut saying there was a ‘persistent output gap’ until all foreign reserves including borrowed reserves were lost and the the country defaulted in peacetime.

The International Monetary Fund gave technical assistance to Sri Lanka to calculate the output gap and also endorsed ‘flexible inflation targeting’, with overnight repo injections, term repo injections, outright purchase of bond, despite having a reserve collecting peg.

On April 12, 2022 Sri Lanka defaulted despite being at peace.

The full statement is reproduced below:

Sri Lanka Bonds Downgraded To ‘D’ After Missed Payments; Sovereign Ratings Affirmed

Overview

The Sri Lanka government remains in default on some foreign currency obligations, including international sovereign bonds (ISBs).

We do not expect the government to make the payments within 30 calendar days after their due dates.

We lowered the ratings on the affected bonds to ‘D’, following missed interest payments due on June 3, June 28, and July 18, and a missed principal payment due July 25.

We affirmed our ‘SD/SD’ foreign currency and ‘CCC-/C’ local currency ratings on Sri Lanka. The outlook on the long-term local currency rating is negative.

Rating Action

On Aug. 15, 2022, S&P Global Ratings affirmed its ‘SD’ long-term and ‘SD’ short-term foreign currency sovereign ratings on Sri Lanka. At the same time, we affirmed our ‘CCC-‘ long-term and ‘C’ short-term local currency sovereign ratings. The outlook on the long-term local currency rating remains negative.

In addition, we lowered to ‘D’ from ‘CC’ the issue ratings on the following bonds with missed coupon or principal payments:

US$650 million, 6.125% bonds due June 3, 2025.

US$1.0 billion, 6.825% bonds due July 18, 2026.

US$1.0 billion, 5.875% bonds due July 25, 2022.

US$500 million, 6.35% bonds due June 28, 2024.

Our transfer and convertibility assessment at ‘CC’ is unchanged.

Outlook

Our foreign currency rating on Sri Lanka is ‘SD’ (selective default). We do not assign outlooks to ‘SD’ ratings because they express a condition and not a forward-looking opinion of default probability.

The negative outlook on the local currency rating reflects the high risk to commercial debt repayments over the next 12 months in the context of Sri Lanka’s economic, external, and fiscal pressures.

Downside scenario

We could lower the local currency ratings if there are indications of nonpayment or restructuring of Sri Lankan rupee-denominated obligations.

Upside scenario

We could revise the outlook to stable or raise the local currency ratings if we perceive that the likelihood of the government’s local currency debt being excluded from any debt restructuring has increased. This could be the case if, for example, the government receives significant donor funding, which gives it some time to implement immediate and transformative reforms.

We would raise our long-term foreign currency sovereign credit rating upon completion of the government’s bond restructuring. The rating would reflect Sri Lanka’s post-restructuring creditworthiness. Our post-restructuring ratings tend to be in the ‘CCC’ or low ‘B’ categories, depending on the sovereign’s new debt structure and capacity to support that debt.

Rationale

Sri Lanka’s external public debt moratorium prevents payment of interest and principal obligations due on the government’s ISBs. As such, interest payments due June 3, June 28, and July 18 on its ISBs maturing 2024, 2025, and 2026, and the principal payment on its July 25, 2022, ISB, would have been affected. Following the missed payments, and given our expectation that payment will not be made within 30 calendar days of the due date, we have lowered the issue ratings on these bonds to ‘D’ (default).

Overdue payments now include the following bonds:

US$1.0 billion, 5.875% bonds due 2022.

US$1.25 billion, 5.75% bonds due 2023.

US$500 million, 6.35% bonds due 2024.

US$1.5 billion, 6.85% bonds due 2025.

US$650 million, 6.125% bonds due 2025.

US$1.0 billion, 6.825% bonds due 2026.

US$1.5 billion, 6.20% bonds due 2027.

US$1.25 billion, 6.75% bonds due 2028.

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Sri Lanka rupee guidance peg edges up; market sees dull trade in govt securities 

ECONOMYNEXT – Sri Lanka’s rupee guidance peg on interbank spot trading strengthened by seven cents while yields on Treasury bills and bonds remained dull on Monday (15) with only a handful of maturities quoted ahead of the central bank’s monetary policy rates later this week, dealers said.

“There was nothing in the market. It was dull today,” a market dealer said.

The central bank will announce its latest key monetary policy rates on Thursday, August 18.

A bond maturing on 01. 06. 2025 closed at at 27.50/28.50 percent on Monday, slightly down from 27.30/28.30 percent on Friday.

The three-month T-bill closed flat at 26.00/27.00 percent on Monday.

Sri Lanka’s central bank announced a guidance peg for interbank transactions strengthened by 7 cents to 360.92 rupees against the US dollar on Monday from 360.85 rupees.

Data showed that commercial banks offered dollars for telegraphic transfers between 369.70 and 370.00 for small transactions. (Colombo/ Aug 15/2022)

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Sri Lanka stocks rally continues for 12th straight session on political stability hopes 

The main index fell for the 4th consecutive session

ECONOMYNEXT – Sri Lanka stocks gained for the 12th consecutive session on Monday (15) ending at their highest in more than four months pushed by retail shares amid signs of political stability after months of protests, dealers said.

The market generated 5.8 billion rupees in turnover, nearly twice of this year’s average daily turnover of 3.11 billion rupees.

The main All Share Price Index (ASPI) rose 1.82% or 164.04 points to 9,191.52, its highest since March 30. The index has risen 19.6% in the last 12 sessions.

“We are seeing a lot of volatility in the market today due to profit taking in the key shares that gained in the last 11 sessions,” a market analyst said.

“Profit-taking also returned after the CSE (Colombo Stock Exchange) published the last set of June reports that showed some counters having done very while some not so much, therefore, there is a significant reaction for that.”

In the last few sessions, the market was mostly driven by Lanka IOC and the plantation sector.

However, ahead of the fuel price revision, LIOC moved to red.

“There was a bit of profit taking on anticipation of price cuts. However, unless fuel prices are cut sharply, LIOC will continue to move,” the analyst said.

At the start of the month, CPC cut fuel prices by 10 rupees based on the price formula.

Globally, crude oil prices have dropped hence there is strong speculation that fuel prices will be cut further.

Last week, Sri Lanka announced a 75 percent electricity tariff hike.

Investors previously feared the move would drag the market down due to possible higher costs for manufacturing firms.

However, the political stability after four months of protest is seen as the catalyst for the market gain, dealers said.

The government also tabled an interim budget last week, revising the budget presented last year as the country is going through an unprecedented economic crisis amid plans on a four-year IMF loan programme, debt restructuring, fiscal reforms, and dealing with loss-making state-owned enterprises.

Sri Lanka already declared sovereign debt default on April 12 this year and failed to pay its first sovereign debt in May amid a deepening economic crisis which later turned into a political crisis and led to a change in the president, cabinet, and government.

The more liquid S&P SL20 index moved up, closing at 0.82% or 25.28 points stronger at 3,097.30.

Sri Lanka is facing its worst fuel and economic crisis in its post-independence era and the economy is expected to contract 7 percent this year.

The main ASPI gained 18.8 percent in August so far after gaining 5.3 percent in July. It lost 9.3 percent in June, 23 percent in April, and 14.5 percent in March.

The market index has lost 24.8 percent so far this year after being one of the world’s best stock markets with an 80 percent return last year when large volumes of money were printed.

Sri Lanka’s sovereign debt default on April 12 has already led the country to be rated with restricted/selective default rating by rating agencies, which has weighed on investor sentiment.

Net foreign outflow was 117 million rupees on Monday while the total net foreign outflow so far this year is 1.3 billion rupees.

Investors are also concerned over the steep fall of the rupee from 203 to 370 levels so far in 2022.

Ceylinco Insurance which pushed the ASPI, closed 11.9 percent up at 2,143.2 rupees a share. Browns Investment closed 8.5 percent up at 8.9 rupees a share, and John Keells Holdings gained 2.5 percent to 129.7 rupees. (Colombo/Aug15/2022)

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