Economy

Sri Lanka’s new administration to re-negotiate IMF deal

Sunday December 1, 2019 10:22 pm

ECONOMYNEXT – Sri Lanka’s new administration will re-negotiate an ongoing agreement with the International Monetary Fund, a top official said.

“We would not abrogate it,” Nivard Cabraal, senior economic advisor to the Prime Minister who is also the finance minister said.

“We would only re-negotiate the terms of the agreement to suit the new policy framework.”

The three year agreement is in the final stages.

Sri Lanka’s central bank gets into frequent balance of payments crises and the rupee collapses as it prints money to artificially push down interest rates, while maintaining a peg to collect forex reserves.

Sri Lanka entered into a three year agreement with the International Monetary Fund after the central bank printed money in 2015 and 2016 trying to keep interest rates down, and sterilized interventions over 100 percent to maintain excess liquidity.

Separately the central bank also targeted a real effective exchange rate and an output gap, a variation of so-called ‘full employment’ policies that triggered balance of payments trouble at the Fed and Bank of England in the 1960s and 1970s and stagflation in the real economy.

In 2018, within the agreement, the central bank against printed money to keep rates and triggered two runs on the currency, as there were no ceilings set on domestic assets of the central bank under the agreement, or a bar on sterilization of interventions to restrain the monetary authority, analysts have said.

After printing large volumes of money through open market operations, the central bank then forced the Treasury to place trade controls, new exchange controls and import letters of credit were also slapped, to cover the monetary policy errors.

The current last stage was renewed after some of the trade and exchange restrictions were removed. They were variously deemed prohibited capital flow measures or multiple currency practices.

Amid stagflation in the broader economy from the last currency collapse with growth at 1.6 percent and inflation over 4 percent, Sri Lanka’s new administration has announced tax cuts to boost economic activity. (Colombo/Nov30/2019)

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Economy

Sri Lanka seeks to settle India ACU debt, credit lines over 5-years

Sunday March 26, 2023 9:22 am

ECONOMYNEXT – Sri Lanka has requested India to settle payments due to the country under the Asian Clearing Union mechanism and credit lines given in 2022 over 5 years, Indrajit Coomaraswamy, an advisor the island’s government said.

Sri Lanka is negotiating with India to settle the money over a 5-year period, Coomaraswamy, a former central bank governor told an online forum hosted by the Central Bank.

“Our request from the Indians is to settle it over five years,” he said. “That I think is still in the early stages of negotiation. The same with the one billion line of credit.”

Sri Lanka’s central bank owed the ACU 2.0 billion US dollars to the Asian Clearing Union according to a year end debt statement, issued by the Finance Ministry.

Sri Lanka owned India, 1,621 million dollars according to ACU data by year end, excluding interest.

India has given a 1 billion US dollar credit line to Sri Lanka as well a credit line for petroleum.

Sri Lanka in March 2024 has paid 121 million US dollar out of a 331 million US dollar IMF tranche to settle an Indian credit line.

Indian credits were given after the country defaulted in April 2022 as budget support/import when most other bilateral lenders halted giving money. (Colombo/Mar26/2023)

Bonds & Forex

Sri Lanka coconut auction prices up 1.16-pct

Sunday March 26, 2023 7:26 am

ECONOMYNEXT- Sri Lanka’s coconut auction prices went up by 1.16 percent from a week ago at an auction on Thursday, data showed.

The average price for 1,000 nuts grew to 83,219.45 from 82,260.58 a week earlier at the weekly auction conducted by Sri Lanka’s Coconut Development Authority on March 23.

The highest price was 92,500 rupees for 1,000 nuts up from the previous week’s 90,600 rupees, while the lowest was 76,500 also up from 70,000 rupees.

The auction offered 900,010 coconuts and 583,291 nuts were sold. (Colombo/Mar 26/2023)

Economy

Sri Lanka in talks for billion dollar equivalent Indian rupee swap

Saturday March 25, 2023 6:44 am

ECONOMYNEXT – Sri Lanka is in talks with India for a billion US dollar equivalent Indian rupee central bank swap, to facilitate trade, Indrajit Coomaraswamy, ad advisor to the government said.

“The amount is still uncertain it could be up to the equivalent of a billion US dollars,” Coomaraswamy told an online forum hosted by Sri Lanka’s central bank.

The money will be used to facilate India Sri Lanka trade, he said.

India has been trying to popularize the use of Indian rupees for external trade and also encouraged Sri Lanka banks to set up Indian rupee VOSTRO accounts.

However the first step in popularizing a currency for external trade is to get domestic agents, especially exporters, to accept their own currency for trade, like in the case of the US or EU, analysts say.

India’s billion US dollar credit to Sri Lanka given during the 2022 crisis is settled in Indian rupees (transaction need).

However the Indian government itself has chosen to denominate it in US currency for debt purposes (future value).

In most South Asian nations, receivers of remittances are willing to accept domestic currencies, leading to active VOSTRO account transactions.

Sri Lanka is expected to repay a 400 million US dollar swap with the Reserve Bank of India next year under an International Monetary Fund backed program for external stability and debt re-structuring.

Central bank swap proceeds sold to banks, which are then sterilized with inflationary open market operations, can trigger forex shortages and currency crises, analysts warn.

Sri Lanka went to the International Monetary Fund after two years of inflationary monetary operations by the central bank’s issue department (money printed to suppress interest rates) triggered the biggest currency crisis in its history and external sovereign default.

Sri Lanka had gone to the IMF 16 times with similar external troubles except for the April 2003 extended fund facility under Central Bank Governor A S Jayewardene which was a purely reform-oriented program with the World Bank (PRGF/PRSP) program at a time when he was collecting reserves with deflationary monetary policy and perhaps the lowest inflation since the Bretton Woods collapsed. (Colombo/Mar26/2023)