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Sunday June 16th, 2024

Sri Lanka’s stocks close lower on Fitch downgrade

ECONOMYNEXT – Sri Lanka shares closed down on Friday as investors pull back on their buying interests as they await reviews from the International Monetary Fund, budget analysis and the Fitch downgrading the financial rating, an analyst said.

The main All Share Price Index was down 0.58 percent or 66.96 points to 11,465.73, while S&P SL20 was up 0.61 percent or 19.91 points to 3,244.51.

“Investors have adopted a wait and see approach on the IMF review and the upcoming budget,” an analyst said.

Fitch Ratings said it has downgraded the rating on several bonds involved in a domestic debt restructuring to default, while the long-term local currency rating was downgraded to ‘Restricted Default’.

“The ratings on its local-currency bonds tendered in the domestic debt exchange have been downgraded to ‘D’ from ‘C’ while its other four local-currency bonds not tendered in the domestic debt exchange have been affirmed at ‘C’,” the rating agency said.

Fitch downgraded Sri Lanka’s foreign currency rating to restricted default when the country defaulted on its sovereign and bilateral creditors last year.

A team from the International Monetary Fund will be in Sri Lanka from September 14 to 27 to conduct the first review of an Extended Fund Facility arrangement, a spokesperson said.

Sri Lanka will have to wait till the International Monetary Fund (IMF) has completed its first review of the ongoing IMF programme for the government to review its own fiscal policy, an official said, noting however that it will not step out of the programme’s framework regardless.

“Let’s wait and see until the review is over. State revenue is not where it was expected to be. There are several reasons for that. Until the end of the review, we cannot make a clear statement on how we can bring state revenue to adequate levels,” said Semasinghe.

The state minister said the IMF review, which began on September 14, will continue for two week.

“Let’s see what we’re told after that.

“Regardless, the government is not prepared to work outside the framework of the IMF programme,” he added.

The review will be conducted on June data.

Sri Lankan government representatives met with a team from the International Monetary Fund who are in the island to review the progress of the conditions for its Extended Fund Facility (EFF).

Officials have said Sri Lanka has over-achieved key IMF quantitative performance criteria though tax revenues, which is an indicative target has fallen short.

Sri Lanka also has met several structural benchmarks, some of which are under World Bank and Asian Development Bank prior actions.

Losers during trade were Ceylinco Insurance, Sampath Bank and Hatton National Bank.

The market generated a turnover of 784 million rupees and the yearly average stands at 2 billion rupees. This is the lowest revenue the market has generated since June 19.

“The turnover is a drop of 43 percent,” an analyst said.

Majority of the revenue came in from the capital good counters as investor sentiment is renewed with factors signaling economic stabilization with paved distances of disinflation and rising consumer demand.

“Interest was seen in the construction sector as the economy stabilizes,” an analyst said.

Sri Lanka’s 12-month consumer price inflation dropped to 4.0 percent with prices falling 0.1 percent within the month, data from the state statistics office showed.

Sri Lanka’s central bank has conducted deflationary open market operations to build reserves and also allowed the exchange rate to appreciate from March 2023.

The CCPI grew only 0.42 percent from September 2022 when the central bank registered a balance of payments surplus.

The banking sector is possessing a wait and see approach as a team from the International Monetary Fund will be in Sri Lanka from September 14 to 27 to conduct the first review of an Extended Fund Facility arrangement, a spokesperson said.

Investors pace around the uncertainties in the financial sector due to debt restructuring and the upcoming IMF review causing a semi evenly split turnover, but sees gains in the consumer sector as demand and overall economic stabilization builds, an analyst said.

The market saw a net foreign inflow of 32 million rupees, while the yearly net foreign inflow was 1.1 billion rupees.

Sri Lanka’s economy has stabilized faster than some other countries that went into crisis recently, State Minister for Finance Shehan Semasinghe said.

“Our economy is on a progressive trajectory,” Semasinghe told parliament last week in a debate to pass a tax linked to domestic debt restructuring.

“Compared to other countries’ whose economies collapsed we have been able to in the shortest time stabilize the economy.

“Other countries are commending our progress.” (Colombo/Sep11/2023)

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Sri Lanka state airport agency swimming in cash after sovereign default

ECONOMYNEXT – State-run Airport and Aviation Services (Sri Lanka) Ltd is swimming in cash after a sovereign default halted debt repayments allowing it to post a profit of 29.7 billion rupees with 10.4 billion rupees in interest income, official data showed.

In April 2022 Sri Lanka declared a sovereign default after printing large volumes of money over more than two years to enforce rate cuts and blowing the biggest hole in the balance of payments in the history of the island’s money printing central bank.

Interest earnings of Airport and Aviation Services also shot up to 10.4 billion rupees in 2023 from 6.1 billion in 2022 and 3.3 billion rupees in 2021 before the sovereign default.

Under the terms of the default or ‘debt suspension’, state agencies like the Airport and Aviation Services, and Sri Lanka Port Authority were also not required to service loans, even if they had the cash to repay loans.

AASL’s finance income shot up in 2023 “mainly because the company has invested surplus cash saved by not servicing the foreign loans obtained by the company due to the temporary debt moratorium policy of the country,” the Finance Ministry said in a report.

Sri Lanka’s rupee and foreign currency interest rates also shot up in 2022 and 2023 as rate cuts enforced by money printing were lifted to clear anchor conflicts.

After inflationary rate cuts kill confidence in a currency triggering capital flight and parallel exchange rates, excessively high rates are needed to kill domestic credit and stabilize the currency.

Countries with such flawed operating frameworks in central banks tend to have chronic high nominal interest rates in any case.

AASL’s rupee revenues went up to 48.8 billion rupees in 2023 from 32.2 billion rupees in 2022 as passenger movements increased to 7.5 million from 5.5 million with a recovery in tourism and local traffic.

Sri Lanka’s currency crisis hit in 2022 just as the island was recovering from Coronavirus pandemic triggering fuel shortages and power cuts as money printing triggered forex shortages.

From 2022 March the rupee collapsed from 200 to 370 levels an attempt to float the rupee was failed by a surrender rule (a type of buy-side pegging which pushes the exchange rate down).

In 2023, after hiking rates to kill credit, the surrender rule was removed, leading to a currency appreciation.

The airport agency also made an exchange gain of 6.1 billion rupees in 2023 against an exchange loss of 10.5 billion rupees in 2022 the rupee appreciated. (Colombo/June16/2024)

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Sri Lanka car import relaxing roadmap given to IMF: State Minister

ECONOMYNEXT – Sri Lanka has submitted a roadmap on relaxing vehicle imports to the International Monetary Fund, State Minister of Finance Ranjith Siymabalapitiya said as the country recovers from the worst currency crises in the history of its central bank.

The import relaxation will allow vehicles for public transport, goods transport, then motor cycles and cars use by private individuals and after that, luxury cars, Minister Siyambalapitiya said.

Luxury cars however attract the highest taxes for each dollar spent on imports.

Economic analysts have characterized vehicle import controls as a ‘cascading policy error’ that follows inflationary rate cuts, which then deprive taxes to the state and triggers more money printing and more forex shortages, requiring even higher corrective interest rates and a contraction of economic activities to save the rupee.

According to the latest IMF report car import controls may have led to revenue losses of 0.7 to 0.9 percent of GDP.

Sri Lanka started controlling imports few years after a central bank was set up in 1950 and also tightened exchange controls progressively, so that macroeconomists using post-1920 spurious monetary doctrines taught at Anglophone universities could print money through various mechanisms to suppress rates.

Sri Lanka is working with the IMF as a guide on many issues and the roadmap was submitted to the agency on June 14, Minister Siyambalapitiya said.

The IMF in an economic report released last week the plan was expected to be submitted by June 15.

Whatever the IMF’s faults, which some wags have called ‘progressive Saltwaterism’, the agency does not advocate import controls as solution to balance of payments problems, despite a Mercantilist fixation with the current account deficit in countries with reserve collecting central banks, analysts say.

Import controls have the same effect as import substation on the balance of payments, which is none, classical economists have pointed out and is now mainly a problem associated with macro economists and economic bureaucrats of so-called basket case countries.

Any pressure on the currency or missed reserves targets in the IMF program has come in the past only if the central bank printed money to suppress rates as credit growth picked up from car imports.

Sri Lanka had 3,000 items under import controls when rates were suppressed with printed money from 2020 to 2022 but eventually ended up with the worst currency crisis triggered by macro economists in the history of the country and eventual external default.

A committee made up of the Department of Trade and Fiscal Policy of the Finance Ministry, the Department of Registration of Motor Vehicles, the Central Bank and two associations representing vehicle imports were appointed to come up with the roadmap, he said. (Colombo/June15/2024)

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Chitrasiri Committee presents draft constitution for Sri Lanka Cricket

ECONOMYNEXT – A draft constitution for Sri Lanka Cricket, the governing body for cricket in the island, prepared by a committee headed by retired Supreme Court judge K T Chitrasiri, was presented to President Ranil Wickremesinghe today (15).

The Sri Lanka team were ignominiously knocked out of the Men’s T20 World Cup tournament this week, sparking renewed criticism of the team and the governing body.

Last November, a cabinet sub-committee was appointed to address challenges faced by Sri Lanka Cricket and provide recommendations after consecutive losses became a hot topic in parliament.

After parliament decided to remove the administrators of the sport, the International Cricket Council (ICC) Board suspended Sri Lanka Cricket’s membership.

Based on the sub-committee’s recommendations in its report, the Cabinet then appointed an expert committee to draft a new constitution for Sri Lanka Cricket.

The committee headed by judge K T Chitrasiri includes President’s Counsel Harsha Amarasekara, Attorney-at-Law Dr Aritha Wickramanayake and Chairman of the Sri Lanka Chamber of Commerce Duminda Hulangamuwa.

Deputy Solicitor General Manohara Jayasinghe, and Shamila Krishanthi, Assistant Draftsman representing the Legal Draftsman’s Department, and Loshini Peiris, Additional Secretary to the President were also on the committee. (Colombo/Jun14/2024)

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