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Too late for Sri Lanka currency board, tool to control central bankers, politicians: Wijewardena

ECONOMYNEXT – It is now too late to convert Sri Lanka’s soft-pegged central bank into a credible currency board (hard peg) which brings discipline to politicians and central bankers as too much foreign reserves have been lost, W A Wijewardena, a former Deputy Governor of the agency has said.

“The currency board is the best for a country which has a chaotic monetary and fiscal situation,” Wijewardene said in an online forum hosted by Advocata Institute, a Colombo-based think tank.

“Because the currency board will introduce discipline to political leaders as well as those in the central bank and also the members of the public.”

Credible Mechanism

A currency board is legally barred from buying domestic assets and cannot buy Treasury bills to operate policy rates and will automatically discipline the rate setting monetary board.

It can neither buy Treasury bills to push up excess liquidity nor can it fill liquidity shorts from interventions (sterilize any forex sales).

A currency board also cannot mop up liquidity from bought dollars and prevent interest rates from falling to low levels close to zero (sterilized purchases) and build up large forex reserves.

The currency board rule will bring discipline to a central bank whose rate setting monetary board will no longer be table to delay rate corrections by printing money and boosting imports above foreign receipts, giving various excuses such as that part of the inflation was cost-push (supply constraints).

Because money is not injected, the public cannot import anything more than the inflows of dollars, or remit out in exactly the same way as a country that is dollarized without altering bank rupee reserves and raising interest rates, giving free capital mobility.

Sri Lanka is dollarizing a Colombo Port City area to liberate it from depreciation and exchange controls.

If the budget deficit goes up in a currency board, rates go up, perfectly crowding out private credit, keeping the exchange rate fixed and any failed Treasury bill auctions will signal default clearly, teaching politicians and stimulus-happy bureaucrats a lesson (a hard budget constraint).

Under a currency board default in domestic bond auctions cannot be hidden from the public and translated into currency depreciation and forex shortages without a central bank to buy Treasury bills and create excess rupees.

Without the hardships of high inflation (cost of living) and currency depreciation, calls for subsidies and government support disappear as happened in East Asia.

When the central bank was created in 1950 from a currency board, Sri Lanka had foreign reserves of 11 months and interest rates Treasury bill rates were 1.4 percent.

No reserves

“But right now we cannot go back to a currency board, because the central bank of Sri Lanka has a huge asset base which has not been backed by foreign exchange reserve,” Wijewardene said.

The central bank has acquired domestic assets (Treasury bills) running into a trillion rupees injecting unprecedented volumes of rupee notes (which are zero coupon liabilities) under so-called Modern Monetary Theory over 2020 and 2021.

The soft-peg has lost close to five billion US dollars in forex assets as the extra note issue (excess liquidity) was redeemed against a peg (weak side convertibility undertaking).

There have been outright reserve appropriations also to repay sovereign bonds for which book entry domestic asset purchases were made. (Sri Lanka’s Rs213bn money printing to repay foreign debt: Treasury Secretary explains)

The central bank’s note issue (the monetary base) was 1.07 trillion rupees in June and net foreign assets the equivalent of 306 billion rupees in June. Sri Lanka’s monetary meltdown will accelerate unless quick action is taken: Bellwether

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By July net foreign assets would fall to very low levels analysts have said.

Analysts who closely track the central bank have warned against looming quasi fiscal losses when foreign liabilities exceed assets.

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Sri Lanka’s central bank should guard against bankruptcy as Fed lights commodity fires

A Reserve Handout

To create a credible currency board, some benevolent person will have to give billions of dollars to cover the existing monetary base.

“So if we are to convert Sri Lana’s central bank into a currency board today one thing we have to do is to infuse new dollar balances to central bank holdings,” Wijewardena said.

“That we cannot do unless we are being supported by some foreign country. China will give us 10 billion US dollars and we would be able to move back to a currency board.”

IMF has given a free 800 million dollar reserve asset which can potentially be used to create a currency board, through strictly speaking special drawing rights are not net foreign assets as the SDR holding (assets) is balanced by an SDR allocation (liability).

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IMF allocates new SDR tranche, Sri Lanka to get US$800mn equivalent

To create a currency board at 250 to the US dollar with a 20 percent haircut about 5 billion US dollars would be needed, analysts say.

Wijewardena said from 2001 to 2004, through central bank reforms an attempt was made to mimic a currency board.

Most high performing East Asian nations (other than Hong Kong, Macau, Brunei, which have true currency boards and Singapore which has a modified one with an appreciating peg) operate systems which are tighter than currency board with foreign reserves in excess of reserve money.

Sri Lanka has been battered by a so-called ‘exchange rate flexibility’ advocated by the International Monetary Fund, involving ‘now-you-give-convertibility-now-you-don’t-policy’ unlike credible consistent convertibility that is available through unsterilized interventions of a currency board.

When all else failed in Argentina the IMF had also allowed a currency board rule for unsterilized interventions for what was quaintly called a disorderly market conditions (DMC) outside a ‘non-interventions’ zone in the latest (2018) monetary collapse.

“In the event the currency were to move outside of this zone, the BCRA would have the option (but not a commitment) to announce a competitive auction to either buy or sell up to US$150 million per day,” the IMF said in its 2018 program giving into ‘fear of floating’, soft-peggers are well-known for.

“The central bank is committed to ensuring that all FX purchases/sales are unsterilized, which would result in an expansion/contraction of base money (i.e. base money would grow at a faster/slower rate than the announced monthly targets).” (Colombo/Aug27/2021)

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Sri Lanka discussing giving extra land, water for Chinese oil refinery

ECONOMYNEXT – Sri Lanka is in discussions with China’s Sinopec to give extra land and assure water supplies after the company decided to expand the capacity of a planned oil refinery in Hambantota, Energy Minister Kanchana Wijesekera said.

“There are concerns on how the water supply is going to be provided for the refinery,” Minister Wijesekera told reporters Friday.

The refinery will need more land and also revise conditions in a Board of Investment agreement, he said.

Read more
Sinopec to double capacity of new refinery in Sri Lanka’s Hambantota

Recommendations and decisions from Sri Lanka’s side had already been sent and Sinopec is expected to revert back in May.

“We are hoping to sign the agreement once everyone has agreed,” Wijesekara said.

The principle agreements are expected to be signed by June, he said.

The refinery could sell up to 10 percent of its output in the domestic market.

“There is no commitment by the government to purchase anything,” Minister Wijesekera said. (Colombo/Apr19/2024)

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Sri Lanka rupee closes weaker at 302.00/50 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 302.00/50 to the US dollar in the spot forex market on Friday, down from 301.50/302.00 a day earlier, dealers said.

There was increased demand for dollars after the central bank bought 715 million dollars from forex markets. In the previous two months it was buying on average about 200 million US dollars, leaving market participants and bank in a ‘oversold’ position.

There were some official dollars sales Friday dealers said.

READ Sri Lanka rupee quoted wide to US dollar as peg inconsistencies flare up

Bond yields were broadly steady.

A bond maturing on 15.12.2026 closed at 11.30/40 percent down from 11.35/40 percent.

A bond maturing on 15.09.2027 closed at 11.95/12.05 percent up from 11.90/12.05 percent.

A bond maturing on 15.12.2028 closed stable at 12.15/25 percent.

A bond maturing on 15.09.2029 closed stable at 12.30/40 percent.

A bond maturing on 01.10.2032 closed stable at 12.40/50 percent. (Colombo/Apr19/2024)

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Sri Lanka stocks close down, banks trade down

ECONOMYNEXT – The Colombo Stock Exchange closed down on Friday, data on its site showed.

The broader All Share Index closed down 0.38 percent, or 44.80 points, at 11,753; while the S&P SL20 Index closed down 0.53 percent, or 18.46 points, at 3,456.

Turnover was at 1.4 billion. The diversified financials (Rs366mn) and banks (Rs266mn) sectors continued to see selling pressure.

“This was possibly due to uncertainty around the bond discussions,” market participants said.

With the exception of Sampath Bank Plc (up at 77.50) all other banks traded down in the day. Commercial Bank of Ceylon Plc was down at 104.50, Hatton National Bank Plc was down at 188.50, and DFCC Bank Plc was down at 77.00.

LOLC Finance Plc saw the most trades and closed up at 6.40. Another LOLC company, Browns Investments Plc, also saw high traded volumes and closed up at 5.60.

Softlogic Capital Plc was up at 7.00, and Softlogic Holdings Plc was up at 11.20. A trading suspension imposed on SHL.N0000 was lifted effective today as the company submitted the annual report for the year ended 31st March 2023.

However, shares of the Company will remain in the Watch List “due to Qualified Audit Opinion and Emphasis of matter on going concern in the Independent Auditor’s Report in the Audited Financial Statements for the year ended 31st March 2022.”

Dialog Axiata Plc, which announced its merger with Bharti Airtel Thursday, saw its share price close up at 11.90.

“There was some traction on index heavyweights,” market participants pointed out.

Top contributors to the APSI included Aitken Spence Plc (up at 134.50), Ceylon Tobacco Company Plc (up at 1,245.25, and Lion Brewery (Ceylon) Plc (up at 1,048.50).

There was a net foreign inflow of 5 million. (Colombo/Apr19/2024)

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