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ECONOMYNEXT – Sri Lanka stocks gained over 1 percent Friday (01), recouping some losses made in the previous session on renewed interest in energy sector firm Lanka IOC, brokers said.

However, concerns over economic political instability remained as the government is yet to address the key issues including reforms.

The main All Share Price Index (ASPI) closed 1.57% or 115.15 points higher at 7,457.48.

“We see a renewed interest in energy sector shares as investors are trying to restructure,” a market analyst said.

“But we don’t think this will be sustainable.”

Lanka IOC gained 8.3 percent to 78.6 rupees a share on Friday.

Lanka IOC has been getting traction among investors since the new fuel price formula is in place and when an electricity formula comes in place, investors believe the sector to move up further,” the analyst said.

Analysts have said the market had a lot of gloomy sentiments as investors didn’t know what to do as the market was under selling pressure with no takers.

On Thursday, IMF said Sri Lanka has made significant progress towards developing a policy package to stabilize the country, however public debt is still assessed to be unsustainable. The global lender is also estimated to have a sharp contraction in the 2022 economic growth.

The rise in T-bill yields also has dampened the sentiment this week. The T-bill yields also rose between 180-312 basis points in the weekly auction on Wednesday.

Government on Monday has declared that it can only provide fuel for essential services including health until July 10 and all non-essential services to work online as the country has run out of fuel, while Power and Energy Minister on Sunday asked the public to use fuel sparingly as there was no fuel shipment scheduled to arrive into Colombo in the foreseeable future.

The Minister said that Sri Lanka’s oil suppliers are wary to supply after the recent downgrades.

The turnover was 1.4 billion rupees, less than a half of this year’s daily average turnover of 3.40 billion rupees.

Market analysts have said investors were heavily feeling the pinch of economic crisis as the country’s fuel bunkers have dried out the island nation was frantically looking for dollars to purchase fuel.

The more liquid S&P SL20 index rose 1.97% or 45.90  points to 2,380.26.

The market in the month of June has lost 9.3% after gaining 6% in May. It lost 23% in April followed by a 14.5% fall in March.

The market has lost 39% so far this year after being one of the world’s best stock markets with an 80% return last year when large volumes of money were printed.

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

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

The gain was led by Ceylinco Insurance, which rose 7.3% to 2.150.0 rupees a share.

Melstacorp rose 6.2% to 37.8 rupees a share, while Sampath Bank closed firmer 2.7% at 31 rupees a share. (Colombo/July 01/2022)

ECONOMYNEXT – Sri Lanka needs 1,285 million US dollar for oil imports in the next three months, of which 500 million will come from an Indian credit line, Energy Minister Udaya Gammanpila said, as the country grappled with forex shortages and global prices went up.

“For the next three months we have forecasted 1,285.5 million US dollars for oil imports,” Energy Minister Udaya Gammanpila said.

“We hope to get 500 million dollars from the credit line from India. We are talking to others we will tell parliament when we finalize them.”

The 500 million dollar credit line to be activated in April is a one year facility at 2.5 percent.

India this month gave consignment of diesel on an appeal by Sri Lanka ahead of the credit line being used officially.

He said oil prices were around 40 to 45 US dollars a barrel in 2020, about 55 to 65 in 2021 are around 90 to 100 million dollars in 2022 so far with Russian invasion of Ukraine pushing prices up, he said.

Brent crude had moved up to 101.40 dollars as he spoke.

As of February 24, Sri Lanka had following stocks of fuel:

Petrol 92 – for 10 days

Petrol 95 -for 40 days

Lanka Auto Diesel 08 days

Super Diesel – 8 days

From a ship that is now being unloaded 5000 metric tonnes of diesel would be given to the Ceylon Electricity Board and 4,200 MT to the Sojitz power plant, which would be enough to run it for six days, he said.

“Some stocks are also coming in the future,” he said.

Each week two to three ship come based on the projected fuel needs of the country, based on which tenders have been floated. However unloading of tankers have been delayed due to forex shortages.

Sri Lanka usually has stocks for 15 to 21 days before the forex crisis, Energy Ministry Secretary K D Olga has said.

Sri Lanka has been struggling to find foreign exchange to pay for oil with liquidity injections being made to keep interest rates down after giving reserves for imports.

When foreign reserves of a pegged central bank (which are savings) are given for imports, an equivalent fall in rupee reserves must take place in commercial banks to keep the economy in balance.

However in a pegged central bank with a policy rates, money is printed an re-inserted to banking system (sterilized reserve sale) preventing a correction in credit, the balance of payments and driving imports and economic activity to an unsustainable level.

Sri Lanka is now trying to get credit lines for fuel, instead of market pricing and offsetting domestic consumption and non-oil imports.

Credit lines (domestic consumption financed by foreign borrowings) will further widen the external current account deficit and national debt.

The Mercantilists who print money or finances budget deficits with foreign borrowings and state enterprises with credit lines then jump up and say there is a current account deficit or a ‘twin deficit’ in a country where private citizens are net savers. (Colombo/Feb25/2022)

ECONOMYNEXT – Sri Lanka plans to remove a forced conversion rule of services exports as part of plans to gradually relax controls imposed in recent months, Central Bank Governor Nandalal Weerasinghe said.

The central bank imposed a series of controls on forcing exporters of goods and services to convert dollars by force and also imposed outward exchange controls as money was printed to keep rates down over the past two years driving up credit and excess demand creating forex exchange shortages.

“In the case of services exports like IT and tourism, we will remove the mandatory conversion requirement,” Central Bank Governor Nandalal Weerasinghe said.

“Goods imports are made through customs. We have no way to track these services. We have been told that some person are not bringing these money in at all because of the forced conversion rule.”

“We want to progressively remove this also.”

The central bank was also planning to relax a rule that required tourists to pay hotels in dollars only.

Governor Weerasinghe immediately slashed a surrender requirement which made banks transfer 50 percent of export and remittances to the central bank for new money, to 25 percent.

Analysts and economists have pointed out that the steep depreciation of the rupee during an attempted float (suspension of convertibility) was due to the surrender requirement which made the regime a peg with ‘strong side convertibility’, a rule that should be use when the exchange rate was appreciating.

Central bank purchases of dollars pushes a peg down.

When a third world intermediate regime central bank prints money, the controls imposed rapidly worsen the crisis. Analysts had pointed at the time that the conversion rules were similar to those imposed by Zimbabwe which was printing excess RTG dollars.

It is not clear to what extend the existing controls fall foul of International Monetary Fund rules on capital flow measures and multiple currency practices.

“We want to progressively remove control step by step,” Governor Weerasinghe said. “For the time being these have been done to stabilize the foreign exchange rate market.”

Governor Weerasinghe said the exchange rate was not being controlled and expatriate workers and other were getting a fair rate now.

Under Governor Weerasinghe policy rates were raised to 14.50 percent from 7.50 in a bid to end the fundamental cause of the currency crisis which is money printed to keep interest rates artificially low.

Treasuries yields have also been allowed to go up, which will drive private savings to the budget deficit instead of to areas like construction and capital goods imports, creating forex shortages for items like medicines.

There have been no major food shortage due to the use of Undiyal payments through open account imports.

Newly appointed Treasury Secretary has also ordered a temporary halt in capital expenditure which will also reduce the deficit, the need for money printing and high rates and construction related imports. (Colombo/Apr30/2022)