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ECONOMYNEXT – Sri Lanka’s actions including a float of the currency and taxes on imported items will help the economy stabilize amid global turmoil, Central Bank Governor Nivard Cabraal said, as the rupee fell in an free float exercise.

The rupee closed at 255/265 to the US dollar on March 10, after opening at 240/260 as the currency headed towards a free float. The kerb market rate and the interbank spot market have unified.

There was still no active trading in the spot market.

Sri Lanka is facing high oil prices and the central bank has depleted its reserves.

Cabral has tightened policy rate 100 basis points to 7.50 allowed market rate to go up, and has also called for fuel price hikes as oil prices rocketed in a bubble fired by the Federal Reserve worsened by Russia’s invasion of Ukraine.

This week the government said it was placing controls on some imports.

“Upon our advice the government seems to be reacting positively and that would help steer the economy to calmer waters in this time of unprecedented global challenges,” Cabraal said on March 10.

“By carrying out those functions, we would be able to increase the policy space in order to take a more sustainable approach.”

Cabraal called for higher taxes on 700 imported items, which will boost tax revenues.

However authorities have also placed licenses on many items which critics say leads to corruption as they had done in the past and increases distortions in the economy.

Top economist W A Wijewardena said the float was a step in the right direction but policy rates have to be raised to help the rupee and also cool inflation.

“We have to raise rates to contain the rising inflation in the country,” Wijewardene said.

“But it has a positive effect on the exchange rate. One reason very high demand for imports is the money available. The high aggregate demand is driving imports.”

The central bank as advisor to the government has also called for higher taxes, and a break on non-urgent capital spending which will immediately put break on imports.

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Sri Lanka central bank asks govt to delay capex, raise taxes, sell assets to slow forex crisis

Slowing government capex financed by domestic borrowings will cool the deficit and reduce aggregate demand leaving more forex exchange inflows for items like fuel.

In 2021, investment goods imports including building materials surged to 4.46 billion US dollars from 3.5 billion rupees a year earlier while fuel imports rose to 3.7 billion dollars from 2.5 billion dollars.

The central bank has also called for higher fuel and electricity prices. Oil prices which have been bubbling due to Federal Reserve money printing (Powell Bubble) rose to levels not seen since the Greenspan-Bernanke bubble which collapsed in 2008.

Higher energy prices direct spending power to oil and reduces non-oil consumption allowing total imports to remain the same.

If oil is subsidized by credit it will drive up interest rates and if the policy rate of 7.5 percent is enforced, money will be printed to accommodate subsidy creating further pressure on the rupee.

There are calls to raise rates to help the rupee and also eliminate arbitrage opportunities between the overnight rates and the 3-month bill yield. (Colombo/Mar11/2022)

ECONOMYNEXT – Sri Lanka’s stock index edged down on Wednesday (23) after gaining in three previous sessions amid concerns over the island nation’s economy and mixed sentiment over possible IMF deal, brokers said.

The main All Share Price Index (ASPI) gained 0.31 percent or 32.93 points to close at 10,457.81.

President Gotabaya Rajapaksa has said the country will seek IMF help to face the debt crisis though some of the government officials have raised concerns over adverse impacts of conditions by global lender in the past.

An All Party Conference held on Wednesday assessed the ongoing economic crisis after the rupee has fallen around 45 percent since March 8 while the market saw yields in government’s treasury bills rising to around 12 percent.

Market analysts have said selling pressure is seen in the market due to the rupee deprecation amid rise in the returning rate of government securities.

The day’s turnover was 1.4 billion rupees, nearly a quarter of this year’s average daily turnover of 5.2 billion rupees.

Analysts predict some investors to move into fixed assets with the return on risk free government bonds expected to move above 13 percent and while 5-year maturities expected to rise above 15-percent.

Sri Lanka’s rupee has fallen nearly 40 percent since the devaluation on March 08.

All commodity prices in Sri Lanka are on the rise due to the currency fall. Currency dealers expect more depreciation in the coming days as the central bank has .

S&P SL20 of the most liquid stocks edged up 0.09 percent or 3.38 points to 3,596.69 points.

Rising oil prices, policy rate hikes, a slowing economy, and shortage of dollars, fuel, and cooking gas along with extended power cuts continues to dampen the sentiment.

The market has lost 8 percent so far in March after falling 11 percent in the previous month. Overall the market has lost 14.2 percent so far this year after being one of the world’s best stock markets with an 80 percent return last year.

Foreign investors bucked the trend and bought a net of 21.0 million rupees worth of shares. However, the market has witnessed a total foreign outflow of 2.4 billion rupees so far this year.

Ceylon Tobacco Company, Aitken Spence and LOLC Holdings dragged the main index on Wednesday.

Shares in Ceylon Tobacco Company slipped 2.8 percent to close at 727.75 rupees a share, Aitken Spence ended 3.1 percent lower at 82.40 rupees a share while LOLC Holdings slipped 0.8 percent to close at 785.00 rupees a share. (Colombo/March23/2022)