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ECONOMYNEXT – The International Monetary Fund said it was hoping a political crisis will be resolved to resume discussions on a program as President Gotabaya Rajapaksa and Prime Minister Ranil Wickremesinghe decided to resign after historic protest in Colombo.

“We are closely monitoring the ongoing developments in Sri Lanka,” Peter Breuer, IMF Senior Mission Chief for Sri Lanka, and Masahiro Nozaki, IMF Mission Chief for Sri Lanka said in a statement.

“We hope for a resolution of the current situation that will allow for resumption of our dialogue on an IMF-supported program, while we plan to continue technical discussions with our counterparts in the Ministry of Finance and Central Bank of Sri Lanka.”

The IMF has concluded a round of policy level talk with Prime Minister Ranil Wickremesinghe who is also Finance Minister and there were some fiscal issues to be resolved, while Central Bank Governor Nandalal Weerasinghe said the monetary program targets were wrapped up.

An interim budget was also due in July or August.

On July 09, protestors overran the Presidential palace, his office and also torched Prime Minister Wickremesinghe’s private residence after police special task force squad guarding suddenly attacked a group of journalist covering protestors.

Speaker Mahinda Abeywardena told reporters President Rajapaksa had agreed to step down on July 13 while Prime Minister Wickremesinghe said he will resign as soon as an all party government was ready to take over.

Sri Lanka’s inflation topped 50 percent in June after two years of money printing and an attempted float botched with a surrender requirement which sent the rupee sliding to 360 to the US dollar from 200.

“We are deeply concerned about the impact of the ongoing economic crisis on the people, particularly the poor and vulnerable groups, and reaffirm our commitment to support Sri Lanka at this difficult time, in line with the IMF’s policies,” the IMF statement said.

The IMF will formally agree to a deal until re-structuring discussions with creditors are initiated but a staff level deal was expected around August 2022. (Colombo/July10/2022)

ECONOMYNEXT – Sri Lanka imposed local indefinite police curfew in some areas of capital Colombo and a town near the island nation’s main airport from 2100 hours of Friday, a day ahead of a protest to force President Gotabaya Rajapaksa to resign after his failures to ensure supplies of essentials like fuel, cooking gas, and kerosene oil.

The local police curfew was imposed in the North, South, central Colombo, Mount Lavinia, and Nugegoda in the district of capital Colombo while the same was imposed in Negombo near the island nation’s main airport and Keleniya in the adjoining district of Gampaha.

“People residing in these police divisions should stay inside their houses and it is hereby informed that breaching the curfew rule will be considered as disrupting the law and order and tough actions will be taken against them,” the police said in a statement.

The police announcement came as thousands of people were expected to participate in the protest near President Rajapaksa’s official residence where his movement has been limited since April first week.

The protesters have warned of prolonged and aggressive protests if Rajapaksa does not resign.

Rajapaksa’s wrong economic policies and a chemical fertilizer ban have led the country to an unprecedented economic crisis and a looming food shortage. The protesters have been agitating for the past 3 months across the country demanding Rajapaksa’s resignation.

The economic crisis also has led to shortage of dollars which in turn has resulted in shortage of essential like fuel, cooking gas, kerosene oil, medicines, and some other essential food amid extended power cuts. The government has announced that it could not supply fuel for two weeks through July 10 though the fuel shipment arrivals show the shortage will not end in the foreseeable future.

The prolonged protests saw the resignation of cabinet twice, resignation of prime minister Mahinda Rajapaksa, former central bank governor Ajith Nivard Cabraal, former finance minister Basil Rajapaksa from the legislator post, and resignation of former treasury secretary S R Attygala.

Despite the curfew, the protesters said they will continue the agitation on Saturday as planned.

“Curfew won’t stop us. This is Gotabaya’s old idealogy, last time also we came to the streets. He can expect the same tomorrow,” Nipun Tharaka, a protester told Economy Next.

“We aren’t scared of their gunshots, tear gas and water canons, hit us or kill us. We are ready. We came to the protest with a mindset to sacrifice ourselves and that hasn’t changed, we’re ready.”

W.P Harin, 26 said he was ready to be killed if Rajapaksa deployed military and give shooting order.

“We are not scared. They have tear gassed us more than 5 times in the last 100 days. I got attacked by Mahinda (Rajapaksa’s) supporters and police arrested me for engaging in protests, but still I continue our fight,” he said.

Legal experts and opposition legislators challenged the police curfew order.

“There’s no law in Sri Lanka that provides for or allows imposition of anything called a “police curfew”,” Viran Corea, a lawyer tweeted.

“Any action to prohibit the freedom of movement and thereby the right to peaceful protest on such a non-existent basis is illegal and a denial of citizens’ fundamental rights.” (Colombo/July 08/2022)

ECONOMYNEXT – Sri Lanka’s economic and political crises are worsening with the currency having collapsed steeply and continued money printing for various purposes creating yet more forex shortages.

The country, which after a 26-year war was expected to follow the development trajectory of Singapore or Dubai due to its geographical location, but with a money printing central bank with aggressive open market operations instead of a currency board like agencies like in Singapore or Dubai, the country now finding it hard to raise a few million dollars to pay for its next fuel shipment.

There are long queues for fuel, cooking gas, and kerosene. People have cut down their food intake and changed their food habits, because everything is expensive. Many people are compelled to risk their lives and commute to work clinging to any available railing or door handle of tightly packed buses and trains as ongoing fuel shortages adversely affect public transport. More than a dozen people have died while waiting in fuel queues.

Daily power cuts continue and people are facing malnutrition. An ambulance service – usually available islandwide for free – said this week that it’s operation has been hit by the fuel crisis, even as people complain of medicine shortages as forex shortages and price controls remain.

Schools and public offices also remain closed as the unprecedented energy crisis deepens.

Despite all this suffering by the people, friendly countries and governments which have a strategic interest in the island nation have chosen to adopt a wait-and-see approach. Most of them have said they will come once the country has secured a deal from the International Monetary Fund (IMF).

Some countries have given financial assistance to buy medicines and food, and India has given money to buy oil and other goods.

Government officials who are aware of discussions the government leaders had with the United States, countries from the European Union, India, China, Japan, and Middle Eastern countries – either for some loan or fuel credit or investments – say the responses have not been encouraging.

With the International Monetary Fund saying that the country’s debt is unsustainable, multilateral agencies’ hands are tied. Western governments and Japan will also not fund a country whose debt is unsustainable and get the country into more trouble.

An IMF program will usually control the central bank’s money printing and restore economic stability through a monetary program and will also try to reduce the deficit and contain a minimum of economic reforms and liberalizations to help the country grow.

The US, particularly after the winding down of the Economic Co-operation Administration (the Marshall Plan Agency) has preferred to work through the World Bank and IMF which has policy clout in recipient countries through formal treaties and USAID now mostly gives grants not debt.

The IMF through its membership with the fiscal agency – usually the central bank – and the finance ministry, is able to devise and implement a wide-ranging macro-fiscal plan, which individual counties have no authority or skills to do.

Through the monetary targets in an IMF program, the agency is able to curtail domestic credit, stop forex shortages by reducing outflows, restore a working pegged regime to start re-building reserves, restoring the ability to repay any new debt and also re-structured debt for which relief has been given.

An IMF program therefore gives confidence to both private lenders and official creditors to lend again.

Diplomats from Asia and the West along with higher-level government officials and Sri Lankan diplomats say many countries have lost their “trust and confidence” in Sri Lanka.

Following are the key reasons they say why other countries are reluctant to help crisis-hit Sri Lanka while forex shortages are still persisting and making imports like oil difficult.

Bankruptcy: For the first time in its history, Sri Lanka declared sovereign debt default on April 12, announcing that it was suspending the repayment of all the foreign loans. Many countries worry about the island nation’s repayment capability in the future. According to Prime Minister Ranil Wickremesinghe’s parliament speech on Tuesday July 05, Sri Lanka has to repay 28.6 billion dollars in debt from June this year to end 2027.

“We are now participating in the negotiations as a bankrupt country. Therefore, we have to face a more difficult and complicated situation than previous negotiations,” Prime Minister Wickremeinghe, who is also the Finance Minister, admitted in his parliament address on Tuesday.

“Once a staff-level agreement is reached, this will be submitted to the IMF Board of Directors for approval. But due to the state of bankruptcy our country is in, we have to submit a plan on our debt sustainability to them separately. Only when they are satisfied with that plan can we reach an agreement at the staff level. This is not a straightforward process.”

The government has earlier said it expected an IMF staff level agreement by June – the IMF itself did not say so – and it is now expected in August.

Sri Lanka is hoping to convene a donor meeting with India, Japan and China, in line with the staff level agreement, but it is not clear whether it will be enough for other countries to start lending in a big way.

India, which is the only country that generously helped Sri Lanka with a 1 billion dollar credit line in the last three months, has also asked Sri Lanka to seek the IMF bailout for a sustainable recovery and has not yet extended their credit lines despite President Gotabaya Rajapaksa’s administration asking for another 1 billion dollars for fuel and other purchases.

Corruption: The IMF, in its statement after initial talks in Sri Lanka ended on June 30, included mitigating corruption as one of the challenges that needs to be addressed.

“Other challenges that need addressing include containing rising levels of inflation, addressing the severe balance of payments pressures, reducing corruption vulnerabilities and embarking on growth-enhancing reforms,” the IMF said in a statement.

Diplomats and senior government officials have told EconomyNext that corruption has been a key reason for lack of foreign investment in Sri Lanka, as well as economic instability and policy uncertainty.

In one instance in 2012, the final agreement for a 1 billion dollar investment was ready to be signed between the governments of Sri Lanka and Qatar during an official visit of the Emir of the State of Qatar Sheikh Hamad Bin Khalifa.

However, one prominent minister of that government wanted to delay the investment due to some concerns over the return. It came to light that the minister had wanted to negotiate for some changes in the finalised agreement. Qatar later abandoned the project. This murky past still has an impact on the diplomatic relations between the two nations.

Government officials say corruption is so deeply ingrained in Sri Lanka that clean politicians and officials are seen as abnormal. From the office clerk to the department head, people including foreigners are expected to give some “incentives” to speed up the processes, a senior government official told EconomyNext.

“The IMF has raised the corruption issue for the first time. Eliminating corruption means the country needs complete reform in police and the judiciary,” the official said.

“If the IMF is going to insist on this, then its loan programme is going to get delayed because most bureaucrats in the public service do not want this as they are the most corrupt.”

The United States Senate Foreign Relations Committee last week said that any IMF agreement with Sri Lanka must be contingent on independence of the Central Bank of Sri Lanka, strong anti-corruption measures, and promotion of the rule of law.

“Without these critical reforms, Sri Lanka could suffer further economic mismanagement and uncontrollable debt,” the U.S Senate Foreign Relations Committee tweeted, responding to the IMF statement.

Any @IMFNews agreement with #SriLanka must be contingent on @CBSL independence, strong anti-corruption measures & promotion of the rule of law. Without these critical reforms, Sri Lanka could suffer further economic mismanagement & uncontrollable debt. https://t.co/oMdT7QIwZP

— Senate Foreign Relations Committee (@SFRCdems) July 1, 2022

“Most of the countries know that all their efforts will be in vain if Sri Lanka does not eliminate corruption, and this is the reason the IMF and other countries have raised concern on corruption,” the senior government official said speaking to EconomyNext.

Diplomatic Blunders: Sri Lanka’s diplomatic blunders in the past two decades are hurting its chances of getting help from other countries. The best example is the relations with Qatar. Apart from reversing the 1 billion dollar investment deal at the eleventh hour, refusal to stop forced cremation and accusing the Qatar Charity of funding Islamic terrorism in Sri Lanka led the booming Middle Eastern country to hide behind the IMF when Power and Energy Minister Kanchana Wijesekera went to ask for fuel credit.

“Met with the Deputy Director General of the Qatar Fund for Development. Discussed possible Credit Line facility for Petroleum and Gas supply. Was informed that funds have been allocated for medical supplies and will consider the request for a credit facility and support the IMF program,” Wijesekera tweeted after his meeting with a Qatar Fund official.

Met with Deputy Director General of the Qatar Fund for Development. Discussed possible Credit Line facility for Petrolium and Gas supply. Was informed that funds has been allocated for medical supplies and will consider the request for a credit facility n support the IMF program. pic.twitter.com/tGy82y10Cs

— Kanchana Wijesekera (@kanchana_wij) June 28, 2022

He also met officials from the Qatar Charity and said that he “conveyed the message that the Defence Ministry has informed the Attorney General of its decision to lift the ban” imposed in 2019.

Met the Officials of the Qatar Charity yesterday. Conveyed the message that the Defense Ministry has informed the Attorney General its decision to lift the ban on the fund which was imposed in 2019. Discussed the Charity’s work in SL and globally. pic.twitter.com/tHzv7HduLV

— Kanchana Wijesekera (@kanchana_wij) June 30, 2022

A foreign ministry official who had served in the region said Middle Eastern countries work on trust.

“We have now broken that trust and nobody believes us when we request them for help in desperation,” the official said, asking not to be named.

In other instances, former president Maithripala Sirisena suspended all Chinese projects in 2015 after India and the US indirectly backed him at the presidential election against Mahinda Rajapaksa.

Incumbent President Gotabaya Rajapaksa who was seen as pro-China, unilaterally cancelled a 500 million dollar East Container Terminal (ECT) project signed with Japan and India and a 1.8 billion dollar Japanese Light Rail Transit (LRT) project, whose work had already begun.

President Rajapaksa also cancelled a 480 million dollar grant from the US-based Millennium Challenge Corporation (MCC), withdrew renewable energy projects awarded to a Chinese company through competitive bidding, and antagonised the United Kingdom, Canada, and European nations over a probe by the United Nations on alleged past human rights violations.

He also offended Muslim nations by his government’s non-scientific forced cremation policy of COVID-19 victims, followed by Christian nation after delaying justice for the victims of the 2019 Easter Sunday attack.

“One country informally said it will not help until Rajapaksas are in power,” a former cabinet minister in the ruling Sri Lanka Podujana Peramuna (SLPP).

“Some countries feel they (the Rajapaksas) are arrogant and egoistic.”

This week, President Rajapaksa spoke to Russian leader Vladimir Putin asking for fuel credit, a month after his government was involved in a diplomatic spat with Moscow by detaining a Russian Aeroflot flight through a court order.

Government officials say President Rajapaksa has also been giving in a lot to India, including the hand over of a part of the Trincomalee oil tank farm and the awarding of a lucrative wind power energy project to India’s Adani group whose owner is a close ally of India’s ruling Bharatiya Janata Party (BJP).

In bilateral relations, Sri Lanka has cancelled several projects with other governments and countries citing various reasons. It has also been carried away by other countries with vested interests.

Under a looming global recession, some foreign countries are reluctant to pump money and resources into Sri Lanka for nothing.

Stability: Many countries have raised concerns over political stability in Sri Lanka amid an uneasy peace between President Rajapaksa and Prime Minister Ranil Wickremesinghe.

Wickremesinghe, a solo member who entered the parliament via a bonus seat, has to depend on the Sri Lanka Podujana Party of President Gotabaya Rajapaksa. The Rajapaksas have retained their majority, thanks in part to a divided opposition.

Parliament cannot be dissolved by the president at lease until February 16, 2023, as per the constitution. This means the existing parliament has to pass through all the reforms the IMF wants while there is a risk of  parliament turning down reform proposals.

Political stability is one of the key factors needed to implement an IMF deal which may require hard reforms.

Sri Lanka does not have the political stability the world wants and officials say the president could change the prime minister and ministers as and when he wants to. There is however broad support from the opposition Samagi Jana Balawegaya for an IMF program, which they have been calling for a long time.

Officials close to Wickremesinghe said the current prime minister could be changed at any given moment as he has given some space for the Rajapaksas to regroup though not to expected levels.

Nobody wants to invest in a nation that is going to get destroyed due to political instability, the officials said.

Past Experience: IMF programs have been victims of political changes in the past. The last programme approved under Wickremesinghe as prime minister in 2016 was suspended after President Rajapaksa came into power.

Not only was the program not completed but key tax reforms were completely reversed in a single day in December 2019, in a move that was unusual even for Sri Lanka.

Sri Lanka has failed to contain the budget deficit repeatedly in the past, breaking its own Fiscal Management Responsibility Law and changing its goal posts.

Sri Lanka is going to the IMF for the 17th time. Some critics have blamed the central bank which operates a permanently depreciating ‘flexible exchange’ rate for high inflation and balance of payments troubles.

But other countries with similar central banks, built by the US in the style of Argentina’s central bank have gone to the IMF 20 times or more.

The Philippines’ central bank, which was built by John Exter, the same US ‘money doctor’ as Sri Lanka along with fellow Fed official David Grove has gone to the IMF 23 times as its ‘flexible exchange rate’ with extensive money printing powers, collapsed.

El Salvador (Henry Wallich and John Adler) went to the IMF 22 times before it dollarized. Ecuador (David Grove) also went to the IMF 22 times before it dollarized.

Korea’s central bank built by the Fed official Arthur Bloomfield lasted only 7 years before it collapsed along with the Hwan currency triggering starvation had gone to the IMF 17 times including in the second re-incarnation.

Mexico, where Argentina central bank founder Raul Prebisch worked for a time, had gone to the IMF 18 times.

Latin American and Caribbean nations with central banks set up or modified by the US with more aggressive money printing powers, were original IMF members in 1945 and played a key part in its formation and became its top customers.

Hotlinks:

The Latin American Origins of Bretton Woods – Forgotten Foundations of Bretton Woods: International Development and the Making of the Postwar Order

World Bank link – Bretton Woods: 75 Years of Solidarity with Latin America and the Caribbean

Argentina itself, the original sterilizing central bank made into a flexible exchange rate, and probably IMF’s top customer, has gone to the Fund 22 times. Its latest program involves a 1000 percent of its quota.  (Colombo/July 08/2022)

ECONOMYNEXT – Sri Lanka’s influential Buddhist monks from three chapters started starve to death protest in Colombo on Thursday, demanding the government and President Gotabaya Rajapaksa to step down after series of failures.

ECONOMYNEXT – The World Food Programme (WFP) has commenced a programme to provide emergency food, nutrition, and school meals until December for three million people in cash-strapped Sri Lanka, a WFP report said.

The latest situation report said about three in 10 households – which comes to 6.26 million people – are food insecure, out of which 65,600 are severely food insecure, following shortages and skyrocketing food inflation.

“WFP is responding to the ongoing crisis, starting in the capital city of Colombo. It plans to support 3 million vulnerable people of Sri Lanka from June through December 2022.”

The programme prioritises “families who are unable to purchase increasingly expensive food, particularly those with children under five, pregnant and lactating women, and persons with disabilities.”

The support extended will be delivered through in-kind food, cash-based transfers, school meals, and nutritional support.

The report further said inflation of food prices in Sri Lanka for June was 57.4%, the highest rate since 1954.

As prices shoot up, due to Sri Lanka’s fuel crisis and fertilizer crisis leaving aisles and racks barren in groceries, households have deviated to employing food-based coping strategies such as eating less preferred and less nutritious food, and reducing food intake, the report said.

“The WFP anticipates that even more people will turn to these coping strategies as the crisis deepens.”

The WFP has reached to about 2,100 pregnant women, 88 percent of its initially targeted 2,375 beneficiaries in Colombo.

“The pregnant women receive three vouchers with a combined value of 15,000 rupees (approximately 40 US dollars and roughly half the cost of a nutritious diet for a family of four for a month) to supplement the family’s ability to purchase nutritious food and other necessities.”

The organisation is also working hand in hand with the government and has agreed to support one million schoolchildren aged between five to 10 with school meals starting from October 2022. This measure has been implemented towards vulnerable schools, where the Government’s national school meals programme has been halted due to budget constraints.

“WFP has purchased iron-fortified rice, pulses, oil and commodities. These are expected to arrive in August,” the statement outlined.

The WFP is in need of a funding requirement of 63 million dollars for the next five months starting July till December 2022. Thus far, the organisation has received 18.14 million dollars from the governments of Australia, Japan, and New Zealand, which represents 28 percent of its emergency appeal for 63 million dollars. (Colombo/Jul07/2022)

ECONOMYNEXT – Sri Lanka President Gotabaya Rajapaksa on Wednesday called Russian leader Vladimir Putin and requested for fuel credit after a recent diplomatic spat between the two nations.

“Had a very productive telecon with the Russia President, Vladimir Putin. While thanking him for all the support extended by his government to overcome the challenges of the past, I requested an offer of credit support to import fuel to Sri Lanka in defeating the current economic challenges,” President Rajapaksa tweeted.

“Further, I humbly made A request to restart @Aeroflot_World operations in Sri Lanka. We unanimously agreed that strengthening bilateral relations in sectors such as tourism, trade & culture was paramount in reinforcing the friendship our two nations share.”

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Had a very productive telecon with the #Russia President, Vladimir Putin. While thanking him for all the support extended by his gvt to overcome the challenges of the past, I requested an offer of credit support to import fuel to #lka in defeating the current econ challenges.

— Gotabaya Rajapaksa (@GotabayaR) July 6, 2022

President’s call came after Sri Lanka’s action on detaining Russian aircraft Aeroflot in Colombo early in June had angered Russia, which later has threatened to halt bilateral trade and flight services to Sri Lanka, government officials have said.

Russia is one of the top buyers of Sri Lankan tea, the country’s top agricultural commodity export which fetches around $1.5 billion export revenue.

Sri Lanka also has been in the process to get Russian crude oil to manage the fuel crisis in the island nation. Thousands of motorists wait in queues for weeks to obtain limited fuel stocks in Sri Lanka as it has run out of dollars to import fuel.

Sri Lanka before April had 90-day and 180-day fuel credits to purchase fuel. The state-run fuel retailer Ceylon Petroleum Corporation has to pay only after the agreed grace period.

However, since Sri Lanka declared sovereign debt default on April 12, many oil firms are reluctant to extend credit to Sri Lanka amid foreign banks have rejecting to be the counterpart to open letter of credit for Sri Lankan buyers.

As a result, the $84.5 billion economy is forced to pay the money upfront when ordering the fuel shipments, the power and energy ministry officials say.

Sri Lanka managed limited fuel stocks from a $700 million credit line from India which exhausted with the last shipment on June 16.

Sri Lanka’s efforts to secure fuel credits from the Middle Eastern countries have failed as some countries have said they will help only after an IMF deal is signed.

Mahindananda Aluthgamage, who is a presidential advisor now, last week said President Rajapaksa called Putin last week without giving much details.

Related: Sri Lanka President calls Russia’s Putin, to visit UAE to seek fuel – Aluthgamage

The Aeroflot flight was detained following a court order obtained by Celestial Aviation Trading 10 Limited of Ireland, the owner of the aircraft, against Aeroflot in a Colombo court, over a lease dispute.

Russia has sought an assurance from the Sri Lankan government of not repeating the diplomatic spat it followed including the legal action after grounding an aircraft operated by Russia’s Aeroflot in Colombo, former president Maithripala Sirisena told the parliament this week.

Related: To resume flights, Russia has sought SL assurance of not repeating Aeroflot action-Sirisena

Government officials are divided on the way Aeroflot issue was handled. Some say the government should have sought diplomatic channels while others say it was a legal issue hence the way it was handled was appropriate.

On 2 June 2022, the Commercial High Court of the Western Province issued an enjoining order on the Aeroflot flight restraining it from taking off from Sri Lanka’s main airport near Colombo.

Later the Sri Lankan Court suspended an order preventing the Aeroflot flight from leaving Sri Lanka. The order was suspended after the Colombo Commercial High Court considered a motion filed by the Attorney General.

The Airbus A330-343 operated by Russian state-owned airline Aeroflot was denied permission to fly to Moscow as scheduled on June 2nd amid a legal dispute with a leasing company. The flight had more than 200 passengers onboard. (Colombo/July 06/2022)

ECONOMYNEXT – Sri Lanka may not be able to extend a debt moratorium for hotels and travel companies given during a Coronavirus crisis as concerns emerge over the stability of banks, tourism Minister Harin Fernando said.

“When a paper to extend the tourism sector loan moratorium was brought to the cabinet, the Prime Minister’s advice was to take case by case as we cannot give a blanket approval anymore,” Tourism Minister Harin Fernando told reporters on July 07.

“Because we have a threat of risk to the banks as well.”

The loan moratorium extended to the tourism sector by the State Banks came to an on June 30.

The cabinet of ministers on June 08 had initially approved to extend the tourism sector loan moratorium till the end of the year, a statement said at the time.

The leisure industry has “appealed to everybody possible” M. Shantikumar President of The Hotels Association of Sri Lanka told Economy Next on June 30.

“Up to now we have got no positive answer and in the absence of not getting the loan moratorium extension most of the hotels will close down.”

Sri Lanka’s central bank had printed money for two years to suppress interest rates and created the worst currency crisis in its history with the rupee falling from 200 to 370 to the US dollar in a botched float with a surrender requirement so far this year.

Interest rates have since been raised to kill domestic demand and stabilize the rupee. The higher rates and currency collapse lead to more bad loans as consumption falls, which tends to lead to economy-wide bad loans.

The industry has no cash flow to make any arrangements to pay loans and their priority is to pay salaries, which the industry is already finding it difficult to do, Shanthikumar said.

At least 80 percent of the industry will not be able to pay the loan or the interest, he said.

There is an estimated 500 billion rupees of tourism sector loans, industry officials say.

Minister Fernando said several discussions have been held with the Central Bank Governor and heads of banks.

“What I realized is that there are certain people in the industry who have taken these loans for the completion of hotels, and some have taken even before the Easter Sunday attacks in 2019,” Fernand

“Therefore, it has been a long time and the banks want to meet the beneficiaries one-on-one and reevaluate case by case and sort out this moratorium without giving a blanket cover.”

Discussions and the Prime Minister and President are looking for the best way out of it, he said.

Sri Lanka gave a moratorium on tourist hotels during the Coronavirus crisis. Tourism is also one of the few sectors that can survive when a currency collapses.

However due to persisting forex shortages from a broken peg, Sri Lanka has been unable to import fuel, and the country has also been hit by power cuts. (Colombo/Jul06/2022)

ECONOMYNEXT – Sri Lanka Prime Minister Ranil Wikcremesinghe should resign from the post of Finance Minister for delaying dollar earning avenues and for “planning for disaster”, newly sworn in ruling party MP and business tycoon Dhammika Perera said, challenging Wickremesinghe for a debate.

Speaking in Colombo Wednesday July 06 morning, Perera said Wickremesinghe has no appetite to resolve Sri Lanka’s ongoing dollar crisis.

“All of Sri Lanka’s economic challenges are linked to the dollar crisis. The Finance Minister plans to borrow money from friends. He has no future cashflow planning for the country,” he said, reading from a document.

“The minister delayed all matters related to dollar earning, borrowing, bridging finance, avaialble credit lines and essential goods credit line. I think for these reasons the minister of finance should resign,” he said.

Speaking impromptu, he told reporters that he will “not allow such things to happen to the country”.

“I too will come out in support of the aragalaya. We cannot resolve the people’s problems by staying silent,” he added.

Perera challenged Wickremesinghe and some 10 economists said to be advising him to come to an open debate on the latter’s handling of Sri Lanka’s economic crisis, the worst since Independence.

“I will not allow this country to be dragged to a disaster from now on. I challenge him and the media to bring him out. I am ready without a script or piece of paper to do that with him,” he said. (Colombo/Jul06/2022)

ECONOMYNEXT – Sri Lanka should stop money printing earlier than indicated in a statement by Prime Minister Ranil Wickremesinghe, opposition legislator Harsha de Silva said, though legislators have already given extensive powers to the agency engage in liquidity injections.

“Prime Minister Ranil Wickremesinghe talked about money printing,” de Silva told parliament.

“He said, the inflation is going up and the printing should be stopped. But he also said it can only be stopped by the end of 2023 or in early 2024,” Silva said.

“It cannot happen like that and you have to take a decision right now. We all must understand that if nothing is being done, the inflation will go up until 100 percent from the predicted 60 percent.”

Silva the country has already become an unlivable place for the general public and according to the CBSL data, the food inflation of the country has risen up to 80.1 percent in June, 2022.

Sri Lanka’s central bank has now created the worst currency crisis in its 72-year history giving soft-peggers the ability to trigger currency crises and high inflation abolishing a currency board where money printing was outlawed.

Sri Lanka’s intermediate regime central bank was set up as a fundamentally flawed Latin America style agency with dual anchor conflicts in 1950 by US money doctor, but with no active open market operations in the initial stages.

A reserve collecting peg collapses when the central bank prints money to keep rates down. Sri Lanka’s central bank repeatedly prints money whenever domestic credit picks up, regardless of whether state or private credit is picking up including when the US hikes rates under pseudo monetary policy independence, with devastating consequences on the people.

However after 2015 with flexible inflation targeting the rupee was hit with extreme open market operations, to target an output gap (printing money to push growth up) creating currency crises and pushing growth down in their wake and impoverishing the people with rupee depreciation.

Under ‘flexible’ inflation targeting a reserve collecting peg was repeatedly bombarded with liquidity injections to manipulate rates down (call money rate targeting) until the currency collapsed.

The currency was depreciated under real effective exchange rate targeting including in 2017 when there was not credit pressure and the rupee was facing upward pressure and large volumes of inflows were sterilized, as growth and private credit slowed.

There is nothing politicians in Sri Lanka can do, whether in power or in opposition when the countries central bank decides to print money to drive interest rates down.

“I don’t know whether you can take that decision now because Nandalal Weerasinghe has been appointed as the CBSL governor,” de Silva told Prime Minister Wickremesinghe perhaps in a reference to central bank independence.

In 2018 as credit recovered, de Silva pleaded with the then leadership with of the central bank in vain to allow rates to go up as the currency was hit with liquidity injections, after giving ‘central bank independence’, to the agency during the ousted ‘Yahapalana’ administration.

Fiscal dominance including de facto fiscal dominance was removed by the Finance Minister Mangala Samaraweer raising taxes, bringing the deficit down and market pricing fuel.

The central bank printed money anyway ignoring political pleas and busted the currency from 152 to 182 and drove away foreign investors in rupee bond by undermining the credibility of the peg.

Over 7 years three currency crisis were created in rapid succession with the 2020-22 one the worst crisis where 2.6 trillion rupees were printed and the rupee has now fallen from 200 to 360 to the US dollar with soft-peggers impoverishing both wage earners and the elderly.

In the 2020-2022 crisis, the banking system was pumped with excess liquidity of up to 200 billion rupees under modern monetary theory up from around 60 billion rupees under call money rate targeting and output gap targeting, which is a milder version of MMT.

The entire world is now suffering from liquidity injections made by the Federal Reserve under its dual mandate which is being conveniently blamed on Russia and Ukraine.

“Due to the current inflation, the depreciation of the rupee has reduced the value of the money in the Employees’ Provident Fund and the Employees’ Trust Fund by 50 percent and the real value of pensions has also decreased by 50 percent,” Prime Minister Wickremesignhe said.

“Think about how this situation affects our senior citizens. Poverty is spreading among all of them. The value of the money they receive has decreased by 50 percent.

“Their purchasing power has decreased by about 50 percent. Presenting positive ideas is easy. But it is difficult to find answers to these problems.”

“What is the solution to this? Stabilizing the rupee as soon as possible, strengthening the rupee without letting it fall. For that purpose, we have implemented a plan to limit the printing of money in the future.

“In 2023, we will have to print money with restrictions on several occasions. But by the end of 2024, it is our intention to stop printing money completely.

“We aim to reduce the inflation rate to between 4 and 6 percent by 2025.”

The central bank, driven by REER econometrics in part and interest rate manipulation mostly, had been engaging drip-drip depreciation for 70 years busting the currency from 4.70 to the US dollar to 360 so far in the worst record among South Asian soft-pegs.

The leadership of the central bank around 2019 had also developed a draft Monetary Law to legalize the flexible exchange rate and flexible inflation targeting, institutionalizing dual anchor conflicts – having both an exchange rate and monetary policy.

Sri Lanka has gone to the IMF 16 times so far due to soft-pegging (operating both an exchange and money policy to create balance payments trouble) and is now going for the 17th IMF bailout.

Though there have been expectations of the country moving to inflation targeting, failed attempts were made to target inflation by continuing to operate a flawed peg (now called a flexible exchange rate) instead of floating rate.

The current law was revised by then-Governor A S Jayewardene taking away ‘exchange rate policy’ or the mandate to maintain the external valued of the currency if there was a decision to go for true inflation targeting.

But the draft monetary law attempts to institutionalize dual anchor conflicts by bringing back monetary and exchange rate conflicts.

Article 7 (1) (a) of the draft law is to “determine and implement monetary policy”

Article 7 (1)(b) of the draft law is to “determine and implement exchange rate policy”

Article 7 (1) (c) is to “hold and manage official international reserves of Sri Lanka”

Analysts have warned that unless parliament brings strict law to curb soft-pegging and supporters of soft-peggers outside the agency who have turned their backs on classical economics and sound money the country will have no future.

The IMF generally does not stop soft-pegging because soft-pegging is required for an net interational reserve target and for its own loan to be repaid.

Unlike in earlier IMF programs involving reserve money targeting, current ones have a monetary policy consultation clause, allowing a soft-peggers to easily create currency crises within a program (2018)and soon after an IMF program ends leading to yet another bailout. (Colombo/ July 05/2022)