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ECONOMYNEXT – Sri Lanka’s tax revenues grew 27 percent from a year ago to 543.6 billion rupees up to April 2022 partly helped by one-off retrospective tax, official data showed while inflation also started to gallop which tends to boost nominal turnover based taxes.

By April Sri Lanka’s 12-month inflation had hit 29.8 percent but many traded goods had risen higher.

The first installment of a retrospective tax had brought 59.6 billion rupees, a Finance Ministry report said. Income tax revenue was up 170 percent to 149.2 billion in the first four months.

Value Added Tax (VAT) on domestic activities increased by 36.6 percent to Rs 85.3 billion in the first four months of 2022 from Rs62.4 billion while revenue collected from excise duty on domestic activities increased 14.6 percent to Rs 94.7 billion.

VAT, CESS and PAL had marginally increased by 1.4 percent to Rs 203.6 billion in the first four months of 2022 from Rs 200.7 billion in the same period of 2021.

Customs Import Duties (CID) fell 44.7 percent to Rs. 17.5 billion and Special Commodity Levy (SCL) 22.9 percent to Rs. 15.8 billion, respectively due mainly to the import restrictions and downward revisions of SCL rates.

The realization of revenue from income tax as against the annual estimated revenue of Rs. 496.0 billion was 30.1 percent in the first four months of 2022.

Petroleum taxes had fallen 20 percent to Rs 16.4 billion with import volumes falling to 2.9 million metric tonnes from 3.4 million a year ago.

With non-tax revenues, total revenues were up 31 percent to 630.9 billion rupees boosted by central bank profits.

The central bank had transferred profits (as domestic liquidity) despite reserve losses and forex shortages.

Sri Lanka’s central bank had projected 20.7 trillion gross domestic product for 2022, sharply up from 16.8 trillion a year ago with a 22 percent inflation.

However it is not clear whether inflation would further increase nominal GDP, despite fall in real activity due to fuel shortages and lower spending power from a currency crisis expected to trigger a contraction in real GDP.

The statistics office had meanwhile also revised the GDP up based on a re-basing.

Inflation Hair Cut

When inflation go up, nominal government revenue go up and domestic debt holders, pensioners bear a key part of a real hair cut on debt as they lose the value of their savings, unlike foreign dollar debt holders and the cost of living and taxes go up.

Rupee wage earners including state workers also lose living standards and pay more taxes contributing to the fiscal correction as the rupee is depreciation. If they had rupee bank deposits or government debt, they pay the fall in the real value of savings as well.

Dollar debt holders are generally protected from depreciation and inflation unless a debt restructuring is done, though bond holders automatically suffer a hair cut and higher nominal tax payments as the currency depreciations.

Based on the central bank projection and last year’s GDP, tax revenues was 2.6 percent of GDP up from 2.5 percent a year ago as revenue grew 27 percent.

Current spending grew at a slower rate of 14 percent to Rs 1,016 billion rupees and was down to 4.9 percent of GDP from 5.3 percent based on the inflated GDP.

The revenue deficit was down to Rs 385.9 billion rupees (1.9 percent of GDP) from Rs 408.4 billion a year ago (2.4 percent of GDP).

Capital spending was Rs138.4 billion up 23 percent, giving an overall deficit of 524.3 billion rupees or 2.5 percent of GDP, compared to 3.1 percent last year.

The primary deficit was 97 billion rupees, down from 154 billion rupees last year.

Foreign borrowings were a net repayment of 127 billion rupees while domestic net borrowings were 651 billion rupees.

(Colombo/July04/2022)

ECONOMYNEXT – Sri Lanka is on the fast-track to the Korea path, with interventionists getting their wish using a US-built central bank with false monetary policy independence and extreme stimulus to target an output gap.

Sri Lanka has printed over 2.3 trillion rupees since the January 2020 rate cut and lost 9.3 billion US dollars in reserves including 4.0 billion in borrowed reserves up to March 2022.

The rupee has collapsed from 182 to 365 to the US dollar in the same period.

Now inflation is going up, monetary stability has not yet been restored and there signs that the central bank could lose control of reserve money.

In the 2012, 2016 and 2018 currency crises the central bank floated and got control of reserve money and there was typical deflationary style collapsed with a small spike in inflation.

However this time an inflationary blow off is the outcome with monetary stability yet to be restored.

Food prices are rising and people are finding it difficult to eat. Even if there are no actual shortages, the high prices will reduce the calorific intake of the poor, particularly children and put protein out of the reach of many.

The hardest hit would be children of poor families, for whom protein and dairy products will be a super luxury, which can harm their growth for years to come.

Sri Lanka’s central bank printed the money from 2020 saying the new administration was going to create a ‘developmental state’ similar to Korea.

Unlike countries like Hong Kong, Singapore, Malaysia, Thailand and Taiwan, Korea was one country which had severe monetary troubles, trade controls and near starvation due to its US-built central bank like Ceylon.

If monetary stability is not restored Sri Lanka will become more of a ‘Korea’.

Spam a Luxury Food

During lunar New Year in South Korea, Spam, a canned ham considered junk food in the US, is a valued gift found in premium gift hampers.

Hormel Foods, which invented the canned food in 1937 and became a component of military rations reportedly, has the biggest sales outside America of over 200 million dollars, in Korea.

When the Bank of Chosen (Joseon) and later the Bank of Korea was printing money in the immediate post-independent period from Japn, Spam was one of the foods available from post-exchange (PX) stores, which served US soldiers, and other American officials and their families.

As money printing triggered import controls, Spam and meat became luxury foods.

One of the foods that were invented during that time was Budae Jjigae or Amy base stew.

Army base stew was made from food trash thrown away from military eateries and officer’s messes. The saying goes that cigarette butts were removed, pieces of sausages and others were rescued, and mixed with spices and kimchi and vegetables it was boiled in to a tasty soup for the starving Koreans.

Another food that was reportedly invented at the time Dwaeji Gukbap which is a culture food in Busan. It was invented in the early 1950s by refugees and poor families and made with discarded pork bone from US military kitchens.

Gamja-tang, a traditional dish was made with discarded pork bone from military kitchens.

When central banks buy Treasury bill to pay state workers or to keep rates down and the currency collapses, it is not only banks that collapse but the nutrition of people.

In Sri Lanka in the 1970s beggars died on streets.

There are those who remember how they used to scavenge discarded food from offices in Colombo after lunch hour, collect the leftover rice, wash them boil then on the roadside in pot with some vegetables again and eat them.

A central banker will never admit to their mistakes, not only in Sri Lanka but anywhere in the world, but will use big words to confuse bamboozle the helpless public, using the same rhetoric used by Western Mercantilists and escape accountability.

The Korean Central Bank’s wish for Japan reform

The Bank of Chosen was originally private bank. It was forced to print money in the latter stages of World War II under Japanese occupation by purchasing Japanese government bonds.

The officials inside the Bank of Chosen however did not want to print money, since they had a long history before American academic central banking. They wanted to change the law.

They pointed out that the Bank of Japan act was changed in 1948 by Joseph Dodge, a US banker who had worked with Ordoliberals of Germany and was involved in killing inflation and setting up the new Deutsche Mark.

One of the first things Joseph Dodge, who was helicopter dropped into Japan did was to close the Reconstruction Development Bank which (Fukkin Bank) was financed with bonds sold to Bank of Japan which was firing 700 percent inflation and triggering multiple parallel exchange rates.

The Fukkin bank among other Keynesian interventions was the product of the Keynesian-New Dealer Economic Co-operation Agency of the US. Japan was a victim of the agency which was rescued by Dodge who fixed the Yen at 360 and banned deficit finance.

Chalmers Johnson who wrote about Japan in a misleading way, was a Naval officer working out of Japan during the Korean war and was protected from the consequences in Korea. In any case they had the Us officers had the benefit PX stores.

The Yen held till the break-up of the Bretton Woods and appreciated, while Sri Lanka printed and closed the entire economy.

Dodge ended up in Japan on the intervention of US President Harry Truman and the US military, which saw the stability and monetary reform in Germany and was able to undo the damage caused by the ECA.

Fed experts in 1948 had failed to arrest the monetary problems in Japan, people were starving and the military feared a revolt when the military administration took matters in hand and brought in Dodge.

According to the official history of the Bank of Korea, “the Korean government and Bank of Chosen reached a consensus that it was necessary to invite international financial experts to examine the government’s central bank bill.”

“At the proposal of the ECA, the minister of finance requested in June 1949 that the Board of Governors of the Federal Reserve send experts to Korea.

“In response the Federal Reserve dispatched Arthur I Bloomfield, (chief economist of the balance of payments division), a prominent authority in financial theory and John P Jensen (assistant chief of the auditing division) from the Federal Reserve Bank of New York.

Korea gets Argentina Cookie Cutter

The Federal Reserve Board had been sending staff to countries including Paraguay, Guatemala, the Dominican Republic, the Philippines and Sri Lanka since 1943 to support their monetary and banking reforms.

The dispatch of two experts to Korea was in line with this trend.”

PICTURE TO USE BELOW

The Bank of Chosen officials who wanted to arrest inflation of course had no idea that US academic economists has been completely corrupted by Keynesianism and the Fed was exporting a cookie-cutter Argentina style central banks and Dodge followed classical discipline.

Arthur Bloomfield, a Fed official, later set up a bank in the style of one’s set up in Latin America in a previous decade and in Ceylon by fellow Federal Reserve official John Exter.

The South Korean won (the first version) had depreciated from 15 to the US dollar in 1945 to 6000 by 1953.

The new bank printed a brand new currency called the Hwan. The new currency was born at 100 old Won per Hwan.

Predictably the new central bank was unable to halt inflation.

Political Upheaval

Sygman Rhee, who had opposed Japanese occupation and was considered an independence leader, returned to the country and won Presidential elections and headed what, was called the First Republic.

However the country continued to experience inflation and by 1960 the Hwan had fallen to around 1250 to the dollar.

The first Republic collapsed and Rhee was disgraced as usually happens when currencies collapse as can be seen in Sri Lanka now. Following what was known as the April Revolution he resigned.

The Second Republic lasted only one year. General Park Chung-hee came to office through a coup, promising to end corruption and tackle big business.

After central bank reform a second Won (which is now found in Korea) was set up with 1 won for 10 Hwan (about 135 to the US dollar).

The new was much better and held for long periods though the country experienced BOP troubles and high interest rate and inflation from time to time.

The currency troubles led to import controls – SPAM smuggling became a popular sport – and was criminalized by the military administration and authoritarian rule prevailed.

The Korea central bank law was reformed about a dozen times. The won collapsed in the early 1980s as Paul Volcker tightened (and Latin America went into default). However the last reform reduced monetary and exchange policy conflicts and stability started to come around the mid 1980s

As the currency was stabilizing after the final collapse, people came to the streets in Great Workers Struggle, the dictatorship also collapsed in a massive strike.

A liberal government came to power (officials of the Bank of Korea Busan branch went on strike demanding further tightening of the law) which was allowed by the liberals.

The currency stabilized and appreciated, interest rates (and inflation) collapsed as a consequence and the Korea became an OECD country within a decade.

All kinds of new economic activities came which interventionists could imagine. Korean music which developed partly as opposition to authoritarian rule took Japan and the rest of Asia by storm.

K-drama and other culture products followed, with the film industry being liberalized and facing competition.

In 2020 Hallyu exports were estimated to have topped 10 billion dollars, about the same as total exports of Sri Lanka.

The government got interest in Hally when it realized one year that culture exports topped the revenues exceeded many of the biggest industrial groups, and it started funding drama schools.

The democratization reforms of the 1980s also created private TV channels, which led to an explosion of the industry. A strong currency preserved peoples, incomes allowing them to spend on culture, and restaurants. Girls and boys who would have worked in factory floors became idols.

Today there is a service sector (global production chains) style activity in Hallyu. K-pop bands have stars from Japan, Thailand and China. Music is developed by in collaboration with sound studios in the US and Europe. Korean stars study at Juliard and top music school.

By and by foreign Mercantilists will write about then and say it is happened as a result of some state intervention.

However Sri Lanka can expect no such prospects in the current situation. Almost all the economists in the country are interventionist soft-peggers who want to manipulate interest rates with no thought of the consequences with the notable exception of W A Wijewardena.

Classical monetary theory is unknown in Sri Lanka.

A deadly flexible exchange rate awaits

A deadly central bank reform that institutionalizes monetary and exchange rate conflicts (flexible exchange rate with flexible inflation targeting) and gives ‘independence’ to soft-peggers is waiting in the wings.

It will probably be enacted under the IMF reforms.

There is little prospect of a clean floating regime starting under any IMF program.

While the IMF is good at smashing economies and stabilizing currencies, it cannot prevent the next one.

That is because the seeds of the next crisis is contained in the discretionary and anchor conflicting ‘flexible’ and sterilizing central bank laws it supports.

IMF is replete with Arthur Bloomfields and Robert Triffins, David Groves, and the like who set up sterilizing supposedly counter-cyclical soft-pegs.

They prescribe to the third world what was discarded by the Fed and the Bank of England in the Reagan/Thatcher era after their own currencies collapsed.

The bigger problem is Washington in now against strong pegs, unlike during the Bretton Woods era.

The Treasury believes (falsely) that strong East Asian stable currencies are ‘undervalued’ and they become export power houses at the expense of the US trade deficit.

Monetary instability will continue and the economists/mercantilists will continue to blame imports, the current account deficit and external shocks instead of their own flexible, discretionary and independent policies backed by central bank credit.

Instability will continue until a currency board is brought to tame the Mercantilists or the country goes into spontaneous dollarization. Prospects of a clean float are almost zero under an IMF program which requires pegging to repay its loans.

Sri Lanka earns about a billion dollars in exports, about 500 to 600 million in remittances (part of it diverted to food until recently through informal markets), more as IT and BPO exports, while food imports are around 100 to 200 million dollars a month.

It is a relatively simple thing to keep the nation fed as long as people have some income.

Even there are no price controls and no shortages, food prices will be high. Like in Korea food will be will be out of reach of the poor.

In particularly proteins will become expensive as in Korea. Malnutrition will go up, young children will be stunted.

Sri Lanka’s interventionists and academic economists have got their Korea wish. But there is there is no SPAM, no pork bones, or PX stores to bring relief.

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Petroleum Corporation will issue fuel on a guaranteed quota to companies that can pay in US dollars, Power and Energy Minister Kanchana Wijesekera said as the country grapples with the worst currency crisis in the history of its soft-pegged central bank.

Sri Lanka is facing severe fuel shortages (cannot convert rupees to dollars) with after the central bank printed money, imposed a surrender requirement and smashed the credibility of a pegged exchange rate regime now called a flexible exchange rate.

“Any company/industry that can pay in US dollars can open a consumer account at CPC to obtain a weekly guaranteed quota,” Energy Minister Kanchana Wijesekera said in a twitter.com message.

“The need to pay a month in advance; fuel will be issued on a daily or weekly basis from the 12th.”

Forex shortages are a problem associated with soft-pegged central bank which artificially manipulates interest rates with liquidity injections and are not found in clean floating regimes or currency boards (credible pegs).

When the credibility of the peg is broken wealth cannot be transferred from the credit system linked to the rupee monetary base to dollar system linked to the US Fed.

However by not converting the US dollar in the first place and keeping wealth in US dollars and settling transactions in the foreign currency (dollarization), the ability to transfer wealth can be maintained.

Analysts had warned that the central bank, which was set up in 1950 by abolishing a credible peg can allow economic activities to continue by allowing parallel dollarization.

However legislators in the country have given the agency extensive powers to control the people through exchange controls and legal tender laws, which can be used block US dollar transactions, preventing normal economic activity from resuming. (Colombo/July04/2022)

ECONOMYNEXT – Sri Lanka will be receiving 9 shipments of fuel in the next two months, Power and Energy Minister Kanchana Wijesekara said.

The shipments include the three Indian Oil Corporation (IOC) consigments that are to arrive between 13 July and 15 August.

Wijesekara said that the IOC ships would be partially paid using the 20 million US dollars left from the Indian credit line.

Related: Three shipments of fuel to arrive in Sri Lanka by mid, end July, August: Lanka IOC

Four shipments of fuel were awaiting confirmation, the minister stated.

Meanwhile, a 40,000 metric tonne diesel shipment worth 66.5 million US dollars from the UAE-based Coral Company is due between 8 and 9 July.

A 35,000 metric tonne furnace oil consignment worth 34 million dollars is due to arrive between 10 and 11 July.

Another 40,000 metric tonne diesel shipment from the Singapore-based Vitol Company is due to arrive between 11 and 14 July. The shipment is worth 77 million USD, Wijesekara said.

The Coral Company had also confirmed a 135,000 MT shipment of crude oil to arrive on 15 July, and another shipment for August.

Another shipment of Petrol is due between 22 and 23 July.

Wijesekara stated that the Sri Lankan Government had requested Malaysian aid for petrol and kerosene, but it was getting difficult to find ships for delivery.

Sri Lanka’s economy has come to a grinding halt due to the fuel crisis, with many private buses and taxis not running. Fuel hoarding is also contributing to the scarcity and queues, and the country’s government recently started to issue fuel tokens in a bid to shorten queues and prevent excessive filling.

However, all those measures have proven to be in vain.
(Colombo/03Jul/2022)

ECONOMYNEXT – Sri Lankan companies will be able to purchase fuel on a weekly or daily basis if they are able to pay for the commodity in dollars one-month in advance, the Minister of Fuel and Energy Kanchana Wijesekera said as the crisis-hit country scrambles to find dollars to pay for its bills.

From July 12, any company that has the ability to pay for its fuel requirements can open a consumer account at Ceylon Petroleum Corporation to obtain a guaranteed quota.

“They need to pay a month in advance & fuel will be issued on a daily or weekly basis from the 12th (July). Already paid customers will receive their quota from the 12th,” Wijesekera said on Sunday (July 03).

Any Company/Industry that can pay In USD can open a consumer account at CPC to obtain a weekly guaranteed quota. They need to pay a month in advance & fuel will be issued on a daily or weekly basis from the 12th. Already paid customers will receive their quota from the 12th.

— Kanchana Wijesekera (@kanchana_wij) July 3, 2022

Sri Lanka’s fuel stocks have almost run dry while the fuel queues continue to grow.

Related: Sri Lanka reveals low fuel stock levels

Previously, the minister said that the country’s money-printing central bank shot down a proposal to allow a few fuel stations to sell petrol in dollars on the grounds that according money regulations dollars cannot be used for internal transactions at retail levels.

However, the minister highlighted that the state-run national carrier SriLankan Airlines and exporters were paying in dollars to CPC to purchase fuel which in fact has helped that raise some dollars.

Some new suppliers had previously asked for upfront payment to supply fuel while foreign banks are refusing to confirm Sri Lanka’s letter of credit.

Related: Foreign banks refuse to confirm Sri Lanka state bank letters of credit: Minister

Suppliers like Petro China used to give Sri Lanka 180 days of credit through LCs, Minister Wijesekera said. (Colombo/Jul03/2022)

ECONOMYNEXT – Sri Lanka’s private credit from commercial banks grew only 2.5 billion rupees in May 2022, amid a soft-peg collapse the lowest since a 2020 strict lockdown when credit turned negative for three months, while credit to government also fell, official data showed.

Sri Lanka’s private credit grew to only 7,754.5 billion rupees in May 2022 from 7,752.5 billion rupees in April with rupee denominated loans barely growing from 6,659.8 billion rupees to 6,659.8 billion rupees.

Loans dollar banking units to private sector fell to 794.6 billion rupees from 797.5 billion rupees in May which in dollar terms reflects a fall of about 130 million US dollars based on official end month exchange rates.

Meanwhile credit to state enterprises grew to 1,750.1 billion rupees in May from 1,725 billion rupees in April with rupee denominated debt rising by 71.6 billion rupees in May.

While the Ceylon Petroleum Corporation has raised prices, the Public Utilities Commission has failed to hike electricity prices for 7 years, leading to higher borrowings from banks, leading to pressure on interest rates and also money printing when rate rises are resisted.

State enterprise loans from foreign currency banking units fell to 222.1 billion rupees in May from 268.5 billion rupees a month earlier indicating a fall of around 160 million US dollars.

Credit to government fell marginally from 6548.1 billion rupees to 6,499.1 billion rupees, with both domestic and foreign banking units contributing.

Net central bank credit to government also marginal, though the central bank bought some bonds outright injecting permanent money into the banking system and reducing overnight injections.

In May Sri Lanka imported oil on a credit line from India, and state-run Ceylon Petroleum Corporation gave the balance rupees from customer sales to the Treasury after covering its losses.

However in June the credit line ran out.

There is another credit line for essential services which will bring some money to the Treasury as long is it used by private sector who will pay rupees to the government.

Sri Lanka’s rupee collapsed from 200 to 370 to the US dollar in a botched float after March though interest rates were raised in April to slow private credit and help save the soft-peg to the US dollar.

Sri Lanka’s private credit and the broader economy has to be smashed to pay state worker salaries without printing money try and save a soft-pegged exchange rate regime in 70 years of monetary instability since a soft-peg was set up in 1950.

The economic smashing has to be greater than in the past due to existence of a surrender requirement that pushes down the rupee, as well as delays in raising rates.

Soft-peggers call monetary instability ‘macro-economic instability’ and also manage to transfer the blame to imports and tax payers though private citizens are net savers and who have no ability to print money and de-stabilize the balance of payments and impose exchange and trade controls.

In May the rupee was transacting around 380 to the US dollar when a 360 to the US dollar and Undiyal premiums were falling, when a guidance peg was slammed at 360 to the US dollar with a surrender requirement still in place.

Sri Lanka is in a severe monetary crisis, with rising prices increasing malnutrition due to the collapse of a soft-peg after two years of money printing and failed float with a surrender requirement.

Inflation topped 50 percent in June.

Soft-pegs or flexible exchange rates cooked up in Latin America and the US after the Great Depression are peddled to third world countries where ‘economists’ have ‘fear of floating’ and ‘fear of currency boards’ and adopt unstable regime with anchor conflicts instead. (Colombo/July04/2022)

ECONOMYNEXT – The International Monetary Fund (IMF)’s agreement with Sri Lanka must be contingent on Central Bank independence, strong anti-corruption measures and promotion of the rule of law, the United States Senate Foreign Relations Committee said.

“Without these critical reforms, Sri Lanka could suffer further economic mismanagement and uncontrollable debt,” the committee tweeted Saturday July 02 morning.

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

The IMF said in a statement on June 30 that the atest talks with Sri Lanka has made significant progress towards developing a policy package to stabilise the country but the island nation also has to move forward on debt restructuring to finalise a bailout.

“The staff team and the authorities made significant progress on defining a macroeconomic and structural policy package,” the IMF statement said.

“The discussions will continue virtually with a view to reaching a staff-level agreement on the EFF arrangement in the near term.”

“Because public debt is assessed as unsustainable, Executive Board approval would require adequate financing assurances from Sri Lanka’s creditors that debt sustainability will be restored.”

Related:

Sri Lanka, IMF make ‘significant progress’ to staff level deal

Sri Lanka has appointed financial and legal advisors to negotiate with creditors.

At least one sovereign bond holder with over 250 million dollars has gone to court seeking full payment.

Meanwhile, a US Treasury and State Department delegation was in Sri Lanka to “explore the most effective ways for the U.S. to support Sri Lankans in need”. (Colombo/Jul02/2022)

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 can avoid a food shortage from July to mid-August following a decision to relax open account imports for 10 essential foods, in conjunction with a fuel distribution scheme for local suppliers and traders, Trade Minister Nalin Fernando said.

“We have allowed the import of 10 essential items from today onward. With this, we expect to meet our needs without shortages, and also to reduce prices through competition,” said Fernando speaking at a government press briefing on Friday July 01.

Open account imports for 10 essential items are permitted effective Friday. These are, according to a previous statement Fernando had made in parliament, rice, wheat flour, sugar, potatoes, red dhal (lentils), onions, dry chillies, dry fish, beans and milk powder.

Open account imports allow food to be cleared on suppliers’ credit which can be settled later through official or unofficial means. Sri Lanka, banned open accounts in May in an attempt to reduce Unidyal style net settlements being made for what officials called ‘non-essential’ imports. However, the ban also hit food imports, which are usually imported long term relationships on suppliers credit. It is estimated that the island needs about 150 to 250 million US dollars a month for food imports according to industry officials.

Minster Fernando said he had been approached about the possibility of allowing a price increase in rice by 25 rupees a kilo, but he had to deny this request as Sri Lanka’s prevailing price controls on rice varieties cannot be changed at present.

“We’re also importing rice. We expect to import about 75,000 to 100,00 metric tons of rice a month,” he said.

The government is also looking to allocate fuel for the transport of essential foods. Sri Lanka is currently in the throes of an unprecedented energy crisis brought about by a crippling dollar shortage. Dire warnings of a possible food crisis over the the next few months have also been raised by various parties including Prime Minister Ranil Wickremesinghe.

“There has been a drop in lorries operating out of Economic Centres (state-run agricultural exchanges) due to the fuel issue. We have a special programme in place to distribute fuel to lorries at these centres through army camps. This will be coordinated by district secretaries and fuel will be supplied to the lorries from tomorrow (July 02),” he said.

“We will provide diesel to transport goods to [state-run retailer] Sathosa and supermarket chains. Diesel will also be given to wholesale outlet’s lorries,” he added. (Colombo/Jul02/2022)

ECONOMYNEXT – Sri Lanka’s National Movement for Social Justice has presented a common minimum program for economic recovery as the country reels from the worst currency crisis triggered by conflicting money and exchange policies.

The carefully thought out program deals with a number of fiscal problems including state enterprises and budgets in detail.

It is also deals with trade and industry.

However it is advocating the adoption of a new draft Monetary Law, which in the early copies in circulation institutionalizes discretionary policy (flexible inflation targeting/dual anchor conflicts) that triggered serial currency crises and eventually drove the country into default.

Sri Lanka has been hit by inflation and forex shortages, accompanied by trade and exchange controls undermining economic freedoms and de-stabilzing the economy after an intermediate regime central bank was set up in 1950 with both monetary and exchange rate policies which conflict with each other.

For true inflation targeting (a rule to control the expansion of money supply) to operate the central bank has to stop intervening in forex markets or in other words have no foreign exchange policy.

For inflation targeting to work the currency has to float and the central bank should only have a monetary policy (open market operations) impacting reserve money with a single target (inflation) generally known as a domestic anchor.

Targeting the exchange rate to collect reserves or for any other objective, changes reserve money through foreign exchange operations, tying the money supply tightly or loosely to the balance of payments through pegging, depending on the degree of interventions.

A central bank, having a distinct foreign exchange policy (intervening in the market) will operate a pegged regime which will conflict with its monetary policy. Forex shortages can emerge whenever domestic credit picks up and attempts are made to push down rates with monetary policy.

In 2018 a currency crisis were triggered by open market operations despite the deficit being brought down, fuel being market priced, with the central bank independence given by Finance Minister Mangala Samaraweera, critics have shown.

A so-called ‘flexible exchange rate’ or non-credible peg operated by a reserve collecting pegged central bank is therefore prone to currency crises, and IMF bailouts, regardless of how good the fiscal policy is.

Then Governor A Jayewardene removed exchange rate policy from the central bank’s main objectives on the path to inflation targeting, by dropping the requirement to maintain the ‘external value’ of the rupee.

According to at least one draft in circulation, the course is reversed with a specific exchange rate policy being to be given legal effect and ensuring that there is no solution to the dual anchor conflicts that has created balance of payments trouble in Sri Lanka since 1950.

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

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

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

Sri Lanka country’s current forex shortages with a 360 to the US dollar peg and fuel shortages are characteristic results of a pegged regime (non-floating ‘flexible’ exchange rate) having both a monetary and exchange rate policy.

The debt office

There are further problems with the draft, creating conflicts of interest.

Article 7 (1) (j) is to act as financial advisor and fiscal agent of, and Banker to, the government.

The common minimum program however has advocated a separate debt office, in a big improvement.

In order to operate a floating exchange rate the Treasury or debt office should also be able to buy foreign exchange to settle loans and manages its dollar balances.

In order to eliminate currency crises (and allow the debt office to buy dollars for rupees) the central bank has to either abandon foreign reserve collections (clean float the currency), or abandon monetary policy to artificially push down interest rates and run a credible peg or currency board.

The draft law as it stands allows policies similar to the past 70s years to be carried out by giving legal effect to even more discretionary policy involving an unstable peg with conflicting anchors (both monetary and exchange rate policies).

Under an IMF program, where a loan given to boost reserves of the central bank, a true inflation targeting framework cannot be implemented at least until the program ends and the reserve loan is repaid, or the debt is taken over by the government.

This is why countries that go the IMF continue to operate unstable pegs and get into trouble in the next credit cycle or usually the one after.

Common Minimum Program for Economic Recovery

Compiled by the National Movement for Social Justice
4 June 2022

We are in the throes of an unprecedented crisis. No useful comparisons may be drawn from the 2001-02 period of negative economic growth. The only analogue may be from 90 years ago, when per capita GDP collapsed from USD 80 to 33 in a few years as part of the Sri Lankan manifestation of the Great Depression.

Sri Lanka has the highest income inequality in South Asia (between China and the US in international comparisons) and provided little compensation for the harms caused by the pandemic and lockdowns. Our citizens in the lower deciles are unable to withstand more shocks. It will not be possible to get out of this crisis without any pain. But the pain can be minimized, especially for the most vulnerable, by a well thought out recovery program.

We should not abandon the commitments to fiscal discipline on the first possible occasion, as was the case in the past. We must be steadfastin our commitment to these reforms because they are our decisions and because this is the only way recurrences can be avoided.

Political actors may be unwilling to accept working within the framework of an IMF program because of the fear of being made responsible for the difficult, but necessary, reforms. That is why it is necessary tocommitto a common minimum program which provides a meaningful role to all participating parties and is anchored in Parliament’s Constitutional responsibility for the control of finances.

How the document was developed

By mid-2021, the National Movement for Social Justicerecognized the necessity of developing a national consensus on measures to get out of the crisis and to avoid recurrences. In keeping with its practice of drawing on expertise to develop policy positions, a series of “kathikawa” webinars were organizedstarting in July 2021. Subsequently, a draft of a common minimum program in all three languages was published in February 2022 for further discussion in the media and otherwise.

Around the same time, various organizations, including political parties, associations and think tanks, published recommendations. In the past few months many were published making it difficult to ensure comprehensive coverage. Economic recommendations that could be implemented within a short time frame were selected from an ideologically broad set of documents and were analyzed (annex 1). Significant agreement was found on topics such as the need for control of government expenditure and the establishment of an efficient and well-targeted social safety net. On issues such as trade and state assets, there were divergences. The results of the comparative analysis were presented to a group of economists (annex 2) who suggested changes in substance and prioritization. The revised recommendations were presented to a panel of business leaders (annex 3) for validation. Changes were made throughout. The final document differs significantly from the base document.

Proposals

The proposals are organized under eight headings that were identified in the course of the analysis and validation. With each of the specific recommendations, the economists were asked to identify the relevant time frame for action: short-term (within 2022); medium-term (by end of 2023); and longer-term (completion after 2023). The time frames are provided as starting points for discussion only.

1. Macroeconomic stability

Given that the economic team is in place, the selection of advisors has been completed, and discussions with the IMF are ongoing, the proposals below look beyond these ongoing activities that are seen as being in good hands. Many of the base documents had been prepared before the above activities commenced. The recommendations that had been implemented by the time of the finalization of this document have been excluded.

It is recommended that priority be given to the Monetary Law Act (which exists in draft form), which will ensure the independence of the Central Bank, which is seen as essential for macro-economic stabilization. Attention is also focused on ensuring that data on public debt are accurate at all times and that a professional approach is adopted for the management of different forms of debt and guarantees. The proposed Public Debt Office should be an elite organization staffed by highly qualified and experienced professionals. It was felt that providing adequate compensation packages for such professionals would be a challenge unless the Office was located within the Central Bank. However, concerns were expressed about whether the placement of the Public Debt Office within the Central Bank would detract from the central objectives of the Bank.

2. Revenue consolidation

It is almost certain that the entering into an IMF program will require a commitment to a time-bound achievement of a primary surplus. This will require the raising of revenue above the current levels. Irrespective of the IMF, this is a laudable objective. Action to restore the tax regime that existed prior to December 2019 has already been initiated. Therefore, the proposals below look beyond the restoration of the 2019 revenue measures.

It is necessary to increase non-tax revenues by increasing the fees charged for services and revenues from state assets. However, it would be good if attention is paid at the same time to reducing the costs of collecting the revenue and improving the services provided. For example, paperwork can be simplified, and the frequency of collection can be adjusted. There is likely to be less resistance if service quality is improved when fees are increased. In some instances, the collected fees go into funds under the control of the responsible agencies. It is important that any funds more than what is required for operations be remitted to the Consolidated Fund.

There are many negatives to the practice of handing out tax exemptions to investors. Exemptions under the Strategic Development Projects (SDP) Act No. 14 of 2008, should be discontinued. Even those who currently enjoy SDP status should be subject to a minimum alternative tax, proposed as 15 percent. Sri Lanka should join the Base Erosion and Profit Shifting (BEPS) Framework. A progressive corporate tax regime, without sharp discontinuities, is recommended.

Customs reforms including changes to customs officers’ reward schemes are recommended. The complex duty structures should be replaced with a three-band scheme and para tariffs should be phased out.

The significant weaknesses in Sri Lanka’s revenue administration should be addressed. Though challenging, a unified revenue administration that would bring together inland revenue, customs and excise is an urgent necessity.

3. Primary expenditure control

The need to ensure that the provisions of the Fiscal Management (Responsibility) Act, No. 3 of 2002, are scrupulously followed was highlighted. Given the disappointing track record since enactment, opinion was split on the relative importance of strengthening the Act versus ensuring a culture of compliance. In the end, there was support for the amendments on the basis that compliance may be looked after by the engaged oversight provided by newly energized citizens.

Concern about large debt-financed projects lacking in feasibility is reflected in the proposal to mandate projects that are in line with the National Physical Plan and have been assessed as meeting all stated criteria. The entity responsible for the Physical Plan should be situated in an appropriate Ministry and must be adequately funded and empowered to ensure compliance.

4. Public sector and SOE management

A freeze on public-sector recruitment is strongly recommended, with all vacancies being filled with those already in state service (green sheeting). Defence expenditures are still the highest a decade after the end of the war and most of it is in the form of recurrent expenditures, with inadequate provision being made for force modernization. A serious effort is recommended to realign and reduce defence expenditures.

The actual personnel requirements of the state, of the armed forces, and SOEs must be calculated, and surplus personnel redeployed. The state must make major investments to upgrade the capacity of personnelin the public service, starting with the leadership layer. To assure productive performance, they must be provided with the necessary facilities. This should not be limited to tangible things such as computers, but must include proper performance reviews, the formulation of customized training plans and the provision of necessary resources for training, etc. Professor Mick Moore, a long-time observer of the Sri Lankan state, has documented the decline of the resources spent on making state employees more productive at the same time as the numbers of employees have been going up.

The privatization of at least one high-profile SOE such as SriLankanAirlines, as already announced, will communicate seriousness of purpose both to debt holders and to the various interest groups. A task force should be established to review all state corporations and state-owned companies andprioritize those to be divested, reorganized as PPPs, or subjected to management reforms. Markets where SOEs operate as monopolies or as protected suppliers should be liberalized.

It is proposed that all SOEs be converted into companies which will ringfence assets and liabilities, improveadherence to accounting standards,and allow for the floating of shares in the CSE under appropriate conditions. It is also proposed that procedures like the “fit and proper test” used for bank boards be established to ensure that persons appointed to the boards of SOEs can perform their duties.

Hard budget constraints should be imposed on SOEsengaged in commercial activities. State banks should be instructed to apply normal risk assessment criteria when lending to SOEs.

5. Social safety net

The Welfare Benefits Board Act became law in 2002, but it is yet to be implemented. It is recommended that the board be activated, the databases completed, and a social safety net be implemented immediately. Because of the similarities of the present situation with disaster and because surveys show that 77 percent of households that receive regular benefits from the government have access to bank accounts, it is recommended that cash transfers to bank accounts of mobile money accounts be used, with improvements to targeting being made over time.

6. Energy and public utilities

Refined and unrefined petroleum products account for around 15 percent of the country’s total merchandise import bill (it may be even higher in 2022).Formula-based pricing for imported fuel, which was recommended in multiple documents, has been implemented, though the actual formula and the periodicity remain opaque. It is recommended that these elements be addressed.

Because fuel is a key input for the production of electricity, which in turn is a significant input for the production of piped water, it will be necessary to extend formula-based pricing to these utility services as well. It appears that distributors of cooking gas are adjusting retail prices to reflect the cost of imports and the value of the rupee. It is recommended that all petroleum products, including cooking gas, be brought under utility regulation through a sector specific law, and price and quality regulation be entrusted to the Public Utilities Commission.

Because over 60 percent of fuel imported into the country is spent on transportation, it will not be possible to address the current account deficit and the volatility caused by world markets unless concerted action is taken to shift more passengers to efficient modes of transport. This will require a shift to a public transport first policy and the removal of various forms of subsidies currently in place for private transport. The investments required for this shift may have to be obtained from external sources.

Load shedding has many negative implications for the economy. To ensure regular power supplies for industry and for consumers, it is necessary to increase the amount of electricity generated from the abundant potential that exists for wind and solar. To take power from these intermittent sources and to remove the cause of periodic country-wide failures, additional investments are necessary to upgrade the transmission grid. The transmission network is currently operated under a separate license, but not as a ring-fenced and independently operating entity. Making it an independently operating entity will be necessary for the required investments to be made and procurements completed in a timely manner and for services such as wheeling to be introduced.

After the divestment of SriLankan Airlines has been completed, it will be necessary to attract airlines, especially low-cost carriers, to Sri Lankan airports. Mattala has been fully liberalized. It will be necessary to consider liberalization at least up to fifth freedom level at Colombo. The rights to provide ground handling services should not be bundled with the airline as part of the divestment. Separate and focused efforts should be made to improve the management of the airport including the lowering of currently non-competitive ground handling service fees and non-discriminatory treatment of all airlines using the airport.

7. Trade and industry

The committees established under the National Export Strategy of 2018 should be used to identify difficulties experienced by exporters. With the relevant state officials present at these meetings, quick action can be taken to remove the barriers to exports. It is likely that barriers include permits for imports of critical inputs and bank-related difficulties will feature large. The permit raj that has been established in the past few years has to be disassembled if exports are to be promoted. The necessity of imports for exports will have to be impressed.

The crisis and the accompanying failure of basic infrastructure services has brought industrial zones back into discussion. Unlike in the 1980s, it would be useful to allow privately managed industrial zones, where the operators will be responsible both for the investments and the recruitment of tenants.

8. Specialized legislation critical to recovery

It is expected that a large number of enterprises will fail and that hundreds of thousands if not more employees will be thrown out of work as a result of the crisis. Extant legislation is not capable of effectively responding to these unprecedented events. Unless new bankruptcy laws that are applicable to all enterprises are enacted quickly, the recovery will take long. In the same way, unless a more realistic mechanism than Termination of Employment of Workman Act (TEWA) for handling employees who lose their jobs as a result of the crisis is set in place, enterprises will not be able to survive.

Intervention 8 Time horizon

Fast track unified bankruptcy laws for all enterprises S
Replace TEWA with Unemployment Insurance Fund S