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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

ECONOMYNEXT – Sri Lanka stocks slipped on Thursday (30), ending the month in red as negative sentiments in the market continued while sharp increase the yields of T-bills at the weekly auction also weighed on the appetite, brokers said.

An IMF statement after a series of discussions with the government authorities did not impress investors.

The main All Share Price Index (ASPI) closed 0.32% or 23.59 points lower at 7,342.33.

“The market activity was extremely low and there was a lot of gloomy sentiments. There’s a lot of selling pressure, but there are no takers,” a market analyst said.

“Investors don’t know what to do.”

On the previous day, the market moved up on the hope of a positive IMF outcome.

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 also estimated to have a sharp contraction in the 2022 economic growth.

Investors are also negative after yields in T-bills rose between 180-312 basis points at a 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 785.4 million rupees, less than a quarter of of this year’s daily average turnover of 3.42 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.

Though a new prime minister and a new cabinet have been appointed, analysts see little progress on both the economical and political fronts. The country is struggling to ensure a continuous supply of fuel due to a shortage of US dollars.

The more liquid S&P SL20 index down 0.68% or 15.92  points to 2,324.36.

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 39.9% 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 fall was led by Melstacorp, which slipped 4% to 35.6 rupees a share.

Expolanka fell down 1.4% to 172.7 rupees a share, while LOLC fell 1.5% to 392.2 rupees a share. (Colombo/June30/2022)

ECONOMYNEXT – A guidance peg announced by Sri Lanka central bank for interbank transactions weakened by 16 cents to 359.88 against the US dollar on Thursday from the previous day’s 359.72, data showed.

Sri Lanka commercial banks offered dollars for telegraphic transfers at rates between 366.88 and 370.00 for small transactions on Thursday, unchanged from Wednesday.

Dealers said the market is dull after the weekly T-Bond and T-Bill auctions in the last two days.

A bond maturing on 01.06.2025 closed at 24.00/15 percent on Thursday, up from 23.75/24.15 at Wednesday (29) close. (Colombo/ June 30/2022)

ECONOMYNEXT – Sri Lanka’s state-run Litro Gas Lanka Ltd has procured 100,000 metric tons of liquid petroleum (LP) gas – enough for four months – worth 90 million US dollars, 70 million of which was funded by the World Bank.

The prime minister’s office said Thursday June 30 afternoon that the remaining 20 million dollars was from Litro.

Sri Lanka, going through its worst forex crisis since Independence, has seen long queues for LP gas which is primarily used for cooking at both domestic and industrial levels. Angry consumers were seen lining up outside gas vendors for days.

“This consignment will be enough to supply the country for four months. Seventy percent of the consignment will be provided to domestic consumers. An estimated 5 million 12.5kg cylinders, 1 million 5kg cylinders and 1 million 2.5kg cylinders will be obtained from this. The remaining 30% will be provided for commercial use,” the prime minster’s office said.

An initial consignment of 33,000 tons of LP gas procured by Litro at a cost of 20 million dollars will reach Sri Lanka by the first week of July and distribution will commence immediately, the statement said. (Colombo/Jun30/2022)

ECONOMYNEXT – Latest talks with Sri Lanka has made significant progress towards developing a policy package to stabilize the country the International Monetary Fund said, but the country also has to move forward on debt restructuring to finalize a bailout.

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

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.

IMF Staff Concludes Visit to Sri Lanka

The IMF team had constructive and productive discussions with the authorities on economic policies and reforms to be supported by an IMF Extended Fund Facility (EFF) arrangement.

Significant progress was made, and discussions will continue virtually towards reaching a staff-level agreement on the EFF arrangement in the near term.

The objectives of the new IMF-supported program would be to restore macroeconomic stability and debt sustainability, while protecting the poor and vulnerable, safeguarding financial stability, and stepping up structural reforms to address corruption vulnerabilities and unlock Sri Lanka’s growth potential.

Colombo, Sri Lanka – June 30, 2022: An International Monetary Fund (IMF) mission team led by Messrs. Peter Breuer and Masahiro Nozaki visited Colombo from June 20 to 30, 2022 to discuss IMF support for Sri Lanka and the authorities’ comprehensive economic reform program. Ms. Anne-Marie Gulde-Wolf, Deputy Director of the IMF’s Asia and Pacific Department, participated in policy discussions.

At the end of the mission, Messrs. Breuer and Nozaki issued the following statement:

“Sri Lanka is going through a severe economic crisis. The economy is expected to contract significantly in 2022, while inflation is high and rising. The critically low level of foreign reserves has hampered the import of essential goods. During the in-person visit, the team witnessed some of the hardships currently faced by the Sri Lankan people, especially the poor and vulnerable who are affected disproportionately by the crisis. We reaffirm our commitment to support Sri Lanka at this difficult time in line with the IMF’s policies.

“The authorities’ monetary, fiscal policy and other actions since early April were important first steps to address the crisis. The team had constructive and productive discussions with the Sri Lankan authorities on economic policies and reforms to be supported by an IMF Extended Fund Facility (EFF) arrangement. The staff team and the authorities made significant progress on defining a macroeconomic and structural policy package. 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.

“In this context, discussions focused on designing a comprehensive economic program to correct the macroeconomic imbalances, restore public debt sustainability, and realize Sri Lanka’s growth potential. Discussions advanced substantially during the mission, including on the need to reduce the elevated fiscal deficit while ensuring adequate protection for the poor and vulnerable. Given the low level of revenues, far-reaching tax reforms are urgently needed to achieve these objectives. 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 authorities have made considerable progress in formulating their economic reform program and we are looking forward to continuing the dialogue with them.

“The IMF team held meetings with President Gotabaya Rajapaksa, Prime Minister and Finance Minister Ranil Wickremesinghe, Central Bank of Sri Lanka Governor Dr. P. Nandalal Weerasinghe, Secretary to the Treasury K M Mahinda Siriwardana, and other senior government and CBSL officials. It also met with Parliamentarians, representatives from the private sector, civil society organizations, and development partners.

“We would like to thank the authorities for the candid approach and warm hospitality and are looking forward to continuing our discussions in support of Sri Lanka and its people.”