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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.”

COLOMBO (News 1st); The World Bank’s Country Director for Sri Lanka Faris Hadad-Zervos said that the World Bank would extend further support after reaching an agreement with the International Monetary Fund. This was stated at a discussion between World Bank representatives and President Gotabaya Rajapaksa at the President’s House in Colombo, yesterday(29). There are 17 World Bank assures support to Sri Lanka

ECONOMYNEXT – Sri Lanka’s hoteliers have urged the government to extend the industry’s debt moratorium and implement the cabinet approval that was given to extend the moratorium that ends on June 30 by another six months.

Hiran Cooray, the past-President of the Hotels Association of Sri Lanka (THASL), urged the government to extend the loan moratorium by six months.

“One of the ways Sri Lanka can recover and earn is through tourism. That is why we are appealing to everybody: we need to bounce back and bounce back fast,” said Cooray.

“I strongly believe we can earn one billion dollars but for that tourism must survive. We have been requesting a moratorium [among other things]. That is just to make sure the tourism plant does not close down. We need the help to go forward.”

On June 08, the cabinet of ministers approved a proposal to extend the debt moratorium till the end of the year.

The industry’s debt is about 500 billion rupees, officials said.

However, the authorities have yet to extend the moratorium.

“We are not asking too much, and it is just for a period of six months,” said Anura Lokuhetty, Vice President of the Galle Face Hotel, speaking at a conference.

“We can’t understand why they should even think twice about it. Already there is cabinet approval. Its a case of implementing, which needs to be done immediately.”

Lokuhetty warned it will be a national disaster if the hotels and accommodation service providers are allowed to close down.

“It is a very dangerous situation. If the moratoriums are not extended the whole hotel sector will collapse and with the failure of the hotel industry all the other dependent sectors such as three-wheeler drivers, fisheries, food and beverages all will be affected.”

Hoteliers said many of the hotels are finding it difficult to pay salaries.

However they say they are confident that with the removal of travel advisories the industry will recover faster, despite a drop in air frequency.

The industry is also talking to the International Finance Corporation ( IFC) and the Asian Development Bank (ADB) to restructure their loans and are looking at green bonds.

“THASL started this discussion in 2021 but the then government was reluctant to obtain any foreign facilities because there was a belief there was enough money,” Asoka Hettigoda, Chairman and Managing Director at the Siddhalepa Group said speaking at the conference.

“However, when we approached ADB, they were keen to help us but they are waiting for Sri Lanka to sign a letter of intent with the International Monetary Fund (IMF).”

Hettigoda said the industry has prepared a proposal on how it’s going to pay and restructure its loans.

“We have discussed several options including a special purpose vehicle, bank-to-bank concept. We have looked at obtaining facilities from foreign donor agencies. We have also discussed a new concept of green bonds,” he said.

“Our current request is to look at these six months. We want to urge the government to immediately make this decision and not to let us get into non-perfomring loans.”

From January to April, the industry has earned 600 million US dollars and aims to earn about a billion dollars in the next six months.

However, air frequency to the island and tourist arrivals have more than halved with daily tourist arrivals numbering around 1,000. (Colombo/Jun29/2022)

ECONOMYNEXT – Sri Lanka will have to stand on its own feet Prime Minister Ranil Wickremesinghe as the country ran out of fuel due to forex shortages coming from a soft-peg destabilized by money printed mis-target interest rates.

“We have to come out of this situation,” Prime Minister Wickremesinghe said in a video statement. “But we have to come out by our own efforts.

“Others have no obligation to rescue us. If get up on our own efforts we can go further. But we cannot go on the current system.”

Sri Lanka now has a large public sector and a soft-pegged central bank which prints money to mis-target interest rates, triggering monetary instability and currency depreciation.

“There is a view among some that that they not getting the value for their dollars,” Wickrmesinghe said.

“That is why some remmittances are coming through Undiyal system. Some others are keeping their money abroad without sending.

Such phenomena is known as a loss of credibility of a pegged exchange rate.

When the credibility of the peg is lost, the currency has to be floated and interventions to maintain a a peg abandoned (a suspension of convertibility) and money printing halted.

To stabilize the exchange rate the domestic economy has to be smashed by killing private credit through high rates and monetary financing of the budget has to be halted through tax hikes and sales of Treasury bills to real buyers and not the central bank.

An International Monetary Fund program usually does that. Sri Lanka has gone to the IMF 17 times since a non-credible peg was set up in 1950.

Sri Lanka set up a non-credible with money printing powers in the style of Argentina’s central bank in 1950, abolishing a currency board or credible peg which had kept the economy stable through a Great Depression and two world wars.

The Great Depression was a crisis in the Gold Standard ares triggered mostly by the US Fed.

Wickremesinghe said Sri Lanka is facing the worst crisis in modern times.

Sri Lanka has faced big crisis in 1869 over the collapse of the coffee industry.

“At the time the crisis was limited to Colombo, Kandy and Galle and most people were in rural areas,” Wickremesinghe said.

Sri Lanka also faced a big crisis in 1884 when also commodity prices collapsed. There was a banking crisis in the silver area at the time and a Eastern and Oriental Bank, which was among several banks that were issuing money in the country closed their doors.

The banks had loans in silver (rupees) and borrowings in sterling (gold) amid bad loans in troubled coffee plantations.

Colonial authorities set up the currency board at the time as a separate agency with the Ceylon Rupee having fallen to as much as 50 percent. (Colombo/June30/2022)

ECONOMYNEXT – Sri Lanka stocks recovered on Wednesday (29), recovering  from a two-month closing low hit on the previous session on the hopes that the country will finally reach an IMF deal, brokers said.

The main All Share Price Index (ASPI) closed 0.73% or 53.26 points higher at 7,365.92, recovering from its lowest close since April 27.

“The market moved up on the hopes of an IMF deal as the staff-level discussions ended today while there was some bargain hunting as market had slipped significantly,” a top market analyst said.

“However, this is not sustainable because the economic concerns are still heavy while the T-bill rates moved up close to 300 basis points.”

The IMF expected to issue a statement on its discussions with Sri Lankan officials on Thursday.

The 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 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 778.7 million rupees, less than a quarter of of this year’s daily average turnover of 3.47 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 public sector and the schools have moved online for two weeks on the government’s advice to reduce transport and save 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 up 0.59% or 13.84  points to 2,350.28.

The market has so far lost 9.1% in June after gaining 6% in May. It lost 23% in April followed by a 14.5% fall in March.

The market has lost 39.7% 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 Senkadagala Finance, which gained 23.1% to 393.8 rupees a share.

Expolanka gained 3.2% to 175.3 rupees a share, while Browns Investment up 2.7% to 7.5 rupees a share. (Colombo/June 29/2022)

ECONOMYNEXT – He has backed many governments in power and he was part of some but he now comes in as a minister with more powers to give effect to his promises.

Dhammika Perera, Sri Lanka’s latest Minister of Investment Promotion in the crisis-hit Gotabaya Rajapaksa administration, made a name for himself in gaming, protected businesses and acquisitions that also brought him into banking, hotels, exports and retail.

He has been talking about innovation, entrepreneurship, and the economy for the past few years and promised that he can do a much better job given the chance.

Sources close to Perera said the businessman has been eying a direct role that could influence change in the country’s economy.

Under Mahinda Rajapaksa’s second tenure as the President, Perera was secretary to the Ministry of Transport after being the chairman of the Board of Investment (BOI) in the first.

But he could not make any significant changes in the sectors he headed. Soon after he was given the Investment Promotion portfolio last week, he asked for some time to put a few key issues in order.

“Though the country is in this situation, I think it won’t be a challenge for me to bring in investments,” Perera told the media after he was sworn in. He was referring to the country’s ongoing economic crisis, the worst in its post-Independence history.

“I have brought foreign direct investments even during the war. So, it should not be an issue for me. From Tuesday (June 28) onward, there will be approvals given in just one day.”

This time he is taking a job in government at a time when the country’s exchange rate peg has lost credibility and the economy is in the midst of unprecedented monetary instability which can only be fixed by the central bank.

Unlike during the civil war, when monetary policy was better, the country has now defaulted after two years of state interventions in the form of aggressive stimulus. Investors are uneasy and the public is in survival mode with the currency having all but collapsed.

Many people are looking to leave the island.

Perera promised to fast-track passport processing and promised to ease the traffic outside the main Department of Immigration and Emigration office in Colombo within a week while introducing one-day services in regional Department of Immigration and Emigration offices in Matara, Kandy, and Vavuniya.

“It will take 14 days for me to come up with a road map. I already have a plan. I will resolve all the issues pertaining to investments and passport issuance immediately,” he said.

Critical failures

Perera’s appointment comes after President Gotabaya Rajapaksa and his advisors pushed for quick state interventions in agriculture by banning chemical (inorganic) fertilizer while the currency collapse and high inflation are causing malnutrition among poor children.There are shortages in fuel, cooking gas, and medicines, though trade controls have made big profits for protected businesses.

Thousands of youth-led protesters are still agitating for more than 80 days demanding that President Rajapaksa resign due to his ill-advised policies that have brought the country to its knees.

Perera succeeded former Finance Minister Basil Rajapaksa, President Rajapaksa’s younger brother who resigned from parliament last month after many of the ruling Sri Lanka Podujana Peramuna (SLPP) MPs asked him to quit.

Before Perera was appointed, the island nation witnessed the resignation of a prime minister, the entire cabinet (twice over), a central bank governor, and a treasury secretary between April 03 and May 12.

Perera’s appointment comes at a time the Rajapaksa administration is going through political instability with the originally strong SLPP government having lost its mandate in the face of mounting public protests.

Before his appointment, Perera had revealed his ambitious plans to attract foreign currency inflows through attracting 25,000 foreign students into Sri Lanka’s university system to earn 2.25 billion US dollars, establishing a budget airline hub to earn 2 billion dollars, and providing opportunity for private sector educational institutions to teach ICT.

He has also revealed plans to develop Sri Lanka’s coconut industry to earn 600 million dollars, construct hospitals with internationally recognised facilities to earn 200 million dollars, improve the fisheries industry to earn one billion dollars, and to make Sri Lanka the country with the best business investment environment in Asia with a view to generating three billion dollars.

Perera has been one of the few businessmen who has navigated the country’s inward looking policies well.

Frontline Socialist Party (FSP) member Pubudu Jayagoda before Perera’s name being considered for the national list MP post exposed that Perera’s casino business failed to pay taxes in the past year. However, Perera later said he had settled it 10 days before he was sworn in as an MP.

Perera has given some hope after consecutive failures of the embattled President Rajapaksa, former finance minister Basil Rajapaksa, and former central bank governor Ajith Nivard Cabraal – all of whom built strong hopes among sections of the business community in the beginning.

Analysts say Perera has huge odds to beat in his task to bring investors if monetary stability is not restored soon. (Colombo/Jun29/2022)