Crisis-hit Sri Lanka cabinet okays US grant after rejecting $480 mln...
ECONOMYNEXT – Sri Lanka Cabinet has given green light to a proposal submitted by the Prime Minister to obtain a grant from the United States of America, nearly two years after President Gotanaya Rajapaksa rejected a $480 million from the U.S.-based Millennium Challenge Corporation (MCC).
The $57 million comes through two agreements signed between the Governments of Sri Lanka and U.S. to supply funds to strengthen the cooperation for democratic good governance and social integrity’ and to create a sustainable and covered economic development’
The proposal by the Premier Ranil Wickramasinghe suggested signing a new agreement for implementation of a new programme for financing 57 million US dollars by the United States Agency for International Development (USAID).
The project has been named as ‘The Programme for a Democratic, Prosperous Sri Lanka with the Ability to Survive Amidst Disasters’ until the year 2026, paying the preliminary attention on the fields of productive democratic governance, growth based on a secure market and strengthening the resources required to sustain pressure and stress.
President Rajapaksa in November 2021 said that his government will never sign the MCC agreement proposed by the U.S soon after the then Secretary of State Mike Pompeo’s visit. However, the U.S. cancelled the MCC offer to Sri Lanka one month after Rajapaksa’s statement. (Colombo/ June 28/2022)
Sri Lanka shares hit 2-month low as economy gradually comes to...
ECONOMYNEXT – Sri Lanka stocks ended at a two-month closing low on Tuesday (28), slipping for the second session as the country’s fuel shortage which has led to a gradual standstill weighed on the market sentiments, brokers said.
The main All Share Price Index (ASPI) closed 1.87% or 139.25 points lower at 7,312.66, its lowest close since April 27.
“This is how the market will be for the next 10 days until we have some confirmation on the fuel supply,” a top market analyst said.
“However, if there’s news about an IMF staff-level agreement tomorrow, we may see some positive in the market.”
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.
Traditional suppliers to state-run fuel retailer Ceylon Petroleum Corporation could no longer bear the risk of supplying Sri Lanka due to unsettled arrears, he said.
The country also has issues in opening letter of credit and some of the new suppliers are asking for pre-payments.
The turnover was 815 million rupees, less than a quarter of of this year’s daily average turnover of 3.47 billion rupees.
A 10-member IMF team arrived in Sri Lanka and began discussions on policy corrections with Prime Minister Ranil Wickremesinghe on June 20 and the talks have been seen as positive for the investor sentiment. However, Sri Lanka must show progress on debt restructuring before IMF lends any money.
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 plunged 1.88% or 44.65 points to 2,336.44.
The market has so far lost 9.7% in June after gaining 6% in May. It lost 23% in April followed by a 14.5% fall in March.
The market has lost 40% 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.
Expolanka Holdings led the fall, slipping 4.2% to 169.75 rupees a share.
Sampath Bank fell down 3.5% to 30 rupees a share, while Aitken Spence eased 6.4% to 79.2 rupees a share. (Colombo/June 28/2022)
Is media not essential?
Sri Lanka GDP shrinks 1.6-pct in 1Q 2022
ECONOMYNEXT – Sri Lanka gross domestic product (GDP) contracted 1.6 percent in the first quarter of 2022 the state statistics office said as monetary instability took its toll in the worst currency crisis in the history of the country’s intermediate regime central bank.
Agriculture contracted 6.8 percent, industry shrank 4.7 percent but service grew 0.7 percent.
The economy started slow compared to 2021 “due to adverse effects of some factors such as inflation, foreign exchange devaluation and dollar deficit,” the statistics office said.
Forex shortages are a problem associated with intermediate regime central banks (flexible exchange rates).
Sri Lanka ‘s central bank started to employ increasingly aggressive open market operations after 2015 with the adoption of a highly discretionary flexible inflation targeting coupled with output gap targeting (printing money for growth) three currency crises in a row.
The GDP deflator was 19.3 percent and the national consumer price index grew 18.6 percent as the central bank inflated the economy.
Sri Lanka faces risk of international airlines pullout after fuel notice
ECONOMYNEXT – Sri Lanka may face international flights pulling out of the country after the island nation’s civil aviation authority (CAA) issued a notice to such airlines asking them to carry return fuel when arriving in Sri Lanka, industry experts warn.
After June 28, 2022, aircrafts will have to carry their return fuel according to a CAA notice to airmen (NOTAM) which strictly advised scheduled and non-scheduled airlines to carry return fuel when arriving in the island nation as Sri Lanka’s oil bunkers are out of A1 jet fuel.
“We can’t go on like this but temporarily airlines can bring their return fuel and SriLankan can fuel at their onward destinations,” a top CAA official told Economy Next.
The island’s main Bandaranaike International Airport has a 7.8 million litre capacity fuel tank while Mattala International airport has a 3 million litre fuel tank.
A NOTAM was issued on June 26, when Sri Lanka is looking for more tourists to boost foreign inflows.
The move signals the jet-fuel tanks have run dry at the airport.
Sri Lanka is going through a severe forex crisis in it’s 72-year history created by ill-advised soft-pegged monetary policies.
The fuel import bill for the first four months of 2022 has jumped 38 percent to 1.9 billion dollars, compared to the same period in 2021 and the country is desperate for dollars with its foreign reserves have fallen to just less than equal to one month of imports.
The recent downgrades by rating agencies following the debt default in April and suppliers asking for an up-front payment to supply fuel have hit the usual fuel supply to Sri Lanka.
Hence to obtain jet fuel, the ministry has invited a few companies including marine bunker companies to provide aviation fuel.
It has already selected one out of a half dozen companies to supply the Jet-A1 fuel, but the supply has yet to start.
The state-run Sri Lankan Airlines too has been given permission to import fuel.
“There’s a possibility of airlines opting out of Sri Lanka simply because their operational factors are becoming tenuous,” the official said.
Normally airlines make a considerable portion of revenue from their cargo hence don’t carry return fuel.
A flight choosing to refuel at a different destination will add extra operational time for the airlines that will have a direct impact on its crew too.
“For these factors, I don’t think airlines can continue for a long time. But for the time being, all airlines will look to manage the situation,” the official said.
Aircraft to carry extra fuel they must cut down on their cargo.
“So for how long can the airlines compensate on their payload? It’s business for them,” the official questioned.
Most aircraft that fly to Sri Lanka are short-sector narrow-body aircrafts A320 and A321 which have smaller tanks.
Most of the budget carries such as Indigo, Vistara, FlyDubia, Oman airlines operate on narrow body aircrafts to Sri Lanka.
“When you are a short sector, landing in another airport en route for refuelling is not practical. So, it will definitely be an issue,” he explained.
Whereas wide-body aircraft can easily carry fuel such as the aircraft operated by Emirates, Turkish Air, Etihad, Qatar and Singapore airlines.
For the moment he says wide bodies will be able to manage. However, it is likely to come with a cost that will shoot the ticket prices for air travel to Sri Lanka.
In the last two years, the island aggressively brought down newer airlines to the country with an average of 90 airline carriers arriving in the country on a daily basis.
Officials say the numbers have dropped down to around 42 airlines carrier per day including SriLankan Airlines
Officials are in discussion with state-run fuel retailer Ceylon Petroleum Corporation (CPC) to find ways to supply the needed fuel and they are hopeful something can be sorted out. (Colombo/june27/2022)
CAN SRI LANKA SURVIVE?
Sri Lanka cabinet clears plan allow new foreign fuel distributors
ECONOMYNEXT – Sri Lanka’s cabinet of ministers has cleared a proposal to allow companies in oil producing countries to distribute fuel as the country is in the grip of a monetary meltdown triggered by mis-targeting of interest rates by a intermediate regime central bank.
At the moment 90 percent of fuel distribution is done by state-run Ceylon Petroleum Corporation and about 10 percent by Lanka IOC.
“Due to the currency crisis faced by Sri Lanka it is a big challenge to supply oil without interruption,” a statement issued after the weekly cabinet meeting said.
“In that situation it is seen as advisable to allow companies in oil producing countries to import and distribute oil using their own resources, without putting pressure on foreign currency problem.”
“The cabinet has approved a proposal by the Minister of Power and Energy to enter into long term agreements with companies selected through an orderly process.”
Energy Minister Kanchana Wijesekera said on June 25 that players may be given 200 to 300 filling stations out of the 1,190 fuel stations operated by state-run Ceylon Petroleum Corporation.
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Sri Lanka plans to allow more fuel distributors
However they have to import and distribute oil on credit for 6 to 12 months, he said.
Sri Lanka has a habit of importing oil on credit and selling every time the soft-pegged central bank prints money to mis-target interest rates and triggers currency trouble. The CPC is already heavily indebted due to the soft-pegging and borrowings.
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On June 27, a group of CPC workers held Energy Ministry Secretary Mapa Pathirana hostage inside his vehicle and blocked his vehicle from leaving his office in a protest against the privatization plan.
Sri Lanka has had foreign exchange trouble ever since a soft-pegged central bank was set up in 1950 but the current meltdown is the worst in its history.
The rupee has fallen from 200 to 360 to the US dollar in a botched attempt to float the currency since March 2022.
The currency is still under pressure due to money printing. (Colombo/June27/2022)
Sri Lanka central bank to give payment plan for oil supplier...
ECONOMYNEXT – Sri Lanka’s intermediate regime central bank which is in the midst of the worst currency crisis in its history will give a payment plan to settle arrears to oil suppliers, a statement issued after a meeting with President Gotabaya Rajapaksa said.
“The Governor of the Central Bank has agreed to pay the outstanding payments due to the relevant companies for the fuel supply with a plan,” the statement said.
“President Gotabaya Rajapaksa instructed the officials to take immediate action to import fuel using the existing funds available until then.”
President Rajapaksa had met the agents of the main oil suppliers to Sri Lanka on June 27.
“Fuel supply agents pointed out the need for direct engagement of the CB Governor and the Secretary to the Treasury with the mother companies supplying fuel, international banks and financial institutions,” the statement said.
“It was also decided to hold discussions with the relevant mother companies to obtain fuel within a certain grace period if fuel is not made available as per the letter of credit (LC) opening procedure followed so far.
“The President instructed to formulate a formal plan for the next few months to manage and maintain the fuel supply properly.”
“It was decided to provide funds from the Central Bank and the Ceylon Petroleum Corporation to restore the supply of fuel,”
Sri Lanka’s central bank ran out of reserves in the first quarter of 2022 after printing money for two years and is now intervening to maintain non-credible peg at 360 to the US dollar mainly with Asian Clearing Union dues deferred by India.
Forex shortages are problem associated with soft-pegged exchange rates and are absent in clean floats and credible pegs or currency boards.
There is also a surrender requirement to push the rupee down.
Sri Lanka’s rupee has fell to 370 to the US dollar from 200 in an attempt float the currency with a surrender requirement (forced dollar sales to the central bank by banks) while money continues to be printed to keep rates down. (Colombo/June27/2022)
Sri Lankans asked to stay at home as country runs out...
ECONOMYNEXT – Sri Lankan are asked to stay at home from midnight on June 27 until July 10 cabinet spokesman Minister Bandula Gunewardena said as the Indian Ocean island ran out of fuel in worst currency crisis in history of its soft-pegged central bank.
The cabinet of ministers had decided that fuel will only be issued to essential services like the port, health, food distribution, agricultural transport services from midnight June 27.
“All other sectors are requested to stay at home and provide services online and help in this difficult time,” Minister Gunewardene said.
“If not we will not be able to distribute the limited stocks to essential services.”
Sri Lanka is expecting to have a better supply of fuel from July 10, Minister Gunewardena said without explaining details.
State bus companies will provide short distance services.
“Inter-provincial transport will most likely stop,” he said. “We expect private companies in export and tourism will continue to provide un-interrupted services.”
Sri Lanka is suffering severe forex shortages and a high inflation after two years of money printing to mis-target interest rates.
An attempt float with a surrender required led to a collapse of the currency from 200 to 370 to the US dollar.
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Sri Lanka economy grinding to a halt as monetary meltdown bites fuel imports
The central bank however has continued to print money to control interest rate and is also imposing a non-credible peg at 360 to the US dollar.
Sri Lanka to order exporters, embassies, hotels to pay electricity bills...
ECONOMYNEXT- Sri Lanka will order exporters, embassies, non-resident visa holders, hotels and will be ordered to settle their electricity bills in US dollars, the regulator has said as the island is in the grip of the worst currency crisis in the history of its soft-pegged central bank.
The customers will be invoiced in Sri Lanka rupees but they will have to settle the bills in US dollars, PUCSL Chairman Janaka Ratnayake said.
The money will be used to import coal, spare parts and foreign currency payments to private power producers.
There are plans to buy power from renewable power companies, which have political clout, for US dollars though the CEB does not invoice customers in US dollars, exposing the agency to foreign currency risk the same way as it is exposed to coal and liquid fuel.
Due to a broken soft-peg with the US dollar, Sri Lanka has difficulties transferring real wealth from the rupee credit system to the US Fed linked dollar banking system and fuel imports in particular have been badly hit.
The PUCSL is expected to hike electricity tariffs following a steep fall in the rupee in a botched attempt to float the currency after two years of money printing to mis-target interest rates.
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Sri Lanka power regulator proposes average tariff hike to Rs32 a unit
The PUCSL said companies with more than 60 percent dollar revenues will have to settle their bills in US dollars after the tariff hike is approved.
Relevant extracts from the PUCSL statment is reproduced below:
In order for CEB to import fuel (coal) and spare parts for the power plants and to pay foreign currency components of IPP invoices, it is proposed to collect sales revenue in United States Dollars from the consumers who have foreign currency income sources. Such USD collection by LECO shall be transferred to CEB as part of their Bulk Procurement payments.
Thus, all customers who earn more than 60% of their revenue in USD would be required to settle their monthly electricity bills issued by CEB/ LECO in USD, calculated at the USD exchange rate (buying rate declared by the Central Bank of Sri Lanka) at the time of settling the bill.
This will be effective along with the end user tariff review. Examples of such establishments are;
• Manufacturing establishments (including their factories, warehouses and offices) who export their products (include all factories in EPZs)
• Marine and Airline service providers (providing services to international aircrafts and ships)
• Export oriented IT or other service companies
• Non-resident visa holders and diplomatic missions/ residences
• SLTDA Registered Tourist Hotels, Boutique hotels, restaurants, etc. serving primarily foreign tourists (having rates published in USD)