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ECONOMYNEXT – Foreign banks are refusing to confirm letters of credit issued by Sri Lanka state banks, and oil suppliers are also rejecting them, Power and Energy Minister Kanchana Wijesekera said as the country reels from the worst currency crisis in the history of the central bank.

A supplier who was given an order for petrol had rejected a letter of credit issued by a state bank.

At first efforts were made with Bank of Ceylon to issue a Letter of Credit and later People’s Bank agreed to issue a letter of credit.

Minister Wijesekera said efforts were made to get Standard Chartered Bank and some Indian banks to confirm the Letter of Credit but they had declined.

The supplier then tried to get the trade credit approved by a financial institution affiliated to them, but a few days later the agency had also refused.

The ship had then been diverted to an Indian port, he said and CPC could not confirm when the next petrol ship would come.

State run Ceylon Petroleum Corporation owes US$326mn to traditional suppliers through the Bank of Ceylon and would owe US$371mn to suppliers by June and July when the terms expire through letters of credit opened by People’s Bank, he said.

The LCs related to fuel imports made in November, December, January, February, March and April 2022.

Some suppliers like Petro China used to give Sri Lanka 180 days of credit through LCs, Minister Wijesekera said.

Sri Lanka is operating probably the most deadly monetary regime cooked up mainly by US neo-Mercantilists and peddled to third world nations called flexible inflation targeting where a unstable reserve collecting peg (flexible exchange rate) is bombarded with liquidity injections via open market operation (flexible inflation targeting) until it collapses.

Traditional suppliers to Ceylon Petroleum Corporation could no longer bear the risk of supplying Sri Lanka due to unsettled arrears, he said.

However efforts were underway to develop a payment plan to settle them, he said.

Sri Lanka was not getting responses for recent oil tenders he said. Except for a solitary tender for Jet-A1 which was too expensive at around 70 million US dollars when the normal price was around 50 million dollars, there were no responses for regular tenders, he said.

With old suppliers in arrears the CPC had evaluated proposals from a number of new suppliers who had made proposals and given letters of awards.

Several of the new awardees had also moved out, he said.

“Two suppliers told me that their banks when they went to their banks, their suppliers refused to supply after a further downgrade a few days ago they cannot agree to LCs with these banks or tripartite agreements,” Wijesekera said.

The new supplier had asked for pre-payment but there was no provision in the agreement to do that.

However the CPC was now looking at paying upfront and getting oil, he said. (Colombo/June27/2022)

ECONOMYNEXT – Sri Lanka’s private bus operators need an overall fare hike to account for currency depreciation and the rise in a consumer price index, Lanka Private Bus Owner’s Association (LPBOA) President Gemunu Wijeratne said after the latest diesel price hike.

“We will have to go for the Annual Revision based on several different factors, including the Colombo Consumers Price Index and the dollar rate,” said Wijeratne, told EconomyNext on June 26.

Recent price hikes were only based on the fuel price hikes said, he said.

Inflation and currency depreciation is caused by the central bank of Sri Lanka.

The agency was set up in 1950 with the power to create balance of payments trouble and high inflation by printing money in the process of giving ‘monetary policy independence’ to a group of persons called the Monetary Board at the expense of the welfare of nation.

Global fuel and food prices have also moved up due to so-called Powell Bubble triggered by the Federal Reserve Chairman Jerome Powell.

“I can’t say how much the price will increase, because that is up to the National Transport Commission,” Wijeratne said, referring to the regulator who approves price hikes based on a formula.

Wijeratne said price hikes would be ‘hard to bear’ for passengers and blamed politicians for the inflation.

“It’s already unbearable, and it’s unfair on them,” he said. “It’s a pitiful situation, but we have no choice. We have to pay for the sins of loss making organizations like the Ceylon Petroleum Corporation, we have no choice.

“Politicians have to take responsibility for these hardships.”

Wijeratne stated that only around 10 percent of buses were currently in operation due to the unavailability of fuel.

The Power and Energy Ministry has said private buses were allowed to refuel at state-run Sri Lanka Transport Board depots, but Wijeratne said many buses were on fuel queues.

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“A lot of bus drivers are on strike. They don’t have fuel and can’t run,” said Wijeratne.

Sri Lanka’s schools, which were closed due to the fuel crisis will reopen for three days next week, even as the crisis continues. (Colombo/Jun26/2022)

ECONOMYNEXT – Sri Lanka’s Consumer Affairs Authority (CAA) has prohibited the use of paddy or rice in the manufacture of animal feed.

An extraordinary gazette issued by the CAA dated June 24 states that no  importer,  manufacturer, trader or distributor shall import, sell, expose or offer for sale, store, transport, distribute or buy or purchase any rice or paddy directly for the manufacture of animal feed or otherwise as an ingredient for the manufacture of animal feed.

The directive came into effect as of Friday June 24.

Sri Lanka is going through its worst ever forex crisis, and the government has warned of possible food shortages in the months ahead, triggered by an ill-advised chemical (inorganic) fertilizer ban coupled with a crippling shortage in US dollars. (Colombo/Jun25/2022)

ECONOMYNEXT – Sri Lanka’s soft-pegged central bank said it is tightening legal tender framework limiting the possession of foreign currency notes to 10,000 US dollars from 15,000 amid the worst currency crisis in the history of the institution.

However holders can deposit foreign currency in a bank and escape the monetary expropriation through depreciation. the deposited money is only returned to bank customers in domestic currency.

People trying to protect their earnings against depreciation were given two weeks from June 16 to convert the dollars or deposit them in a dollar account.

“At the end of the said amnesty period, the Central Bank of Sri Lanka has the right to initiate actions against persons who hold foreign currency in possession by violating the Order, in terms of the provisions of the Foreign Exchange Act,” the agency warned the people hit by depreciation and high inflation.

Since the Central bank was set up in 1950, Sri Lanka’s legislators has given the agency increasingly draconian powers to restrict the economic freedoms of citizens without enacting a strict laws to limits its independence to mis-target interest rates and trigger currency crises.

“The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges,” explained classical economist Friederich Hayek.

“Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference.

“Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty.

“It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape‐​not merely for the rich but for everybody.”

The rupee has fallen from 4.70 to 360 to the US dollar since the agency was set up abolishing a currency board that had taken the country through a Great Depression and two World Wars.

The full statement is reproduced below:

Department of Foreign Exchange
25.06.2022

AMENDING LIMITS AND TERMS AND CONDITIONS ON POSSESSION OF FOREIGN CURRENCY

With the intention of attracting foreign currency in the hands of the public into the formal banking system, the Minister of Finance has issued an Order under Section 8 of the Foreign Exchange Act No. 12 of 2017 as follows:

(1) Reducing the amount of foreign currency retained in possession by a person in, or resident in, Sri Lanka from USD 15,000 to USD 10,000 or its equivalent in other foreign currencies.

(2) Granting an amnesty period of 14 working days effective from the date of the Order (16 June 2022) for persons in, or resident in, Sri Lanka who hold foreign currency notes in possession for the following:

i. To deposit into a Personal Foreign Currency Account or into a Business Foreign Currency Account as specified in the Order, or

ii. To sell to an Authorized Dealer (A Licensed Commercial Bank or National Savings Bank) a. Contact any Licensed Commercial Bank or National Savings Bank.

b. Refer the Order under Section 8 of the Foreign Exchange Act published in the Gazette (Extraordinary) Notification No. 2284/34 dated 16 June 2022 via the official website of the Department of Foreign Exchange, www.dfe.lk.

c. Contact the Department of Foreign Exchange through 011-2477255, 011-2398511 and [email protected].

At the end of the said amnesty period, the Central Bank of Sri Lanka has the right to initiate actions against persons who hold foreign currency in possession by violating the Order, in terms of the provisions of the Foreign Exchange Act.

ECONOMYNEXT – A delegation of top US Treasury and State Department is visiting Sri Lanka as the country reels from a collapse of a soft-peg (flexible exchange rate) backed by conflicting monetary policy.

Members of the delegation include Robert Kaproth, Deputy Assistant Secretary of Treasury for Asia, and Ambassador Kelly Keiderling, Deputy Assistant Secretary of State for South and Central Asia.

“The visitors will meet with a wide range of political representatives, economists, and international organizations,” the US embassy in Colombo said in a statement.

“In all their meetings, they will explore the most effective ways for the U.S. to support Sri Lankans in need, Sri Lankans working to resolve the current economic crisis, and Sri Lankans planning for a sustainable and inclusive economy for the future.”

Sri Lanka which has a Latin America style pegged central bank with extensive sterilization powers and open market operations, has entered its first default cycle in April 2022 and is casting about for foreign aid after the currency collapsed from 200 to 360 to the US dollar.

Sri Lanka which has a Latin America style pegged central bank with extensive sterilization powers and open market operations, has entered its first default cycle in April 2022 and is casting about for foreign aid after the currency collapsed from 200 to 360 to the US dollar.

“This visit underscores our ongoing commitment to the security and prosperity of the Sri Lankan people,””.S. Ambassador to Sri Lanka, Julie Chung said in a statement.

“As Sri Lankans endure some of the greatest economic challenges in their history, our efforts to support economic growth and strengthen democratic institutions have never been more critical.”

U.S. has announced120 million in new financing for Sri Lankan small and medium-sized businesses, a 27 million dollars contribution to Sri Lanka’s dairy industry and 5.75 million in humanitarian assistance to help those hit hardest by the flexible exchange rate.

The flexible exchange rate has pushed up food prices beyond the reach of the less affluent classes.

“In the coming months, the U.S. will continue to support Sri Lankans as they revive their economy, combat food insecurity, and promote public health and education,” the embassy said.

“The United States also strongly supports Sri Lanka’s decision to seek assistance from the International Monetary Fund, which can provide the most durable resolution to the present crisis.”

Sri Lanka has gone to the IMF 16 times but has not been able to end currency crises.

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Though the IMF can help stabilize the exchange rate temporarily by smashing the domestic private sector the central bank is encouraged to return to aggressive liquidity injections (in as little as two years under flexible inflation targeting) and triggers another currency crisis.

The phenomenon is known among classical economists as recidivism.

Under an IMF program there is no hope for a single anchor money regime such as inflation targeting, due to the obligation to target the exchange rate, operate a reserve collecting peg to pay back the loan to the Fund. (Colombo/June24/2022)

ECONOMYNEXT – Sri Lanka’s President Gotabaya Rajapaksa has met a team from the International Monetary Fund who are in the island to negotiate a bailout involving tighter monetary and fiscal policies and a debt re-structuring.

The IMF mission was led Deputy Director of IMF’s Asia Pacific Department Anne-Marie Gulde. The IMF has also appointed senior mission chief Peter Breuer, who is Chief of the Debt Capital Markets Division, Monetary and Capital Market Department of the IMF.

IMF’s Mission Chief for Sri Lanka Masahiro Nozaki, Resident Representative for Sri Lanka Tubagus Feridhanusetyawan had also met President Rajapaksa.

“IMF representatives briefed the President regarding the preliminary round of discussions heldwith the Prime Minister, the Ministry of Finance, the Central Bank and other economic authorities and experts as well as regarding the current situation,” his office said in a statement.

“The delegation reaffirmed their commitment to support Sri Lanka at this difficult time, in line with the IMF’s policies.

“The President elaborated on the current economic situation and expressed his gratitude to the delegation for their support to Sri Lanka during difficult times.”

The IMF was invited to Sri Lanka at the request of President Gotabaya Rajapaksa at a time when state economists were still supporting ‘stimulus’.

Stimulus or money pritning became a fad during the Coronavirus crisis and was endorsed by the IMF and major reserve currency central banks also engaged in the practice creating a ‘hangover’ in the form of high inflation.

After the Fed fired a massive commodity bubble food prices are high around the world and Mercantilists are now claiming there is a ‘food crisis’ s just as they claimed at the height of the Greenspan-Bernanke bubble in 2008.

Sri Lanka defaulted on the its foreign debt after 7 years of aggressive monetary stimulus, involving call money rate targeting, real effective exchange rate targeting and output gap targeting, including with fiscal stimulus (tax cuts) which led to monetary instability and higher foreign borrowings.

The country is now trying to re-structure its foreign debt but is also attempting to borrow a whopping 6.0 billion dollars in 2022 amid enhanced monetary instability. (Colombo/June24/2022)

ECONOMYNEXT – Sri Lanka stocks closed firmer for a fourth ]straight session on Friday, as investors expect the ongoing government discussions with the visiting 10-member International Monetary Fund (IMF) would end in a positive note to ease the current economic crisis, brokers said.

After the market closed the IMF delegation met President Gotabaya Rajapaksa to discuss about the current economic crisis, a presidential source said.

The main All Share Price Index (ASPI) closed 1.26% or 95.10 points higher at 7,651.19. It has gained 3.1% in the last four sessions.

Foreign investors, however, sold a net of 39.5 million rupees worth of shares on Friday. The market has suffered a total foreign outflow of more than 1.25 billion rupees so far this year.

“There is some hope of an IMF deal. So far nothing has happened as in the past. So investors believe that the outcome will help to stabilise the economy,”  a market analyst said.

The turnover was 1.25 billion rupees, highest since June 07, but still around a third of this year’s daily average turnover of 3.52 billion rupees.

Analyst have said there is a lot of selling pressure in the market because the investors will not see an ideal investment climate at least for the next 9-months due to high interest rates and taxes.

Th 10-member IMF team arrived in Sri Lanka on Monday and began discussions on policy corrections with Prime Minister Ranil Wickremesinghe 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 gained 1.59% or 38.75 points to 2,470.19.

The market has so far lost 5.5 in June after gaining 6% in May. It lost 23% in April followed by a 14.5% fall in March.

The market has lost 37.4% 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 gain and ended 3.5% firmer to 192.25 rupees a share and brokers said its  rupees cash dividend announced on Wednesday still attracting more investors.

LOLC Holdings Plc gained 4.1% to 436.25 rupees a share, while Hayleys ended 5.2% to 65.20 rupees a share. (Colombo/June 24/2022)

COLOMBO (News 1st); The Ambassadors representing the European Union has requested the President to consider the countries in the region as close friends of the country, and assured continued support to the nation. The members of the EU delegation met with the President at the President’s Office today (24), and pointed out that they can EU Ambassadors urge President to send firm message on future economic plans

ECONOMYNEXT – Sri Lanka is looking at ways to trim the public sector by allowing state workers to go on leave for other jobs both locally and abroad as a worsening economic crisis compels the island nation to reduce government expenditure.

The country is going through its worst ever forex crisis and the government is faced with the possibility of cutting down the number of employees in the state sector in order to manage a massive wage bill, even as talks begin with the International Monetary Fund (IMF) on a possible bailout.

Sri Lanka has more than 1.5 million public sector employees at present, the size having doubled over the past 15 years, according to official data. Efficiency in the public service is lower compared to that of Sri Lanka’s peers in Asia, despite there being a public servant for every 14 citizens.

Most state owned enterprises (SOEs) have become a dumping yard for politicians to recruit their supporters, resulting in more employees with very little do in spite of a monthly payments and pension scheme. Power and Energy Minister Kanchana Wijesekera recently said there are 26,000 employees working in the state-owned Ceylon Electricity Board (CEB) alone, an institution that can be run with just 5,000 employees.

In 2021, the government paid 86 cents as salaries and pension payment to public servants from every rupee it earned as tax revenue, leaving little for other public investments like health and education.

Many multilateral finance organisations including the IMF, the World Bank, and the Asian Development Bank (ADB) have advised Sri Lanka to reform the public sector and to keep it tight and efficient bu political leaders have been stubborn in their reluctance to heed the advice fearing political repercussions including electoral defeats.

However, the ongoing financial crisis has forced the government to look into alternatives, government sources said.

“We may either have to go for a salary cut or reduce the number of  government servants by at least 30 percent as the first step,” a top government official told Economy Next.

This week, the Ministry of Public Administration came up with two key proposals to reduce the size of the public sector: No-pay leave for state sector employees to go for foreign jobs or to work locally in the private sector.

“It has been decided at the meeting of the Cabinet of Ministers held on 13.06.2022 to grant leave with no pay to be spent in/out of Sri Lanka to public officers under special provisions, deviating from the provisions existing in the Establishments Code regarding the granting of leave with no pay, until further notice,” M M P K Mayadunne, Secretary to the Ministry of Public Administration, Home Affairs, Provincial Councils and Local Government, said in a circular issued on Wednesday June 22.

“Public officers are able to obtain leave with no pay to go out of Sri Lanka subject to a total period of five (05) years maximum, so as to be applicable to seniority and pension.”

Public servants who are leaving the country for foreign jobs need to send remittances through formal channels, ranging from 100-500 US dollars monthly depending on their grades, the circular showed.

It has also addressed the key issues of seniority and eligibility for pensions if they choose to leave the government service. According to the new circular, there won’t be any impact on both these both sensitive areas.

In addition to this, a committee has been appointed to find out if five years of leave could be granted to government employees to work in the private sector. The committee is expected to submit its report to the cabinet within the two weeks, the government official said.

“There is no way we can go ahead with the current public sector. The ideal size is 500,000. But it is an ambitious target and there could be a lot of socio-economic impact if we are going to implement that in the short term,” the official said.  (Colombo/Jun24/2022)

ECONOMYNEXT – A 15,000-metric ton shipment of rice, milk powder and essential medicines worth over three billion Sri Lankan rupees arrived in Colombo as part of a Indian humanitarian aid package to cash-strapped Sri Lanka as the island nation goes through its worst ever forex crisis.

The Indian High Commission in Sri Lanka tweeted Friday June 24 afternoon that more aid will follow.

From the people of #India to the people of #SriLanka!!! High Commissioner,Hon'ble Ministers @Keheliya_R, Nalin Fernando, MPs, various dignitaries and officials welcomed a large humanitarian consignment worth more than SLR 3 billion from #Tuticorn today. (1/2) pic.twitter.com/pMOF8kJppx

— India in Sri Lanka (@IndiainSL) June 24, 2022

This is the second such shipment to arrive from Tamil Nadu, India, since Sri Lanka defaulted on foreign debt as the country’s foreign reserves depleted making it difficult to pay for imports including essentials.

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Indian shipment of rice, milk powder, medicines worth 2bn arrive in Sri Lanka

Friday’s donation, worth over 8.3 million US dollars, was ceremoniously handed over to Health Minister Keheliya Rambukwella, Minister of Trade, Commerce and Food Security Nalin Fernando and other officials.

Indian media reported that the shipment had set off from Tuticorin on Wednesday June 22.

The Tamil Nadu state assembly passed a resolution on April 29 to provide assistance to Sri Lanka. The Times of India reported that the Tamil Nadu government has promised total aid worth over 15.7 million US dollars. (Colombo/Jun24/2022)