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ECONOMYNEXT – Sri Lanka must begin rebuilding its agriculture sector immediately to forestall looming food shortages and to retain the international market for export crops, Prime Minister Ranil Wickremesinghe said.

“We are losing the international market for our export crops.  Action must be taken to prevent this. [Inorganic] fertilizers are needed to boost local agriculture.  It costs 600 million US dollars a year to import fertilizer for paddy, vegetables, fruits, other major crops as well as our tea, rubber, coconut and export crops.

“Since manure has to be applied from time to time from the beginning to the end of a harvest, it is essential that fertilizer is exported without any shortages. We must ensure that no money or effort will be wasted,” Wickremesinghe said in a statement made to parliament on Monday (07).

Sri Lanka’s agriculture sector has taken a catastrophic hit from President Gotabaya Rajapaksa’s ill-conceived overnight shift to organic farming. Compounded by the country’s worsening forex crisis, Sri Lanka is now looking at a possible food shortage around October, as warned by several government officials including Agriculture Minister Mahinda Amaraweera.

“Our harvest has declined in the past several months. We have to face this situation at and we have to work hard from this point onwards to ensure the next harvest is a success. That harvest, however, will be available by the end of February 2023,” said Wickremesinghe.

“In terms of rice, our country’s annual rice requirement is 2.5 million metric tons.  But we have only 1.6 million metric tons of rice in stock.  This is not limited to paddy but applies to many other crops. In a few months we will have to face serious difficulties and shortages in terms of our diets. We need to import food items to meet our daily requirements. It costs about 150 million dollars a month,” he said.

Meanwhile, the cabinet of ministers on Monday (06) approved a proposal to provide 150,000 MT of urea, 45,000 MT of MOP and 36,000 MT of TSP fertilizer for farmers for the next Maha cultivation season through the Ceylon Fertilizer Company and the Colombo Commercial Fertilizer company.

Related:

Sri Lanka state firms to buy 230,000MT fertilizer for next cropping season: Minister

(Colombo/May07/2022)

COLOMBO (News 1st); Sri Lankan Prime Minister Ranil Wickremesinghe said that the beginning of the decline of the country’s economy was when the government lost Rs. 6.6 billion in revenue with the abolition of the tax system implemented in 2019. “We must immediately return to the 2019 tax system. We must begin our resurrection from ‘Economy started to decline when 2019 Tax system was abolished’ – PMs Full Speech

ECONOMYNEXT – Sri Lanka will present an interim budget cutting capital spending and directing money for essential public services and relief for the poorer sections of society, Prime Minister Ranil Wickremesinghe said.

“Some projects will have be delayed or halted,” Wickremesinghe, who is also Finance Minister told parliament.

“We have to have a safety net for the weak.”

He said about 700 million US dollars in spent on transfers including pensions. It will be increased to 850 million US dollars wand if possible about 900 million US dollars.

About 100 billion rupees has been spent on Samurdhi relief but it has to be increased by around 150 billion to around 350 billion rupees, he said.

After Sri Lanka’s soft-peg with the US dollar collapses people are facing high food prices.

“By 2022 we have to stabilize the economy,” Wickremesinghe said. “In 2024 we can give some stimulus for growth. By 2025 we want to have a primary surplus in the budget.”

“All future government’s must keep to the plan.”

Sri Lanka is currently facing the worst currency crisis in the history of the country’s 72-year old intermediate regime central bank after stimulus triggered three currency crises in 7 years.

Each stimulus is followed by an economic shock.

After two years of stimulus, economy is set to contract in 2023.

“The central bank estimates the economy to contract 4 to 5 percnet,” Wickremesinghe said. “The IMF thinks in will be worse around 6.9 percent.

For 2023 about a trillion rupee may have to be printed, he said.

Agricultural loans to farmers who have land below two hectares will be written off he said.

Promises of loans write-off usually triggers a wave of defaults in Sri Lanka endangering banks and discouraging farming loans in the future, critics have said.

State urban housing units where occupants are now on rent will be given to them to own on a concessionary terms.

He said many were built by the father of the current opposition leader Sajith Premadasa. (Colombo/June07/2022)

ECONOMYNEXT – Sri Lanka Cricket (SLC) has decided to donate the entire revenue from ticket sale of the upcoming Australia tour of Sri Lankan games to the welfare of the people suffering from the ongoing economic crisis, a SLC spokesman said.

Eight games between the two countries will be played as day and night games, which are expected to play under flood lights and consume more power than only day light games. Two one-day games will be played in Kandy, Pallekele ground, while other six matches in the shorter version of the game will be played in Colombo.

The SLC’s executive committee has taken the decision to donate the money following a request made by the Sports Minister Roshan Ranasinghe.

“The entire ticket money from the five one-day games, three T20 games, and the two tests will be donated for the people to have their essential items,” the he said.

The first Twenty20 (T20) starts on June 7 at 1900 hours. The tour goes until end July.

SLC has already made nearly 2 million US dollars of donation for two hospitals in Colombo to buy medicines.

Sri Lanka is facing its worst economic crisis in its history with people are facing shortage of essential goods including fuel, cooking gas, milk powder, medicines, and foods.

Many people are forced to wait in queues for hours or days to get their essentials amid President Gotabaya Rajapaksa’s government has exhausted the country’s dollar reserves. Tens of thousands of people have lost their jobs or earning less because of lower demand and closure of businesses. (Colombo/June 06/2022)

This is a report produced by Bloomberg. Bloomberg: Sri Lankan President Gotabaya Rajapaksa vowed to finish the remaining two years in his term despite months long street protests calling for his ouster, but won’t stand for re-election as he focuses on fixing a financial mess that tipped Sri Lanka into its worst-ever economic crisis. “I “I can’t go as a failed president,” – Sri Lankan President Rajapaksa Vows to Finish Term, Won’t Run for Re-Election

ECONOMYNEXT – Sri Lanka’s central bank has explained its exchange rate regime, which is still creating forex shortages amid a failed attempt to float the currency after mis-targeting interest rates for two years.

Sri Lanka has a soft-peg or intermediate regime (now called a flexible exchange rate) which loses credibility quickly and collapses frequently when liquidity is injected as money and exchange policies conflict.

The rupee collapsed steeply after March 2022, as an attempt was made to float the currency with a surrender requirement (forced dollars sales to the central bank) making the regime a peg and forcing the currency down, critics have said.

The central bank is now intervening in the market with surrendered and borrowed dollars, preventing a clean float from taking place.

Sri Lanka’s rupee has fallen from 4.70 to the US dollar to 365 to the US dollar since the soft-peg was set up in 1950.

The central bank introduced a ‘guidance rate’ last month saying transactions were taking place at different rates and there was no price transparency.

Later open account imports were also banned, raising fears over food imports if the banks do not allocate dollars for food quickly.

In 2022 Sri Lanka is suffering the worst currency crises in the history of the intermediate regime central bank.

However the central bank has taken the key step of raising rates which will reduce domestic credit, private investments and therefore imports, drive more money to the deficit, and reduce money printing which is creating forex shortages.

Sri Lanka’s public are generally net savers, cannot print money, and are incapable for creating balance of payment problems, either through imports, undiyal transactions, holding foreign currency in hand or maintaining dollar deposits, unless such transactions are directly or indirectly re-financed by central bank credit and open market operations.

Forex shortages are a problem associated with soft-pegs where outflows exceed inflows through the credit system when money is printed and rupee reserves of individual banks change when interventions are sterilized.

Clean floats also do not have forex shortages. Both clean floats and hard pegs match inflows to outflows at all times.

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Sri Lanka rupee to Indonesia’s Rupiah, the consequences of state failure

Monetary regimes that are do not have conflicts involve targeting one anchor (keeping one variable constant like the exchange rate or inflation or until 1971 price of gold) and allow or change monetary policy to maintain it.

The full statement is reproduced below:

06 June 2022
Communications Department

The Current Exchange Rate Arrangement: Background, Positive Impact thus far, and Expected Outcomes

This note is intended to explain to the general public the background to the current exchange rate arrangement, and the positive impact it has already made, and expected outcomes in the period ahead.

The country is facing extremely challenging economic circumstances at present while it is going through the worst balance of payments crisis in history. The Sri Lanka rupee was subject to tremendous depreciation pressure, amidst the shortage of foreign exchange liquidity in the domestic foreign exchange market, warranting a measured adjustment in the determination of the exchange rate in early March 2022, compared to the level that prevailed in the market amidst concerns about the adverse impact of any large depreciation of the exchange rate on the society.

However, the outcome of the exchange rate flexibility that was thereafter allowed following the initial measured adjustment fell short of expectations due to the large overshooting by market forces, reflecting the significant liquidity pressures that prevailed in the domestic foreign exchange market as well as the delay in market correction. This behaviour of exchange rate since allowing more flexibility in March 2022 suggests the need for careful sequencing of measures when allowing flexibility in exchange rate under balance of payments crisis conditions.

Following the excessive depreciation, inflation accelerated significantly through imported prices, while second-round effects of such excessive depreciation on other goods and services were also observed subsequently. Moreover, due to the acute shortage of foreign exchange in the domestic foreign exchange market, along with continuous depreciation of exchange rate, the conversions of foreign exchange by the foreign exchange holders delayed due to expectation of further depreciation and high premium offered in the grey market, thus adding further pressures on the currency.

Meanwhile, the demand for foreign exchange in the grey market thrived to part finance rising import demand outside the banking system, causing further pressures on the currency as well as heightening stresses in the banking system. This significant volatility of the exchange rates drove up the interbank exchange rates as well as customer buying and selling rates in an abrupt nature, causing undue speculation on the currency.

Against this backdrop, limiting the extent of depreciation and excessive volatility became necessary. If remained unresolved, such boundless rate of depreciation of the exchange rate could have led to extremely detrimental impact on overall macroeconomic stability, given the severity of the balance of payment crisis that the country is going through at the moment. Further, during the discussions with the Heads of Treasuries of licensed commercial banks, the need for some guidance to the market from the Central Bank on the degree of volatility of the exchange rate movements was emphasized, while the commercial banks have the prerogative to determine the interbank spot market exchange rate.

In consultation with the market players, the Central Bank commenced providing daily guidance on the degree of volatility (with an allowable two-sided variation margin) to all licensed commercial banks from 13 May 2022 based on exchange rate determined in the interbank market on the preceding day. Although this arrangement is often misinterpreted as ‘pegged exchange rate’ regime, there are clear distinctions between the current transitory arrangement and the pegged exchange rate system. Under the pegged exchange rate regime a fixed middle rate is usually dictated by a central bank, while market driven variable spot rate being considered as the middle rate under the current arrangement.

The implementation of this arrangement has brought in a greater stability in the exchange rate determination in both formal market and grey market thus far, while also minimizing excessive margins prevailed in both markets, and the effects of the same are expected to reflect in the exchange rates used for customer transactions. According to the feedback received from the stakeholders, there exists broader consensus on the current arrangement of the exchange rate, which is market driven with less volatility and more predictability, compared to the earlier arrangement, which experienced excessively volatile of the exchange rate driven more by speculation rather than market forces and economic fundamentals.

The Government and the Central Bank implemented several complementary measures, alongside the current exchange rate arrangement, to correct some of the imbalances observed in the external sector, thereby bringing about stability in the domestic foreign exchange market. Restrictions imposed on open accounts and consignment payments terms have helped curtail activity in the grey market, thereby narrowing the gap between the official exchange rate and the grey market rate. Accordingly, the current exchange rate arrangement is viewed as a more credible mechanism, vis-a-vis an arrangement where grey market activity could operate freely.

Consequently, inflows on account of workers’ remittances to the banking system have gathered pace since the introduction of the new exchange rate arrangement, while conversions have improved. Import expenditure has declined notably in May 2022, compared to April 2022, according to provisional data from Sri Lanka Customs.

Despite the reduction in import expenditure, all possible measures would be taken to secure availability of essential commodities with the expected inflows from multilateral and bilateral sources to the banking system in the period ahead. Given the degree of overshooting of the exchange rate in March 2022, a further market based correction is expected with the deceleration of non urgent import expenditure, alongside increasing inflows to the banking system in terms of workers’ remittances and export proceeds on goods and services, among others.

This improved momentum in the domestic foreign exchange market is expected to consolidate with the progress being made towards reaching the staff level agreement with the International Monetary Fund (IMF) on a funding arrangement, along with the negotiations for bridging finance from other multilateral and bilateral partners.

The Central Bank would like to reiterate that the current arrangement of exchange rate would be reviewed from time to time, and further flexibility would be allowed if need be, once market confidence is restored, supported by envisaged foreign exchange inflows to the country.

Sri Lanka was, – for a short while, measured in months – the world’s first and only all-organic farming nation. This came about when the country’s former military strongman virtually in disguise as the nation’s de facto Defence Minister, now President, Gotabaya Rajapaksa announced an immediate overnight ban on the importation of all pesticides and Sri Lanka nosedives into an abyss of despair

COLOMBO (News 1st); Former General Secretary of the Communist Party of Sri Lanka, D. E. W. Gunasekera alleged that there are hidden forces in operation behind the detaining of the Russian ‘Aeroflot’ aircraft. He also urged the Government to probe further into the matter, and to not to pick sides in fear of diplomatic relations with India D. E. W. Gunasekera alleges hidden forces behind Aeroflot issue

COLOMBO (News 1st); What caused the country to come to its current state within two years was the bad management of the economy, says Prime Minister Ranil Wickremesinghe in an interview with NDTV. Prime Minister Wickremesinghe also said while thanking India for their assistance that, unfortunately, Sri Lanka has come to its worst situation in Post of PM, Youth in Politics, Economic Crisis : PM’s stance

ECONOMYNEXT – Sri Lanka’s China-backed Port City Project has faced a setback as due to the unstable situation in the country a top official said after two years of money printing to keep rates down triggered currency collapse and social unrest.

The Port City is a 1.4 billion US dollar sea reclamation project by unit China Communications Construction Company Limited, in partnership with the government of Sri Lanka which will sell a share of land to get revenue. Already 1.2 billion had been spent.

“We had a huge plan to aggressively market and sell Port City from this year but we have been challenged by the country situation,” Assistant Managing Director of CHEC Port City, Thulci Aluwihare told an online forum on May 28 by the Sri Lanka Economics Association.

Sri Lanka has seen progressive downgrades as money was printed to keep rates down and boost growth (stimulus or output gap targeting) under flexible inflation targeting triggering three currency crises in seven years as open market operations became increasingly aggressive.

In the latest crisis, the rupee collapsed to 366 to the US dollars from 200, in a botched float with a surrender requirement after a global pandemic which also delayed the project.

Monetary stability has still not been restored with money printing continuing and shortages seen in energy and medicines.

The Port City’s first large project, a 250,000 square metre office and retail development called the International Financial Centre are due to break ground in the third quarter of 2022, Aluwihare said.

The billion-dollar IFC’s first phase will see 500 million US dollars invested.

A Duty-free Store in association with two international operators, which is currently under construction, will be opened in the fourth quarter of 2022.

Utility connections to the periphery are to be completed by June 2023, he said.

Of the 100 hectares of land ready for development, 4.4 hectares by the Marina were sold for 200 million US dollars to predominantly local investors.

The Marina will be utilised for the development of an international luxury yacht marina and a five-star city hotel, which is also generating interest for residential development, he said.

Investors who get the land will then construct buildings, and permanent economic activities will then begin as businesses and residents occupy the buildings.

The project is slated to generate 143,400 direct jobs, and add 24 billion US dollars in economic value from reclamation and development. It is expected to generate 13 billion US dollars of gross domestic product a year when fully operational. (Colombo/June05/2022)