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ECONOMYNEXT – Sri Lanka is urging citizens to grow vegetables in flower pots after the country’s economists mistargeted interest rates triggering a currency collapse and forex shortages continue amid money printing at higher interest rates.

After a partially failed main (Maha) cropping season and under-cultivation in the current Yala (minor) season due to fertilizer and fuel shortages, Sri Lanka is expecting record falls in food production.

Global commodity prices including foods and energy have risen in the so-called ‘Powell Bubble’ fired by US Federal Reserves, which also initially lied and blamed rising foods on ‘supply chain shortfalls’ but has since raised interest rates to stop money printing.

“If you have twenty flowerpots, and you grow food in at least ten of them, then we can get out of this crisis,” Agriculture Minister Mahinda Amaraweera told a reporter in Colombo.

“There are so many types of Yams that can be grown. If we do that we can successfully get out of this global crisis.”

Sri Lanka has imported more rice with crop shortfalls. Agriculture experts say about 5 months’ worth of rice (about a million metric tonnes) may need to be imported.

Minister Amaraweera says already about 338,000 Metric tonnes of rice have been imported and the government wants to import more rice before prices go up further.

Sri Lanka would need about 400 million US dollars to import a million tonnes (about two months’ worth of dollars coming through the Undiyal system). However, there are warnings that all food imports may be hit after open account imports were banned by the state.

After printing money to mis-target interest rates, Sri Lanka usually imposes various controls in cascading policy errors which worsens the fallout of central bank action.

After two years of money printing by the country’s Keynesian economists who favour an unstable peg (flexible exchange rate) with discretionary monetary policy (flexible inflation targeting) and output gap targeting (printing money to push up growth) inflation is soaring.

In May, has already hit 39 percent. Food prices have risen 57.4 percent in the 12-months leading up to May.

There have been calls to reform the central bank and hold it accountable so that it can no longer practice ‘flexible’ or discretionary policy.

Under the current law which binds the agency to economic and price stability, generating monetary stability and targeting output through ‘flexible policy’ is a violation of its basic goals.

However a draft law to legalize flexible policy and allow officials to escape accountability, and also give legal assistance is in existence, critics have said. (Colombo/June05/2022)

COLOMBO (News 1st); The Ministry of Agriculture states that paddy cultivation in the Yala season is facing a serious crisis. Accordingly, a senior official of the Ministry stated that the crisis situation has arisen due to the non-avalibility of the required stocks of fertilizer for the Yala season. The official pointed out that paddy cultivation in Yala harvest in crisis due to non-availability of fertilizer

ECONOMYNEXT – State-run SriLankan Airlines had lost 170 billion rupees in 2021 and its accumulated losses had risen to 542 billion rupees, a Finance Ministry report said despite the national career improving its performance in the last quarter.

SriLankan Airline’s revenue fell to 71 billion rupees in 2020 in the Coronavirus pandemic triggering a 45 billion rupee loss.

In 2021 revenues grew to 134.6 billion rupees as foreign travel was gradually relaxed.

But the airline had been hit by high finance costs and currency depreciation as the island’s soft-pegged central bank triggered the worst currency crises in its history.

In the year to March 2022 finance costs went up to 122.5 billion rupees from 35.6 billion rupees and unrealized forex losses were 47.7 billion rupees, up from 6.8 billion rupees a year earlier.

SriLanka’s intermediate regime central bank created the worst currency crisis in its history in 2022 after two years of money printing and a botched float with a surrender requirement.

The government has re-issued letters of comfort of 205.4 million US dollars and 27.6 billion rupees to state banks for loans given to SriLankan Airlines.

The airline had trade creditors of 183 billion rupees including 89 billion rupees owed to state-run Ceylon Petroleum Corporation.

SriLankan Airlines had interest bearing liabilities of 372 billion rupees, the report said.

“This scenario has had a significant impact to the banking sector and the CPC,” the Finance Ministry said.

“Furthermore, the capital erosion of Sri Lankan Airlines has been aggravated by the massive loss experienced in 2021/22, throwing further doubt on SLA’s going concern in light of the government’s fiscal restricted fiscal space and the financial environment of the state banking sector.”

“..[U]under the prevailing economic conditions, the Government is no longer in a position to finance SLA’s losses and therefore SLA requires an immediate transformation to clear up their liabilities through a proper business restructuring by selecting a suitable
business partner.

SriLankan Airlines has lost money since ex-President Mahinda Rajapaksa ousted Emirates Airlines as managing shareholder an re-nationalized the airline.

ECONOMYNEXT – Sri Lanka President Gotabaya Rajapaksa has instructed to identify all underutilized lands owned by plantation companies and prepare an expeditious programme to cultivate food crops, his media division said on Saturday as the crisis-hit island nation is facing a food shortage in the near future.

“Plantation companies own more than 9,000 hectares of uncultivated land. The President pointed out the need to identify suitable crops for cultivation in respective estates owned by 23 companies,” the President’s Media Division (PMD) said in a statement citing Rajapaksa made the remarks at a discussion held at the President’s House, o Friday (03).

The president’s instructions come as the island nation’s agricultural experts have warned of a possible shortage of rice and other essential foods possibly in September because of lower production due to the impacts of chemical fertilizer ban last year and inability to import amid dollar shortage.

Prime Minister Ranil Wickremesinghe has already warned of an acute food shortage by August and said the island nation would require $600 million to import fertilizer amid Sri Lanka’s near zero foreign currency reserves.

Crop scientists have warned that Sri Lanka could produce enough rice only for seven months of this year due to the fertilizer ban. Before the fertilizer ban, Sri Lanka had self sufficiency in rice production.

COLOMBO (News 1st); The future of food security in Sri Lanka remains a blur, while an impending shortage looms, with the pinch of the crisis already being felt by some in remote areas, surviving on jackfruit alone or on a handful of vegetables. Experts have warned since 2020 with regard to the food crisis that would eventually A Food Crisis? The Facts

COLOMBO (News 1st); Sri Lankan Prime Minister Ranil Wickremesinghe said that the Party Leaders have arrived at a consensus with regard to the 21st Amendment to the Constitution. “It will be an amendment that will avoid any provision which will require a referendum,” he said. However, he said that will not be enough as the 21A : Party Leaders agree that it should avoid provisions calling for a referendum

ECONOMYNEXT- Prime Minister Ranil Wickremesinghe has said the government has planned to maintain supply of fuel for three wheelers in a manner that will not be create a shortage, his office said on Friday (03).

Sri Lanka has nearly more than 1 million three wheels and it has become a source of self employments for nearly 1 million people, official data show.

Many three wheel drivers lost their usual earnings while some lost their livelihoods due to fuel shortage and long queues for fuel amid the price sharply increased to record high.

Wickremesinghe had discussions regarding the supply maintenance of fuel with representatives of the Three Wheeler Associations on Thursday (02), his office said.

“The Prime Minister agreed to support the establishment of a three wheeler regulatory body,” his office said in a statement.

Sri Lanka needs around $500 million a month to import required fuel, while the country’s dollar shortage has forced the island nation to depend on an Indian credit line for fuel and essentials from March this year.

“Therefore, discussions were held at length on measures to be taken to protect the three wheeler industry in the face of the crisis facing the country in the future,” it said.

Related: https://economynext.com/sri-lankas-economic-crisis-compels-uber-pickme-drivers-to-cancel-credit-card-hires-93911/

In addition to this discussion, Wickremesinghe had meeting with representatives of the Petrol Station Owners’ Association, in which the security of the petrol stations and the regularization of fuel supply was discussed.

Security of the petrol stations and the regularization of fuel supply have become priority after a mob torched a fuel station owner’s residence in Anuradhapura on May 21, using a petrol bomb.

Related: https://economynext.com/mob-sets-sri-lanka-fuel-station-owners-house-on-fire-amid-petrol-queues-94526/

(Colombo/June 03/2022)

ECONOMYNEXT – Sri Lankan Prime Minister Ranil Wickremesinghe on Friday (03) briefed the representatives of Food and Agriculture Organisation (FAO) and United Nations Development Program (UNDP) over possible food shortage and the plans to overcome the production gap, the prime minister’s office said.

The meetings come as the island nation’s agricultural experts have warned of a possible shortage of rice and other essential foods possibly in September because of lower production due to the impacts of chemical fertilizer ban last year and inability to import amid dollar shortage.

Wickremesinghe has already warned of an acute food shortage by August and said the island nation would require $600 million to import fertilizer amid Sri Lanka’s near zero foreign currency reserves. Crop scientists have warned that Sri Lanka could produce enough rice only for seven months of this year due to the fertilizer ban. Before the fertilizer ban, Sri Lanka had self sufficiency in rice production.

Wickremesinghe met Vimlendra Sharan, the Country Representative of the FAO and Malin Herwig, the Deputy Country Representative of UNDP on Friday.

“The Prime Minister explained that in view of the threat of a food shortage, a food security program was being compiled by the agriculture department officials. This program is due to be unveiled next month, with the UNDP expressing their support for the initiative,” Wickremesinghe’s office said in a statement.

“He (Wickremesinghe) stated that the biggest issue currently facing the agriculture sector is the fertiliser and fuel shortage. The Prime Minister also elaborated on the urban agriculture initiative that he had established to try and overcome a potential food shortage.”

Sri Lanka is unable to import fertilizer although President Gotabaya Rajapaksa has cancelled his detrimental fertilizer ban policy because it does not have dollars and sharp increase in fertilizer prices globally.

Sri Lanka produces no nitrogen fertilizer. Rajapaksa banned chemical fertilizer and requested farmers to go for only organic fertilizer. Paddy harvest has seen a decline of around 40 percent in the last two cultivation seasons, crop scientists have said.

The prime minister’s office said the UNDP explained that they were compiling an innovative farming assistance program which would help the farming community overcome the fertiliser shortage.

“The FAO also explained that donors had stepped forward to assist the country in the urban agriculture program, and was hopeful that a successful implementation would see more financial support provided,” it said in the statement.

“The FAO also stated they were drafting a food crisis response plan that can be enacted in Sri Lanka.”

“The Prime Minister explained that within 5-6 months the current agriculture shortages could be salvaged if swift action was taken to address the shortages faced by the farmers.” (Colombo/June 03/2022)

ECONOMYNEXT – Sri Lanka’s power disruption is slowing down the island nation’s rubber exports, despite there is an increased global  demand for rubber-based products this year, Sri Lanka Association of Manufacturers and Exporters of Rubber Products (SLAMERP) said.

“Rubber industry’s order books are full and we being offered more orders,” Rohan Masakorala, the Secretary-General of SLAMERP told Economy Next.

“But the problem is we cant take because there’s not continuous power and energy.”

Export earnings from Rubber and Rubber finished products from January-April 2022 have edged up 1.3 percent to 337.6 million US dollars compared to 333.28 million dollars in the same period last year, Export Development Board (EDB) data showed.

Masakorala attributed the rise in demand was due to opening up of main markets in Europe after Covid-19 pandemic.

“After two years of slowdown in markets, people are demanding for more automobile while the covid infections in the key markets are still present. So we are seeing a demand for tyres as well as products like gloves,” he said.

EDB has said the demand for pneumatic & retreated rubber tyres & tubes had increased by 10.3 percent in the first four months, but the export of industrial and surgical gloves has decreased by 13.5 percent, as the industry is unable to absorb extra orders because the country grappling with its worst and unprecedented economic crisis in its history.

“Expansion is difficult when there are these uncertainties in the manufacturing sector,” Masakorala said.

Rubber is one of the top dollar earners of the country, generating 1 billion dollars for the year 2021, the highest in three years. The industry saw 33.6 percent jump in export earnings last year, the central bank data show.

The raw rubber needs a lot of energy to make value added products at high heating temperatures.

However, Sri Lanka’s extended power cuts since February 22 has dampened the growth of the industry as the island nation is still depending on Indian credit lines to import fuel for power generation due to severe dollar shortage.

“We are unable to do more business due to the current situation. The opportunity cost is the 20-30% of extra dollars we would have earned compared to last year,” the SLAMERP director general said.

“We could easily earn few more millions provided we are allowed to expand and invest to the extra demand.”

Other Sri Lankan export manufacturers are complaining that their orders are being cancelled due to fears of delivery due to the ongoing crisis. (Colombo/June02/2022)

ECONOMYNEXT – A guidance rate mandated by Sri Lanka’s central bank is another way of is not found in the real world and the monetary authority has no ability enforce a managed float (soft-peg) a top economist has said.

Sri Lanka’s central bank started quoting a guidance rate for interbank market at around 360 to the US dollar in May, about 20 to 30 rupees below the market rate at the time where a higher level of middle remittances were also starting to come from exchange houses.

Banks are quoting telegraphic transfers around 365 rupees to the dollar.

“I speak to importers everyday and they tell me that when they go to banks to buy dollar at 365 they are told to wait at least one to two months,” W A Wijewardena, Former Deputy Governor, Central Bank of Sri Lankatold a Central bank forum in Sri Lanka’s crisis on Thursday.

“They have to wait in a queue.”

Foreign exchange shortages happens in a non-credible or soft-peg (also called a managed float or flexible exchange rate) which collapses whenever the central bank injects money to mis-target interest rates.

A pegged central bank runs out of reserves when money is injected to enforce the artificial policy rate and dollars are sold to mop up the rupees hold the exchange rate, in self-feeding spiral when domestic credit is strong either due to a deficit or a recovery in private credit.

A central bank then gets into a sterilization trap where liquidity shortages coming from dollars sold to defend the exchange rate (reserves for imports or to provide ‘convertibility’ to the newly created money) are sterilized (offset) with new money, preventing reserve money and credit from slowing.

A central bank which steadily continues to provide reserves for imports then ends up financing the private sector with central bank credit, by injecting money into banks through open market operations to sterilize the interventions.

In a sterilized intervention cycle (reserves for imports) the soft-pegged central bank then loses control of reserve money in the process of trying to enforce a policy rate.

Later the money shows up as deficit finance because Treasury bill or bond (originally issued to cover past deficits) holdings of the central bank go up altering the loans to deposit ratio of banks.

However the private sector finance is eventually classified as deficit finance because the instrument used to inject money is a government security.

In the days of the classical economists of UK for example this error was not made as bankers’ acceptances were used for open market operations and central bankers could not get away blaming the deficit and not their fixation with a policy rate as they do after World War II, analysts say.

Market participants who fear a currency collapse, then hold back dollars and try to take counter measures to protect their savings from the central bank leading to a loss of credibility of the peg.

To restore the credibility of the peg domestic credit and economic activities have to smashed to make outflows fall below inflows. If the deficit is high, private sector credit has to be smashed to a greater degree and high de-leveraging has to take place in a typical IMF style ‘stabilization measure’.

The central bank has raised rates to match domestic conditions and taken the first step towards reducing outflows.

Sri Lanka’s central bank has not only lost its reserves but also lost borrowed money leaving it about 4 billion US dollars in debt by March.

Wijewardene said the central bank’s gross debt was in the region of about 6 billion US dollars while the net debt was over 4.0 billion dollars.

“The central bank debt is 6 billion dollars while the reserves are minu 4.4 billion dollars,” he said. “So putting money in central bank is like sinking well. No matter how much water you put, it won’t fill.”

With no reserves it should not try to hold an exchange rate. At the moment the central bank is accumulating more debt from Asian Clearing Union deferments as busting them on ‘reserves for imports’.

“For a central bank to hold on to an exchange rate at a given level, it should have reserves to do so,” Wijewardena said.

“If we don’t have reserves then we are holding on to a kite that this floating freely without any direction by the person who is holding the thread.”

“So when you have a negative foreign exchange position, central bank cannot fix the rate. We have lost the battle already with the exchange rate.”

“What we have to do now is to allow the exchange rate to fall to whatever the realistic level the rate would take.”

“In my view the present exchange rate policy to fix the exchange rate at middle rate officially (the previous two did it unofficially).”

“You can’t do it without having a sufficient stock of exchange.”

A central bank that runs out of reserves and cannot exchange dollars for rupees (provide convertibility and enforce an external anchor) can then float the currency (suspend convertibility) and shift the regime to a float, where reserve money is no longer altered by forex interventions ending the need to sterilize any interventions.

Reserve money no longer drains from the banking system through dollar sales and the central bank then regains the ability to enforce both a policy rate and the reserve money.

The currency then stabilizes and forex shortages disappear as long as new money is not created to generate excess liquidity in money markets.

The central bank and then peg reserve money to a domestic anchor (inflation target) instead of an external anchor (the convertibility rate) through a policy rate.

Soft-pegs or managed floats collapse when domestic credit picks because the intermediate regime central bank tries to enforce two monetary anchors (domestic and external) simultaneously (anchor conflict), eventually losing control of the policy rate, reserve money, broad money and also inflation.

Under an IMF program the currency is re-pegged and inflows sterilized to re-build reserves.

IMF programs usually advocate structural reforms.

However the IMF does not advocate the ending of the soft-peg or managed floats and the anchor conflict comes up again to trip the managed float when the economy recovers.

Instead IMF gives clues to developing country central bank to ‘modernise monetary policy’ further towards those practiced by clean floating central banks which do not collect forex reserves and do not give any forex reserves for imports.

The intermediate o dual anchor regime, worsened by monetary policy modernization (the latest permutation being flexible inflation targeting/flexible inflation targeting) then almost guarantees that the country will go to the IMF again a phenomenon classical economists call IMF recidivism.

Sri Lanka has gone to the IMF 16 times.

The trips to the IMF ends when either a clean float where reserve money is pegged to an inflation index with suitable accountability imposed on the central bank governor who fails rates on time is set up or a currency board (hard peg) linked to an external anchor is set up, ending dual anchor conflicts.

A currency board blocks both also types of central bank credit: deficit finance (monetization of the deficit) and also private sector finance by re-purchasing bonds from banks after giving reserves for imports.

The decision to end trips to the IMF and move to a single anchor regime can be made by the people who are hurt most by the soft-pegging and also politicians who are kicked out of power when currencies collapse. (Colombo/June03/2022)