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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)

ECONOMYNEXT – Fears of animal feed shortage has led crisis-hit Sri Lanka’s key zoological gardens to consider selling and releasing animals to downsize animal population to a manageable level, a top Zoological Department official said, amid the island nation’s worsening economic conditions.

Amid ongoing economic crisis, officials at Sri Lanka’s three main zoological gardens are preparing for possible feed shortages in the future because the sovereign debt-defaulted country does not have dollars to import such feeds.

The move comes as the South Indian island nation is expecting a possible food shortage among the country’s 22 million population in coming months, while lack of US dollars have limited President Gotabaya Rajapaksa government in importing both essential food for people and feed for animals.

“There is no feed shortage yet. There are some due payments for some feed suppliers and that is the issue we have at the moment,” a senior Zoological Department official told EconomyNext asking not to be named fearing possible consequences from the higher ups for reveling the real conditions.

“There are excess population of certain animals in the zoos including deers. And we are discussing with the Wildlife Department to see the possibilities to see whether we can release some of those animals back to the wild. In that way we can reduce some of the expense,” the official said.

“And also there are some domestic animals such as rabbits and birds. If there are excessive population in those animals, we will take actions to sell them. through this, we can reduce the number of animals and cost.”

On Wednesday, Minister of Agriculture and Wildlife, Mahinda Amaraweera said, concerns over finding required feed for the animals in zoological gardens in the country have been raised amid current worsening economic conditions.

Sri Lanka has around 5,000 animals under three zoological gardens in Dehiwala, Pinnawala, and Safari Park in Hambanthota.

The official said precautions are being taken to increase the income of the zoological gardens and reduce the costs at the moment including cultivating  short term crops to add to the feed supply and purchasing plant based feed from third parties have also been considered.

“We need to prepare for the worst situation, considering the economic situation of the country,”  the official said adding that introducing local substitutes for import feeds.

“We have to not kept any unnecessary excessive amount of food in our stores,” the official said.

The daily feed cost of Sri Lanka’s all zoological gardens is around 250,000 rupees.

The official said other innovative options are also being considered to prevent the starvations at zoo.

“One is foster care system. This was already there but not active. Since we already have inquiry from the interested parties, we will initiate the program in the next two days as a support for the system while letting the people interact with animals,” the official said.

“Also, we are open for donation. In special occasions people can do donations and the Department will issue a certificate for the donors, appreciating their contribution towards the wellbeing of the animals in the gardens. For the people who do not like to contribute in money, they can donate goods, foods  and medicine.”

“A medicine shortage is also there, but none of the essential medicines are in shortage yet. We are securing several suppliers for other medicines as well.” (Colombo/ June 2/2022)

ECONOMYNEXT – Concerns by China that it will be pushed to restructure a swap with Sri Lanka seems to be holding the country back from lifting conditions to allow the funds already with the central bank from being used used, ex-Central Bank Governor Indrajit Coomaraswamy said.

The proceeds of China’s swap is already in Sri Lanka but it can be used only when gross reserves reach a defined level in terms of months of imports.

“There is a challenge for the Chinese to convert that,” Coomaraswamy who is an advisor to the government in the economic crisis told an online forum.

“That is an easy win because it in the central bank account. But it can’t be used because there is a condition.

“There are concerns among the Chinese because it is a 3-year loan and it might be termed a loan and there may be pressure from the IMF and others to include it in the stock of debt to be re-scheduled.”

All swaps of the central bank from Bangladesh and India are currently excluded from re-structuring.

“So that is making them hesitate in terms of taking off that condition to enable Sri Lanka to use that money which is already in Sri Lanka central bank’s account.”

Using the money will put the central bank deeper in debt.

Sri Lanka is currently suffering the worst currency crises created by the soft-pegging central bank in its 72-year old history, and it is in debt after spending swap and IMF borrowings.

By March its net debt was 4.5 billion US dollars and the Chinese swap at it has not been able to use to engage in soft-pegging.

The central bank is currently using Asian Clearing Union payment deferred by India to engage in soft-pegging and get deeper into debt. (Colombo/June02/2022)

ECONOMYNEXT – The Free Trade Zone Manufacturers’ Association (FTZMA) is opposing Sri Lanka’s newly proposed electricity tariff hikes, warning that the move will lower the competitive advantage of local manufacturing plants which are already losing customers due to countries like Ethiopia and Bangladesh.

In a letter to Power and Energy Minister Kanchana Wijesekara, the FTZMA said that Board of Investment (BOI) enterprises were going through a tough time, and that lack of returns on equity (ROEs) are negatively impacting businesses and creating trickle down effects in the supply chain. Given these reasons, the FTZMA said, they cannot agree with a sharp hike in rates, instead calling for “reasonable revisions” to the tariffs.

The FTZMA also stated that while Wijesekara’s plan to solve Sri Lanka’s energy crisis by installing rooftop solar panels in state agencies industries and hotels was “a good idea,” it was not a practical solution as the roofing capacity available for solar panel installation would not allow to generate even half the required power.

The “exorbitantly high cost of solar batteries as a backup system to store power” was also stated as a hurdle for manufacturers.

Sri Lanka’s ongoing crisis situation is affecting the apparel industry, with many overseas brands having already moved to countries like Bangladesh, Vietnam and Ethiopia, in search of cheaper cost of operations and political and social stability.

After campaigning by the FTZMA and other parties, the government decided to give the Free Trade Zones (FTZs) uninterrupted power throughout April, despite power cuts in other parts of the country due to fuel shortages brought about by forex shortages. However, things took a turn for the worse with a recent breakdown in the Norochcholai power plant.

Sri Lanka’s power plants are subject to frequent breakdowns, and experts have been campaigning for a more diversified and long term power production scheme, but bodies like the FTZMA say that a sudden implementation of such moves would not be practical due to unbearable costs and lack of infrastructure.

The letter also added that the current price per unit of solar energy (22 rupees) was not enough to draw investors into the country, which would “halt the country’s ambition to become a high renewable energy generating nation.”

According to FTZMA Secretary Dhammika Fernando, interruptions in the normal operations of FTZ factories lead to losses of up to 18 million US dollars per day, which is not a cost that Sri Lanka can bear in the current climate.

Sri Lanka’s apparel export income hit a five year high, at 488 million US dollars in January 2022. However, Fernando stated that many SMEs in the country had reported that their order books were empty after July of this year. Given the situation, it is uncertain if the country can meet its target of 8 billion US dollars for apparel exports by 2030. (Colombo/Ju01/2022)

ECONOMYNEXT – Sri Lanka owes global shipping lines 70 million US dollars in delays as agents were unable to find the foreign exchange to remit the money, and has asked for port dues to be paid in rupees instead, a media report said.

Shipping lines may abandon Sri Lanka, halting imports and exports if arrears continue to accumulate, Sri Lanka’s Daily Mirror newspaper quoted a representative of the Ceylon Association of Shipping Agents as saying.

The CASA had requested Shipping Minister Nimal Siripala de Silva to allow shipping agents to pay port charges in rupees as a solution, the report said.

From June 01 Sri Lanka Ports Authority had required all payments to be made in US dollars, the report said, in gradual payment dollarization, as the country faced persistent forex shortages.

The CASA had said that shipping agents get payments from customers in rupees.

These include payments such as LCL (small shipments less than a container load) charges, change of status, reefer electricity charges, and payments for break-bulk cargo, casual callers, and tanker vessels, the report said.

Minister de Silva had promised to talk to the central bank and come up with a solution.

Sri Lanka’s central bank has printed large volumes of money since early 2020 triggering the worst currency crisis in its 72-year history.

The intermediate regime central bank operates a soft peg which collapses whenever money is printed to keep interest rates artificially low when deficits go up or domestic private credit strengthens. (Colombo/June02/2022)