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ECONOMYNEXT – Sri Lanka government foreign debt adjusted for foreign reserves went up to 32.8 billion rupees in 2022 despite no foreign deficit financing in the year, as money printing with a peg created forex shortages and a run-down of foreign reserves.

Government foreign debt, after adjusting for reserves went up to 32.8 billion rupees in 2021 from 28.9 billion rupees in 2020 despite negative 69 million US dollars in budget financing.

The debt was repaid in 2021 by running down foreign reserves and putting the central bank in debt, after it ran out of net reserves. The central bank ended 2021 with net international reserves a negative 423 million US dollars.

Debt after gross reserves also went up to 29.2 billion rupees in 2021 from 26.8 billion rupees in 2021.

When a central bank prints money, forex shortages emerge and domestic economic agents lose the ability to buy dollars for rupees at the margin.

The government also loses the ability to repay foreign debt with rupee income and is forced to borrow dollars to repay foreign debt.

From 2015 monetary instability intensified as the country followed discretionary policy involving flexible inflation targeting coupled with output gap targeting (printing money to boost growth), leading to an accumulation of net foreign debt.

Monetary stability was seen only in 2017 and 2019 when debt was paid back on a net basis and forex reserves re-built by sterilizing inflows (deflationary policy).

When outflows are sterilized after interventions in a pegged central bank, credit and imports are boosted, above the inflows leading.

In addition to flexible inflation targeting with output gap targeting which created monetary instability with currency crises in quick succession Sri Lanka also started to borrow dollars to repay dollars as official policy using ‘Active Liability Management’.

Sri Lanka had 17.2 billion US dollars of net government debt (after deducting foreign reserves) by the end of 2014. Inflationary policy began in the last quarter of 2014 in the form of liquidity releases as the economy recovered from the 2011/2012 crisis.

Net debt went up faster than the foreign financed deficit as dollars were borrowed at the gross financing level.

As a result foreign debt started to spiral in every year liquidity injections created foreign currency crises.

Separately the Ceylon Petroleum Corporation also borrowed from state banks and suppliers also running up debt in the years with inflationary policy.

In 2020 Sri Lanka was locked out of capital markets making it difficult for both the government and state banks to borrow from international markets.

In 2022 Sri Lanka defaulted on its foreign debt, despite the lack of a war. In peacetime liquidity injections can result in monetary instability faster.

ECONOMYNEXT – Sri Lanka’s official remittances were down 52 percent from a year ago to 248 million US dollars in April 2022, indicating that an attempt to float the currency had not yet succeeded and parallel exchange rates remained at a rate higher than banks.

Sri Lanka had received about 1,031.5 million US dollars in worker remittances from official banking channels.

In 2021, Sri Lanka received 2,385 million US dollars of remittances. In the first four months remittances were down 56 percent.

The rest was diverted to parallel markets as the banks were unable to give enough dollars to importers who were demanding dollars armed with excess money printed by the central bank usually to keep rates down or finance the deficit.

Money is usually printed to pay state workers, who then buy goods or travel using the printed money, triggering forex shortages and depreciation when the depleted stocks are replaced by importers.

When central bank either control the exchange rate or place exchange control, the new money seeking to go out are settled at higher parallel exchange rates via traditional Hundi/Undiyal/Hawala gross settlement systems.

In Sri Lanka a large chunk of the unofficial remittances went to food imports. As a result though there were medicine and fuel shortages, the country was spared of food shortages despite a harvest failure due state intervention in agriculture.

In April the central bank hiked policy rate 700 basis points to 14.50 percent. Market rates have risen faster to around 20 percent, bringing monetary policy to support the exchange rate.

The higher rates are expected to collapse private credit and economic activity to help stabilize the unstable soft-peg (flexible exchange rate).

The flexible exchange rate which has inherent anchor conflict (no consistent monetary policy) due to flexible policy collapsed to 380 to the US dollars after the central bank ran out of reserves and attempted to float it without raising rates.

The float also failed due to a surrender rule (central bank purchases of dollars to further push down the broken peg) critics have said.

Sri Lanka’s monetary policy deteriorated severely after the end of a 30-year war as discretion triumphed rules under by flexible inflation targeting and output gap targeting (printing money to boost growth) possibly violating Section 5 (a) of the Monetary Law Act.

The International Monetary Fund gave technical support to calculate an output gap target and engage in flexible policy encouraging the violation of the economic and price stability objective of the central bank bank.

After two currency crisis in 2015/2016 and 2018 triggered growth shocks and depreciation, a new administration in 2020 also cut taxes saying there was a ‘persistent output gap’ adding fiscal stimulus to monetary stimulus,

The country which went through a 30-year civil war, defaulted after 7 years of flexible inflation targeting and output gap targeting. With the foreign exchange shortages still persisting, the country is now scrambling for ‘bridge financing’, despite defaulting. (Colombo/May22/2022)

ECONOMYNEXT – Sri Lanka is looking for funds to pay a ship carrying Siberian Light Crude, which is anchored off Colombo Port, Prime Minister Ranil Wickremesinghe told parliament as the country is hit by the worst currency crises created by the island’s Latin America style central bank.

The ship Nissos Delos has been waiting from May 01, he said.

“It has 90,000 metric tonnes of Siberian Light Crude,” Prime Minister Wickremesinghe said on May 19.

“There is still no money. We will find the money.”

Sri Lanka is in the worst currency crisis created by the island’s intermediate regime central bank which operates a unstable peg called a flexible exchange rate backed by flexible monetary policy were flexibility has subverted rules eventually driving the country to default

The country is now facing severe forex shortages after the peg collapsed due to money printing, which has resulted in fuel shortages and power outages.

“If we use this oil for power stations we can use diesel for other activities,” Prime Minister Wickremesinghe said.

Sri Lanka’s refinery can process only light crudes. The aged refinery has a low output of light distillates such as petrol, kerosene and diesel and high share of furnace oil as it lacks the technology to crack longer hydrocarbon strands. (Colombo/May22/2022)

ECONOMYNEXT – Sri Lanka’s main stock index closed higher on Friday (20), recouping losses made in the previous sessions after the new government under Prime Minister Ranil Wickremesinghe appointed a new cabinet, dealers said.

But concerns over how Sri Lanka is going to come out of the ongoing economic crisis and the sovereign debt default still remained.

The main All Share Price Index (ASPI) closed 1.12 percent or  91.75 points higher at 8,265.61 at the close.

Nine ministers were appointed to the new cabinet on Friday as the new government with the new prime minister Ranil Wickremesinghe was trying to ensure some political stability to to handle a unprecedented economic crisis.

The market was volatile throughout the week as there were positives from the political front and negatives from the economical front were creeping in amid fuel shortage raised concerns over crippling transport and manufacturing sectors.

The day’s turnover was 1.9 billion rupees, less than half of this year’s average daily turnover of 4.2 billion rupees.

Analysts said investors were concerned over possible hard default on Wednesday as the country had no dollars to pay coupon payments for sovereign bondholders and another payment for Asian Development Bank.

Prime Minister Wickremesinghe will announce the economic policy of the new government next week after getting all the statistics on the debt repayment. In his address to the nation on Monday, he said Sri Lanka will go through its worst in the coming few days with the duration of daily power cuts could go as high as 15-hours.

The most liquid index S&P SL20  up 1.75 percent or 47.21 points to close at 2,750.91.

The 84.5 billion economy has already suspended foreign debt payments as it had run out of dollars.

Investors are also concerned over the steep fall in the rupee, which has fallen over 80 percent since it was allowed flexibility on March 7. The rupee in TT dollars has remained around 365 throughout the week while the interbank spot rate was around 359.47 on Friday.

The market has gained 8.4 percent in May so far following a loss of 14.5 percent in March and 23 percent in April.

Overall the market has lost 32.4 percent so far this year after being one of the world’s best stock markets with an 80 percent return last year.

Foreign investors sold a net 120 million rupees worth of shares. The market has witnessed a total foreign outflow of 1.2 billion rupees so far this year.

Friday’s gain added a market capitalization of 71.9 billion rupees.

Shares in Expolanka gained 8 percent to close at 219.50 rupees a share, LOLC rose 3.8 percent to close at 556.50 rupees a share, while Browns Investment ended 5 percent up at 8.40 rupees a share. (Colombo/May20/2022)

ECONOMYNEXT -Japan has said it will provide 1.5 million dollars (600 million rupees) to Sri Lanka through a the United Nations World Food Programme for essential food rations and school meal programs.

“We are pleased to announce that the Government of Japan will grant 1.5 million dollars emergency assistance through WFP to provide three months’ essential food supplies, including fortified rice, dhal and oil, for approximately 15,000 urban and rural people and 380,000 school children across the island,” Charge d’ Affaires ad interim of Japan to Sri Lanka Katsuki Kotaro said.

“We hope that this humanitarian assistance will help improve food access and nutrition for the people of Sri Lanka amidst the economic crisis.”

Using the contribution, WFP will procure rice for the daily free school meals and also distribute ration packs comprising essential commodities to vulnerable households.

“Getting the right nutrition to those who need it the most will help mitigate the long-term effects of today’s economic downturn,” Abdur Rahim Siddiqui, WFP Representative and Country Director in Sri Lanka said.
The foods will be distributed through WFP in form of daily food meals at schools

(Colombo/May20/2022)

ECONOMYNEXT – Sri Lanka may face higher food prices and shortfalls of foods after authorities banned open account and DA/DP trade, importers warned as the country tried to get out of a currency crisis by raising rates and killing private credit.

Though there were severe forex shortages the country did not face food shortages up to May 2022, due to food importers in the main wholesale market in Colombo somehow keeping the nation Fed.

Out of the about 1.7-1.9 billion US dollars earned every month by the country’s exporters and overseas workers only about 200 million US dollars a month go for food.

With no mechanism to give priority allocation of foreign exchange for food many food importers have channeled Middle Eastern remittance via the Undiyal system to keep the nation fed, sources familiar with the process say.

This is why the country did not face severe food shortages, but medicines which were under price controls went off the shelves, when the rupee fell. The monthly requirement for medicine is estimated at about 25 million US dollars or about half a fuel ship.

Importers who have long term relationships with regional suppliers in particular and they ship goods at a moment’s notice.

Food suppliers have been willing to extend credit to their local counterparties due to the strong relationship spanning generations.

Foods such as onions and potatoes are also perishable, which will rot in containers unless cleared quickly, while importers go from bank to bank searching for dollars, the food traders said.

Some foods spiked in the Pettah market Friday, wholesalers said.

Related

Sri Lanka can trigger food shortages as in medicines with new trade controls: Bellwether

Economic analysts had earlier warned that price controls and banning of DA/DP imports was the easiest way authorities could create food shortages.

The import ban came after the central bank raised interest rates in a bid to stop money printing and private credit was starting to fall.

Sri Lanka has a intermediate regime central bank which had created monetary instability and social unrest ever since it was set up in 1950.

The country suffered balance of payments trouble within two years of its creation, an exchange control law was enacted in 1952 and a ‘hartal’ took place in 1953. (Colombo/May20/2022)

ECONOMYNEXT – Sri Lanka’s state-run fuel retails Ceylon Petroleum Corporation (CPC) has suspended licenses of four filling stations for hoarding and selling fuel in cans and barrels, the Minister for Power and Energy Kanchana Wijesekara said on Friday (20).

Facing an acute fuel shortage, thousands of Sri Lankan motorists are forced to stay in queues for fuel for days as the island nation is facing its worst-ever foreign exchange crisis amid debt and economic crisis.

Prime Minister Ranil Wickremesinghe has said Sri Lanka has less than 1 million US dollars of usable reserves. The crisis-hit nation paid 53 million US dollars on Thursday to clear a shipment at Colombo port that came weeks earlier.

Hoarding and selling fuel in cans and barrels have been banned as those methods are misused to stock fuel and earn an exorbitant profit after fuel prices increase.

“License of 4 Fuel stations has been suspended by CPC last night for holding stocks without distributing and dispensing to cans and barrels, ignoring the guidelines and regulations, Minister Wijesekara tweeted on Friday.
He also said the steps are being taken to cancel the licenses as the country runs on its last drop of fuel.

License of 4 Fuel stations has been suspended by CPC last night for holding stocks without distributing and dispensing to Cans and Barrels ignoring the guidelines and regulations. Police Fuel station’s temporary permit to sell fuel for other vehicles has also been revoked. pic.twitter.com/Y8G0fbdC78

— Kanchana Wijesekera (@kanchana_wij) May 20, 2022

The banned stations are in Makola South, Naalla, Pethiyagodda and Mirigama.

In April, Sri Lanka banned fuel distribution in cans and barrels as a temporary measure to stop fuel hoarding.
(Colombo/May20/2022)

ECONOMYNEXT – Sri Lanka’s main stock index slipped to near one-week low on Thursday (19) as acute fuel shortage and political instability concerns amid a debt default weighed on investor sentiments, dealers said.

The main All Share Price Index (ASPI) closed 2.89 percent or  243.35 points weaker at 8,173.86, its lowest close since May 13. Thursday’s percentage fall was the worst since April 26.

“Uncertainties; mainly ‘no fuel’ in the country is creeping into investor sentiments,” a top market analyst said.

“Because of the fuel issue even investors are unable to get to work.”

Minister of Power and Energy Kanchana Wijesekara on Wednesday said petrol will not be available in he country for next two days because the country is unable to pay for a petrol shipment that is already anchored in Sri Lankan waters.

On Wednesday, analysts said investors were also concerned over possible hard default as the country had no dollars to pay coupon payments for sovereign bondholders and another payment for Asian Development Bank.

The day’s turnover was 1.5 billion rupees, a third of this year’s average daily turnover of 4.1 billion rupees.

Prime Minister Ranil Wickremesinghe told the parliament on Wednesday that he will announce the economic policy next week after getting all the statistics on the debt repayment. Wickremesinghe addressed the nation on Monday over its economic crisis and said Sri Lanka will go through its worst in the coming few days with power cuts on the cards which could go up to as high as 15-hours.

The most liquid index S&P SL20 too fell 3.29 percent or 91.83 points to close at 2,703.70.

The 84.5 billion economy has already suspended foreign debt payments as it had run out of dollars.

Investors are also concerned over the steep fall in the rupee, which has fallen over 80 percent since it was allowed flexibility on March 7.

The market has gained 7.2 percent in May so far following a loss of 14.5 percent in March and 23 percent in April.

Overall the market has lost 33.1 percent so far this year after being one of the world’s best stock markets with an 80 percent return last year.

Foreign investors sold a net 8.7 million rupees worth of shares. The market has witnessed a total foreign outflow of 1 billion rupees so far this year.

The fall eroded market capitalization of 130 billion rupees.

Expolanka, Royal Ceramics, and LOLC dragged ASPI on Thursday.Shares in Expolanka fell 7.4 percent to close at 203.25 rupees a share, Royal Ceramics fell 8.3 percent to close at 30.00 rupees a share, while LOLC ended 3.6 percent down at 536.25 rupees a share. (Colombo/May19/2022)