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ECONOMYNEXT – The United States and India congratulated Sri Lanka’s new Prime Minister Ranil Wickremesinghe who was appointed on Thursday to accomplish a tough task of bailing out the sovereign-defaulted country from the ongoing economic crisis.

The new prime minister’s appointment came at a time when both India and the U.S. are looking for more engagement with Sri Lanka amid concerns that Sri Lanka could drift towards China because of Beijing’s large volume of loans.

Wickremesinge, 73, was appointed to the post for for the fifth time in the last three decades. He has been in the parliament since 1977 and leader of center-right United National Party since 1994.

“I look forward to working with Ranil Wickremesinghe. His appointment as prime minister and the quick formation of an inclusive government, are first steps to addressing the crisis and promoting stability,” U.S. ambassador Julie Chung said in her twitter feed.

“We encourage meaningful progress at the IMF and long-term solutions that meet the needs of all Sri Lankans.”

Look forward to working w/ @RW_UNP. His appointment as PM, and the quick formation of an inclusive government, are first steps to addressing the crisis & promoting stability. We encourage meaningful progress at the IMF & long-term solutions that meet the needs of all Sri Lankans.

— Ambassador Julie Chung (@USAmbSL) May 12, 2022

Sri Lanka is facing twin crisis of debts and balance of payment crisis. The island nation under President Gotabaya Rajapaksa has failed to address the economic concerns, aggravating the already existing crisis.

The 84.5 billion economy has already suspended  all foreign debt repayments from April 12 while a top delegation held talks with the IMF last month to seek assistance in facing the current crisis. However, the country has to deal with some debt restructuring on its foreign loans before seeking the IMF help.

Government sources have said Wickremesinghe’s appointment is expected to instill some confidence in the markets. That confidence is expected to increase foreign investment into Sri Lanka’s government securities and equities.

Despite he lost the 2020 parliamentary election personally and as a party, Wickremesinghe entered the parliament with a bonus seat his party got.

He has past records of handling financial crisis through foreign funds. However, this time, he is given the task of handling the financial crisis as soon as possible amid a geopolitical cold war between India and China in Sri Lanka’s territory.

“High Commission of India hopes for political stability and looks forward to working with the Government of Sri Lanka formed in accordance with democratic processes pursuant to the swearing in of Ranil Wickremesinghe as the Prime Minister of Sri Lanka,” Indian High Commission in Colombo said in its official twitter feed.

“India’s commitment to the people of Sri Lanka will continue,” it said. 

High Commission of India hopes for political stability and looks forward to working with the Government of Sri Lanka formed in accordance with democratic processes pursuant to the swearing in of Hon'ble @RW_UNP as the Prime Minister of #SriLanka. (1/2)

— India in Sri Lanka (@IndiainSL) May 12, 2022

India has given nearly 3.5 billion US dollars so far this year mainly in credit including 1.5 billion US dollars to buy essentials and fuel

Sri Lanka’s worst economic crisis since 1948 independence has already led to a political crisis. Protests started two months ago when President Gotabaya Rajapaksa failed to handle the economy with wise moves. Now the protests have grown against Rajapaksa.

The protesters demand the resignation of President Rajapaksa and his brother, then Prime Minister Rajapaksa and the entire government.

Mahinda Rajapaksa resigned on Monday after his supporters attacked unarmed protesters in capital Colombo. The attack led into island wise violent clash which killed at least 9 people and injured nearly 300. (Colombo/May13/2022)

ECONOMYNEXT – Sri Lanka’s President Gotabaya Rajapaksa appointed Ranil Wickremesinghe as Prime Minister amid the worst currency crisis in the history of the country’s central bank making it the sixth time he got the post.

Wickremesinghe pipped main opposition leader Sajith Premadasa of the Samagi Jana Balawegaya to the post, as he delayed insisting that Rajapaksa resign.

Premadasa wrote to President Rajapaksa hours before Wickremesinghe was sworn in saying he was willing to take up the post subject to four conditions.

Multiple Terms

Wickremesinghe was first Prime Minister under Ranasinghe Premadasa, Sajith’s father and steered the country after his assassination through an election that his United National Party lost.

Wickremesinghe returned to office in 2001, after a currency crisis which saw the rupee collapse and the economy contracted for the first time since records began.

Sri Lanka has an intermediate regime central bank set up in the style of Argentina’s in 1950s by a US money doctor and its currency has fallen from 4.70 to the US dollar to 380 so far in the worst performance among South Asian monetary authorities.

He gained credibility as a economic whiz after the economy recovered strongly with low inflation and a strong currency under a tight International Monetary Fund backed program and privatization.

However his party suffered in both opposition and after it returned to power in 2015 when two currency crises triggered by the central bank in the pursuit of output gap targeting triggered monetary instability and slowed growth.

One Member Party

A bomb blast in Easter of 2019 helped bring Rajapaksa’s back to power. Wickremesinghe’s UNP suffered a humiliating defeat failing to directly win any seat as the SJB brokeway and took most of its vote base. He came to parliament on a residual vote total.

Under Rajapaksa’s and extreme output gap targeting was pursued with large volume of money being printed and taxes cut. The country ran out of reserves and defaulted on its foreign debt in April.

Wickremesinghe’s appointment was slammed by Omalpe Sobitha, Buddhist monk and the country’s Catholic Cardinal, shortly before the appointment.

“This is not the change the country is looking for,” he said. Wickremesinghe has come under firm in parliament for being close the Rajapaksa family.

ECONOMYNEXT – Sri Lanka will have to print money to pay state worker salaries unless taxes were raised, Central Bank Governor Nandalal Weerasinghe said as the country struggles with low revenues after taxes were cut for output gap targeting.

“State workers salaries are paid by money in the Treasury,” Governor Weerasinghe said. “The reason money was printed all this time is because there aren’t enough revenues.

“So revenues have to be increased.

“If there is not enough money the central bank has to monetize it. There is no bar to that. Under the Monetary Law Act we can do it. It is something that should be done.

“If money printing is stopped and salaries are not paid there will be a bigger crisis.

Weerasinghe said interest rates have been raised and 100 percent of the money has been raised from the market in recent weeks. Essential spending included salaries, pensions and domestic debt repayment.

“In addition, if there is an urgent need, we have told the Treasury it will be monetized only if it is essential, if not to delay it,” he said. “That is why the Treasury Secretary issued a circular asking non-priority spending to be stopped.”

“I can clearly say there is no worry of paying state workers salary and pension. Because we can give money which are paid in rupees. But we should do it with some responsibility and we should not do it like it was done previously and increase the inflation to around 40 percent.”

When money is printed under a pegged exchange rate (flexible exchange rate), dollar shortages emerge in a matter of weeks as the new money moves through the credit system and ends up in the forex market as imports or other outflows.

When money is printed over a longer period, boosting domestic credit and broader money supply, domestic inflation goes up, with asset prices (stock and property) also inflating as mal-investment takes place.

In Sri Lanka large volumes of money have been printed to trigger currency crises in the past including when tax revenues were expanding, with the economy also growing, to target gilt yields through a bond auction committee.

Market bids are rejected and money is printed to repay maturing bonds issued to finance deficits of past years. In 2020 and 2021, price controls were placed on bond and bill auctions to keep Treasury bill yields around 5.2 percent.

Disbanding the bond auction committee will take away the ability of the state to to pro-cyclically inject liquidity and fire currency crises by engaging in output gap targeting (Keynesian stimulus), analysts say.
Sri Lanka’s Treasury bill yields are now around 24 percent and large volumes of money is flowing into the market.

The first beneficiaries of printed money are those who receive the money first like state workers or borrowers of commercial banks who get newly printed money from rejected Treasury bill and bond auctions.

Later recipients of the money see higher prices as the currency falls and inflation goes up.

Sri Lanka printed large over two trillions of rupees over two years, while operating an intermediate regime (soft-peg) and ran out of reserves, losing the ability to maintain the peg at that interest rate.

An attempt to shift the broken soft-peg to a clean float has so far not fully succeeded and the rupee had fallen with forex shortages persisting.

A floating exchange rate, as found in advanced nations operate without any foreign reserves, with foreign exchange inflows and outflows matching each other outside the reserve money which remains stable and unaffected from changes made through central bank purchases and sales of dollars. (Colombo/ May 12/2022)

ECONOMYNEXT – He was a demigod for tens of thousands of Sri Lankans. Some people in the North Central Sri Lankan district of Anuradhapura still keep his picture next to their Buddha statue.

He was revered to that extent.

Many of them are still thankful for the 76-year-old seasoned politician for his role in ending a 26-year war, for his government’s initiative of subsidised fertilizer, and the infrastructure drive in their rural area which had been neglected by successive governments since independence from British colonial rulers in 1948.

Rajapaksa, Sri Lanka’s president from 2005 to 2015 and four-time prime minister through 2004 to this Monday (09), built up one of Asia’s strongest political dynasties similar to the Philippines’ fallen dictator Ferdinand Marcos.

He was the most popular and ‘down to earth’ leader Sri Lanka ever had since independence. The common man’s touch he has with him helped him to connect anybody he meets – whether it is a public official or private sector CEO or a poor rural paddy farmer or a journalist.

Famous for his unique maroon family shawl wrapped around the neck, Rajapaksa the politician fought every battle to come out stronger, starting in 1988 when he took on the then mighty United National Party (UNP) government and went to Geneva alleging gross human rights violations committed under president Ranasinghe Premadasa – the father of current opposition leader Sajith Premadasa.

Not unlike the late Premadasa, Rajapaksa always presented himself as a pious Buddhist though his close allies now say he practiced Buddhism only for show.

War winner or war criminal?

In 2009, Rajapaksa cemented his legacy as a historic leader when Sri Lanka’s state military annihilated the separatist Liberation Tigers of Tamil Eelam (LTTE) which had fought for a separate state for ethnic minority Tamils in the island nation’s North and East in a 26-year war.

When he was informed of the climactic end of the war in the Northern lagoon of Nanthkadal, Rajapaksa was in a Middle Eastern country. He promptly flew back on a state-run SriLankan Airlines flight, and upon landing, he knelt on the ground and kissed it, in what became a much celebrated display of his love for the motherland.

“My country comes first; my country comes second; my country comes third,” Rajapaksa would repeat over the years that followed.

Political commentators say people were ready to even die for him after he won the war.

Less than a year later, Rajapaksa won his second term with a landslide thanks in large part to his popularity after winning the war. He ran and won resoundingly against the army general Sarath Fonseka who fought the war and led the army on the ground.

As much as he was revered as a demigod for winning the war by the majority Sinhalese, Rajapaksa was considered a war criminal by the Tamils and some international rights groups because of how he led the war, particularly during its final phase.

A report by a United Nation expert panel has revealed there could have been as many as 40,000 Tamil people killed during the final weeks of the war. Rajapaksa has never responded to calls to probe what happened to the Tamils who allegedly disappeared after surrendering to the military just before the war ended on May 18, 2009.

The UN Human Rights Council (UNHRC) is already probing past human rights allegations in the war during Rajapaksa’s first tenure.

Emotional leader with PR

Rajapaksa always has been a sentimental and emotional leader.

When the LTTE bombed a bus in North Central village of Kebithiigollewa, he went to the funerals of the people who were killed in the blast.

The father of a child killed in the attack said to Rajapaksa, in front of his child’s body: “Mr President, you have to eradicate this terrorism.”

Later that father’s statement was used frequently in state-run television to convince the public that militarily defeating the LTTE was the only solution to the conflict.

Rajapaksa is a master at engaging anybody constructively, with his ability to listen carefully and change his tone and manner in a way that will win over even his harshest critics. It was this approachability that led to his mass appeal, at least among Sinhalese Buddhists.

He also has a habit of never missing a family funeral of those who he knows well. When he was leader of the opposition, prime minister or even president, he was ever ready to sign as a witness at marriage registrations upon invitation.

The first thing he says whenever he meets just about anybody is “How are you? It’s been a while,” as he gently touches the shoulder of the person.

Rajapaksa’s public relations skills are the envy of Sri Lankan politicians. Observers say he may be a leading figure in this area even at a global level.

Family-first policy

Rajapaksa always loved his close family – the former first lady Shiranthi Rajapaksa, their three sons Namal, Yoshitha, and Rohitha, and his extended family.

During his second tenure, his family members in parliament were handling almost 70 percent of the island nation’s budget. When President Rajapaksa was also the Minister of Defence and Finance, his younger brother Basil was Minister of Economic Development minister, older brother Chamal was Speaker of Parliament. His younger brother was Secretary to the Ministry of Defence.

During his second tenure, he appointed his brother-in-law Nishantha Wickremesinghe to run the loss-making state-run airline, cousin Jaliya Wickremesuriya as the US ambassador, another cousin Prasanna Wickremesuriya as the head of the local Airport and Aviation firm, nephew Shashindra Rajapaksa as chief minister of a rural province and another nephew Shameendra Rajapaksa as a director at state-run SriLankan Airlines.

Another cousin Udayanga Weeratunga was the Ambassador for Russia and Ukraine. Weeratunga faced corruption allegations in a MIG fighter jet deal, while Jaliya Wickremesuriya was found guilty by a US court over misappropriation charges in a building deal.

In his second term, Mahinda Rajapaksa was criticised for allowing his oldest son Namal to organise a motor race around a sacred temple in the central Sri Lankan city of Kandy. His youngest son Rohitha was allowed to launch the country’s first satellite at an estimated cost of 320 million US dollars, while his second son ran a sports channel.

Nepotism was one of the main reasons among many others including dragging post-war reconciliation efforts and building close ties with China that led to his defeat which some analysts say was an internationally-backed domestic coup.

Rajapaksa’s family-first policy got worse during the incumbent administration of President Gotabaya Rajapaksa. Under the new current president, Mahinda Rajapksa was Prime Minister, Basil wasfinance minister, Chamal was irrigation minister, while Mahinda’s son Namal became the youth and sports minister. Chamal’s son Shashindra was also given a state ministry.

Analysts say Rajapaksa tried to run the country as a family business, keeping key decisions close to their chest within the group of four brothers – him, Gotabaya, Chamal, and Basil.

Despite political differences, the family has always been united, sources close to Rajapaksa say.

Constitutional changes

Rajapaksa will be remembered in history for achieving the goal of a two-thirds parliament, ever since the UNP’s unprecedented five-sixth majority win in 1977, which no political leader would have dared dream of. In 2012, he along with the help of his brother and Economic Development Minister Basil Rajapakasa engineered some defections from the opposition to achieve this feat.

Using the two-thirds majority, Rajapaksa removed Chief Justice Shirani Bandaranaike in 2013 for opposing a poverty alleviation bill. Later, he changed the constitution to abolish the limit on the number of terms a person can become the president.

Using the new constitutional change, he called early polls in 2014, but lost the bid for his third term. In a bitter campaign, he lost the election for his party’s former secretary Maithripala Sirisena who defected and joined a common opposition coalition.

After the last parliamentary polls in August 2020, he also helped his brother Gotabaya Rajapaksa change the constitution to remove independent institutions

and strengthen the powers of the president.

The constitutional amendments were only possible under Rajapaksa because he had a large majority in parliament and he also used some manoeuvrings to get the support of opposition politicians.

Such constitutional changes have always been beneficial for Rajapaksas, analysts say.

China’s man

Rajapaksa was always seen as a pro-Chinese leader.

Following the end of the war, he got close to China because the West led by the United States, international rights groups, and India pushed him to the wall demanding that alleged human rights violations on his watch be addressed.

China poured money into Sri Lanka under Rajapaksa in the form of investments, grants, and loans and strengthened its footing in the island nation just a few kilometres south to India. This development led to a geo political cold war being played out in Sri Lanka.

A port terminal and port city project in Colombo port drew concern from India.  Rajapaksa’s disinterest in implementing a constitutional amendment that Sri Lanka had agreed to in the 1987 Indio-Lanka Agreement did not help. India had been pushing to implement this amendment to decentralize power with the central government to Sri Lanka’s provinces. This was advocated as a solution for the ethnic conflict.

With the end of the war, Rajapaksa’s focus was post-war infrastructure development in the North to help economic recovery.

India repeatedly conveyed its concerns with Rajapaksa who always promised to look into them, though they were hardly addressed.

Rajapaksa allowed two nuclear submarines to be docked in Colombo port – once when Chinese leader Xi Jinping was in Colombo in October 2014 and again within a few weeks of that visit.

India directly warned Rajapaksa. After the 2015 election defeat, Rajapaksa said it was India which defeated him at the presidency.

Divide and rule

Sri Lanka’s minority Muslims and Tamils have never backed Rajapaksa overwhelmingly as Rajapaksa was seen as a racist and favouring only Sinhala Buddhist majority.

Rajapaksa, however, engineered a number of defections to give himself an edge in politics.

Analysts say Rajapaksa practised the time-tested ‘divide and rule’ policy with the minorities.

Tamils saw him as a war criminal while Muslims also started to see him as a creator of violence after Rajapaksa failed to control anti-Muslim violence that erupted in June 2014.

Both minorities voted for his rival in the 2015 election in which he lost unexpectedly.

After losing the election, he went to his ancestral home in Hambantota, where he sat on a windowsill and said to a large crowd of supporters: “It was Northern Tamils who defeated me”.

As a shrewd politician, Rajapaksa has faced many challenges over the years, and engineering defections in the opposition has been an effective strategy that has helped him throughout his career.

Economic crisis

Over the years, Sri Lanka’s 22 million people endured the corruption, nepotism, misappropriation, unethical political manoeuvrings, crony capitalism, and racism that many attribute to successive Rajapaksa administrations.

Finally, it was Sri Lanka’s repeatedly delayed economic crisis that was the nail in Rajapaksa’s coffin

Many economists, including some close to Mahinda Rajapaksa, say that then President Rajapaksa called for early elections in 2015 in order to avoid a financial crisis that year. It is hard to say this was indeed the case, but what is clear now is that the once widely admired leader has now lost the plot.

Sri Lanka’s looming debt and balance of payment crises were twin risks the economy was facing when Gotabaya Rajapaksa won the presidential election in 2019.

From 2016 to 2019, Mahinda Rajapaksa and his Sri Lanka Podujana Peramuna (SLPP) said the then government had brought immense economic difficulties to the people.

“How is cooking gas? Do you have gas? How much are onions? How about potatoes? People cannot afford three vegetables in their meals. People are forced to eat only once a day because of the high cost of living,” Rajapaksa famously said at an election rally in 2019.

He and the SLPP criticized the then government’s tax hikes, flexible exchange rate, its IMF programme, and a misunderstood fuel price formula.

Rajapaksa would never have guessed his own fear mongering would become a reality under his brother’s leadership.

It all started with a tax cut in December 2019. Nobody asked for tax cuts, but the president slashed the tax assuming that a bigger volume of business will increase government revenue under a lower tax regime. This never happened.

Then, one of President Rajapaksa’s advisors said, the former military official was of the view to go for tax reforms under a new government after the parliament polls which was expected to be held in March 2020. Those reforms never came.

COVID-19 was a real shock, but Sri Lanka was not the only country that was hit by the pandemic.

Farmers furious

Making matters worse, the president blundered through the government’s agriculture policy by banning the import of inorganic fertilizer. Thousands of farming families took to the streets protesting Gotabaya Rajapaksa’s decision. Despite widespread criticism from farmers, opposition politicians and experts, a stubborn president stuck to his guns and refused to relent.

He along with former Agriculture Minister Mahindananda Aluthgamage imported Chinese organic fertilizer. The shipment was rejected by the government authorities who said it was contaminated, and a subsequent non-payment for the Chinese shipment became a diplomatic issue. President Rajapaksa’s government then turned to India for liquid nitrogen fertilizer which farmers refused to use claiming it had a strong odour and dogs and other animals going over the crops as a result.

The fertilizer policy blunder hit Sri Lanka’s paddy cultivation and created a food shortage. The government was compelled to import rice due to Rajapaksa’s ill-timed and ill-advised decision.

The fertilizer policy left farmers with a lower than normal or no harvest. Meanwhile, prices across all farm products were rising. As a result, consumers are now forced to pay more than double the price for rice and all vegetables.

The government’s maximum retail price policy on import products created shortages in cooking gas, milk powder, and wheat. That led to a queue regime which Sri Lankans hadn’t seen until the 1970s.

On the financial front, the central bank reduced interest rates to a record low, printed excess money, and kept the exchange rate around 200 rupees per US dollar.

Neither the Rajapaksas nor the government officials told the truth about an impending economic crisis to the people.

Central Bank Governor Ajith Nivard Cabraal misled the public with a six-month policy framework with over 26 billion US dollar inflows into the country in just six months through March 31. He also promised a stable currency and claimed that using reserves for repayment of international sovereign bonds (ISBs) will not be a problem for imports.

Around February 2022, the people finally realised they had been fooled as queues for essentials grew longer. Then, the government’s weak foreign reserves prevented it from importing fuel required for power generation which resulted in extended power cuts. The severe scarcity for dollars also had an impact on the import of medicines, wheat, and milk powder.

All of these prompted the people to protest against President Gotabaya Rajapaksa as he had failed in his economic policies in ensuring the essentials to the public.

Then came the “Go Home Gota” protests, which later extended to a Go Home Myna (Mahinda) campaign. However, the anti-Mahinda protests weren’t as aggressive as youth-led protesters demanding the president’s resignation – at least at the start.

In the meantime, people started to believe the allegation that the Rajapaksas had looted the country and that that was the main reason for the current economic crisis.

People started to ask questions about how the first family got as rich as it did when they were just elected officials living on government pay and perks.

Even as the protests were going on, there were no policy measures taken by the government to address the core issues faced by the public such as the shortage of dollars, fuel, cooking gas, medicines, and foods.

Final days

Finally, Cabraal opened the door for the destruction of Mahinda Rajapaksa’s 50-year political career. He allowed flexibility in the exchange rate without any plans to control its range in the event of a steeper depreciation.

The rupee fell as much as 85 percent in just two months. The cost of fuel more than doubled. All goods and services prices increased sharply. People could not bear the cost of living. The country was forced to face power cuts for as long as 13 hours a day.

People started to realise that they had been cheated and taken advantage of by Mahinda Rajapaksa before the election just to grab power.

The protesters started to demand his ouster as well.

It is true that the protesters really wanted Gotabaya Rajapaksa to resign. However, that demand has now somewhat shifted to getting Mahinda Rajapaksa out.

Protestors soon tired of the indecisiveness of Mahinda Rajapaksa over his resignation, which had by now become a national demand. His office repeatedly issued statements that he had not resigned.

On the last day, May 09, his supporters unleashed violence on unarmed and peaceful protesters after listening to him and his close ally and former minister Johnston Fernando.

Before the violence he spoke to the supporters at his official residence.

“I am ready to sacrifice anything on behalf of the people. But I do not want to betray the 6.9 million people who voted for us,” he told the gathering.

When he asked if he should resign, his supporters said in unison that he should remain as prime minister.

“I always have the memory of uniting the country that was to be divided into two. We will fulfil our responsibility on behalf of the country. I believe we can stand together to face the challenges of the country,” he said.

“As I have always said, for me, the country comes first, the country comes second, the county comes third.”

That was his last public utterance as prime minister of Sri Lanka.

Many people have expressed that they are “done with Mahinda Rajapaksa”.

The violence he started has now backfired. He is said to be in an undisclosed location now, heavily guarded by security forces personnel. The people are in search of him to demand accountability for Monday’s violence which took place in the presence of police.

Mahinda Rajapaksa was forced to relinquish office as the leader of what can only be described as a kleptocracy rather than a great statesman who ended a war to bring peace for millions. (Colombo/May11/2022)

ECONOMYNEXT – Sri Lanka’s commercial banks quoted the rupee at 375 to the dollar for telegraphic transactions on Tuesday (10) while the equity and secondary markets were closed following violent protests in the country, participants said.

The central bank’s indicative spot was quoted at 364.76 against the US dollar on Tuesday, down from 358.5 against the US dollar on Friday.

However, at the time of filing central bank’s dollar TT rates for Tuesday were not available. On Monday the TT rate was 361.7/374.9 against the US almost close to the commercial bank rates.

The kerb market ended the week at around 397/400 to the US dollar on May 07.

Sri Lanka’s new Central Bank Governor Nandalal Weerasinghe jacked-up policy rates to 14.50 percent from 7.50 percent and also allowed Treasury bill yields to rise which would eventually slow private credit and investment and imports.

The falling rupee had also impoverished the population of the island which will reduce consumption and support the rupee as long as no new money is printed.

Sri Lanka’s rupee fell steeply after an attempted float in March due to low policy rates and a surrender rule. Electricity prices were also not raised, driving bank credit up with losses, unlike a float in 2012 after printing money.

The country’s debt markets were closed on Tuesday following violent clashes between pro and anti-government demonstrators after a faction of Prime Minister’s supporters met him at his official residency Temple Trees.

Market dealers said they were still clearing out the transaction that took place on Monday.

On Monday, bonds maturing in 2025, 2027, three-month bills and one-year bills remained active, market participants said.

A bond maturing on 01.06.2025 was quoted at flat at 21.50/22.00 percent on Monday.

A bond maturing on 01.5.27 was quoted at 21.75/22.15 percent on Monday, up from 21.50/22.00 percent on Friday.

The three-month bill was quoted at 22.00/22.75 percent, up from 21.00/22.00 percent on Friday.

The 12-month bill was quoted at 23.15/24 percent on Monday, up from 23.00/24.00 percent at the previous day’s close.

At this week’s bills auction, the debt office is offering to sell 92.5 billion rupees.

Last week, the Treasuries auction yields stabilized with strong demand from genuine buyers, dealers said.

Sri Lanka’s official foreign reserves drop 90 million US dollars to 1.8 billion dollars in April.

Sri Lanka is facing the worst currency crisis triggered by the island’s economists who maintain an intermediate regime central bank after it attempted to target an output gap. (Colombo/May10/2022)

ECONOMYNEXT – Sri Lanka’s commercial banks quoted the rupee at 375 to the dollar for telegraphic transactions on Monday (09) while only a handful of maturities were quoted in the secondary, participants said.

The central bank’s indicative spot was quoted at 364.76 against the US dollar on Monday, down from 358.5 against the US dollar on Friday.

The central bank was quoting the dollar TT rate on Monday at 361.7/374.9 against the US almost close to the commercial bank rates.

The kerb market ended the week at around 397/400 to the US dollar on May 07.

Sri Lanka’s new Central Bank Governor Nandalal Weerasinghe jacked-up policy rates to 14.50 percent from 7.50 percent and also allowed Treasury bill yields to rise which would eventually slow private credit and investment and imports.

The falling rupee had also impoverished the population of the island which will reduce consumption and support the rupee as long as not new money is printed.

Sri Lanka’s rupee fell steeply after an attempted float in March due to low policy rates and a surrender rule. Electricity prices were also not raised, driving bank credit up with losses, unlike a float in 2012 after printing money.

In debt markets, bonds maturing in 2025, 2027, three-month bills and one-year bills remained active, market participants said.

A bond maturing on 01.06.2025 was quoted at flat at 21.50/22.00 percent on Monday.

A bond maturing on 01.5.27 was quoted at 21.75/22.15 percent on Monday, up from 21.50/22.00 percent on Friday.

The three-month bill was quoted at 22.00/22.75 percent, up from 21.00/22.00 percent on Friday.

The 12-month bill was quoted at 23.15/24 percent on Monday, up from 23.00/24.00 percent at the previous day’s close.

At this week’s bills auction, the debt office is offering to sell 92.5 billion rupees.

Last week, the Treasuries auction yields stabilized with strong demand from genuine buyers, dealers said.

Sri Lanka’s official foreign reserves drop 90 million US dollars to 1.8 billion dollars in April.

Sri Lanka is facing the worst currency crisis triggered by the island’s economists who maintain an intermediate regime central bank after it attempted to target an output gap. (Colombo/May 09/2022)

ECONOMYNEXT – Sri Lanka’s central bank has advanced a total of 246.1 million dollars to commercial banks by March through swap contracts official data shows, with state banks in particular facing tight conditions.

Sri Lanka’s banks found it more difficult to renew counterparty credit lines as money printed to keep rates down and target an output gap, progressively depleted forex reserves and led to credit downgrades over 2020 and 2021.

By December about 204 million US dollars had been advanced mainly to state banks by the central bank, and more were given later.

Over March another 104.9 million dollars had been advanced by the central bank to banks, taking the total to 246.1 million US dollars.

“If you look at the banking system, all the banks are very stable in terms of capital adequacy,” Central Bank Governor Nandalal Weerasinghe told reporters on April 29.

“Obviously the issue right now is the foreign currency liquidity in the banking system.

“There is a lack of foreign currency liquidity in the banking sector at different levels. So state banks are facing a higher liquidity shortage, and private banks are also facing forex liquidity shortage to a certain extent.

State bank have given dollar loans to the Ceylon Petroleum Corporation during the current and previous currency crises. There were attempts to secure long term loans to back the CPC loans at one time.

Persistently low rupee yields and dollar liquidity shortages in balance sheets of banks led to sharply higher interbank dollar yields in Sri Lanka triggering discounts in the forward and swap markets at different times over the past year.

Governor Weerasinghe said the central bank also had low reserves and the country as a whole was facing dollar liquidity problems due to the overall balance of payments crisis and all the measures now being taken was to address the problem.

Rates have since been hiked and rupee yields have picked up.

Sri Lanka had also sought support from China to get dollar credits to the state banks.

“Minister Ali Sabry discussed the need for FOREX liquidity support for the state banks of Sri Lanka and requested if such can be provided by AIIB,” the Finance Ministry said.

Net open positions of several banks were negative at different times over the past two years, financial sources have said.

Bank have also bought domestic dollar debt with foreign borrowings also face problems when credit lines are not rolled over.

Over the past year many banks repaid market foreign borrowings and raised more dollars from depositors.(Colombo/May09/2022)

ECONOMYNEXT – Sri Lanka’s Prime Minister Mahinda Rajapaksa has taken a vow Sunday to help remain in office despite mounting pressure to step down over the worsening economic crisis, sources close to the premier said.

In his first public outing since the outbreak of anti-government protests last month, the Prime Minister travelled to the sacred city of Anuradhapura where hostile crowds booed and jeered him and asked him to step down.

“The PM took a vow before the sacred Sri Maha Bodi,” the source said. “He wants to stay in office and that is why he climbed the steps to the upper terrace to touch the sacred Bo tree.”

The top most is not open to the public and access is allowed only for visiting heads of state and Sri Lanka’s top politicians.

Apart from seeking divine help to remain in office, the prime minister is also taking action to muster support from his constituents by inviting large numbers to visit him at his Temple Trees residence on Monday, the source said.

Local government representatives loyal to the premier met with him on Saturday and pledged support and demanded that his younger brother, President Gotabaya Rajapaksa, resign in response to the main demand of the escalating protests.

“Will dollars start flowing into the country if you resign?,” an unidentified woman was seen asking the premier in a video shared on social media. “People are not asking you to go, they are asking for the president to go. He must. We want you to continue.”

Following an emergency cabinet meeting on Friday, the president had indirectly suggested that a resignation by his elder brother Mahinda could clear the way for a broad-based national government to steer the country out of the economic chaos.

Contrary to some reports that Gotabaya asked Mahinda to step down, sources close to both said there was no such direct demand.

However, sources at Temple Trees said the PM was digging his heels and preparing to rally support within the SLPP for him to hold onto power.

“The PM has pointed out that he was not in any way responsible for policy blunders that brought the country to this mess,” the source said.

“The fertiliser fiasco as well as the delay in seeking an IMF bailout were all decisions taken by the president. Why should the PM be the fall guy.”

In the meantime, the Prime minister’s wife Shiranthi has visited the Dedimunda devale at Mawanella recently in a bid to secure blessings to ward off evil spirits tormenting their family.

The devale is said to have powers to neutralise any curse and return evil to those who instigated the spell. She travelled to the devale with extra police protection.

Last week, the president’s personal shaman, Gnana Akka, had charmed bottled water that was secretly delivered to the Galle Face agitation site in the belief that those who drink it will give up their agitation and the protests will fizzle out. (COLOMBO, May 8, 2022)

ECONOMYNEXT – Sri Lanka President Gotabaya Rajapaksa’s decision to declare State of Emergency without any violence in the month long protest has drawn heavy criticism from the international community including the United States and the island nation’s colonial rulers Britain.

The government on Saturday said Rajapaksa’s decision was to “ensure political stability” and thereby assuring public safety and uninterrupted supply of essential services.

The move comes as Sri Lanka’s trade unions have decided to start a continuous protest from May 11 if Rajapaksa and his government fails to resign.

An island wide protest on Friday crippled the country’s economy and brought the nation standstill.

The Indian Ocean Island’s trade unions, backing thousands of youth-led protesters, had warned for continuous protests until the resignation of President Rajapaksa and the Sri Lanka Podujana Peramuna-led government for their failure to ensure essentials.

The protests erupted late in March after people were deprived of essentials like cooking gas, fuel, import foods, and medicines.

The month long protests have been largely peaceful though police shot dead a protester in central Sri Lankan town of Rambukkana.

Diplomats and the United Nation’s unrepresentative questioned the motive of the emergency rules at this juncture when there had been only peaceful protests without any violence.

The US ambassador raised concerns over the State of Emergency (SOE)

“The voices of peaceful citizens need to be heard,” Ambassador Julie Chung said in her official twitter platform.

“And the very real challenges Sri Lankans are facing require long term solutions to set the country back on a path toward prosperity and opportunity for all. The SOE won’t help do that.”

Concerned by another State of Emergency. The voices of peaceful citizens need to be heard. And the very real challenges Sri Lankans are facing require long term solutions to set the country back on a path toward prosperity and opportunity for all. The SOE won’t help do that.

— Ambassador Julie Chung (@USAmbSL) May 7, 2022

The European Union, which is in discussions with Rajapaksa government’s efforts in addressing past human rights abuses to renew an annually over 500 million US dollar worth trade concession GSP, raised concerns over SOE and urged Sri Lankan authorities to safeguard democratic rights of all citizens, including right to free assembly and dissent, which has to be peaceful.

“A month of peaceful demonstrations has shown how Sri Lankan citizens fully enjoy their right to freedom of expression in the oldest democracy in South Asia,” the EU delegation in Sri Lanka said in its official twitter feed.

“State of emergency will certainly not help solving the country’s difficulties and could have a counter productive effect!”

Concerned by the state of emergency, EU strongly urges Sri Lankan authorities to safeguard democratic rights of all citizens, including right to free assembly and dissent, which has to be peaceful. Challenging times for Sri Lankan people- EU continues to follow situation closely

— EU in Sri Lanka (@EU_in_Sri_Lanka) April 2, 2022

The UN Human Rights Council (UNHRC) has already started an evidence gathering process over Sri Lanka’s past human rights allegations. Sri Lanka government under the current prime minister Mahinda Rajapaksa, a brother of the president, has been accused of war crimes in the final stage of a 26-year internal civil war ended 13 years ago.

Hanaa Singer-Hamdy, the resident representative of the United Nations said “limitations to the exercise of fundamental rights and freedoms are only acceptable when exceptional, proportional and justified.”

“But Peaceful expression of dissent is not an emergency.Root causes for dissent must be tackled,” she said in her official twitter feed.

Limitations to the exercise of fundamental rights and freedoms are only acceptable when exceptional, proportional and justified. But Peaceful expression of dissent is not an emergency.Root causes for dissent must be tackled

— Hanaa Singer-Hamdy (@SingerHanaa) May 7, 2022

Envoys of Canada, the Britain, Switzerland, and Norway also raised concerns over Rajapaksa’s decision to declare SOE.

It’s hard to understand why it is necessary, then, to declare a state of emergency,” Canada High Commissioner David Mckinnon said.

Over the past weeks, the demonstrations across #SriLanka have overwhelmingly involved citizens enjoying their right to peaceful freedom of expression, and are a credit to the country’s democracy. It’s hard to understand why it is necessary, then, to declare a state of emergency.

— David McKinnon (@McKinnonDavid) May 6, 2022

President Rajapaksa’s government in the past has been critical over the suggestions by international community to improve human rights in the country.

However, a looming economic crisis compelled it to deal with international powers and listen to them. Rajapaksa’s government has said it had made significant amendments into an anti terrorism act.

Any violence or human rights abuses at this juncture could delay Sri Lanka’s opportunity of securing an International Monetary Fund deal to overcome its economic crisis as political stability is a key requirement for such deals, two government officials have told Economy Next.

Sarah Hulton, the British High Commissioner to Sri Lanka said a democratic and peaceful approach is essential to resolving the current challenges.

The United Kingdom moved a resolution at the UNHCR in March last year urging to address past human rights vuiolations.

“Rights to peaceful protest and freedom of expression must be respected alongside all fundamental rights. Emergency laws restricting those rights work against democratic dialogue & solutions,” Hulton said in her twitter platform.

A democratic and peaceful approach is essential to resolving the current challenges. Rights to peaceful protest and freedom of expression must be respected alongside all fundamental rights. Emergency laws restricting those rights work against democratic dialogue & solutions.

— Sarah Hulton OBE (@SarahHultonFCDO) May 7, 2022

Any violence or human rights abuses could have detrimental impacts on Sri Lanka’s chances in rapid recovery from the ongoing economic crisis.

Swiss Ambassador to Sri Lanka Dominik Furgker said the causes of the protests have to be seriously and credibly addressed now to avoid an escalation.

“It‘s hard to see how a state of emergency could help in any way,” he said.

For weeks the Sri Lankans have been peacefully demonstrating because they are desperate and suffering. To avoid an escalation the causes have to be seriously and credibly addressed now. It‘s hard to see how a state of emergency could help in any way.

— Dominik Furgler (@SwissAmbLKA) May 7, 2022

New Zealand High Commissioner Michael Appleton also raised concerns concerned  in a State of Emergency, “without a clear rationale provided”.

“Sri Lankans, whose recent protests have been overwhelmingly peaceful, deserve to have their voices heard. We encourage all to focus on solving ’s political & economic challenges,” he said.

New Zealand is concerned is again in a State of Emergency, without a clear rationale provided.

Sri Lankans, whose recent protests have been overwhelmingly peaceful, deserve to have their voices heard.

We encourage all to focus on solving ’s political & economic challenges.

— Michael Appleton (@michelappleton) May 7, 2022

(Colombo/May08/2022)

ECONOMYNEXT – Sri Lanka’s gross official reserves have dropped 90 million US dollars to 1,827 million US dollars in April 2022, official data showed, with an attempt to shift from a soft-pegged exchange rate to a float still not having succeeded.

Finance Minister Ali Sabry told parliament that useful reserves were down to 50 million US dollars.

Most of the remaining reserves are from an 11 billion Chinese Yuan swap (about 1.5 billion US dollars) obtained through a swap which has restricted use.

The central bank said there were 1,827 million dollars of currency reserves, down from 1,917 million dollars.

There was 115 million dollars in IMFs special drawing rights, 29 million US dollars in gold, unchanged.

Sri Lanka started to experience unusual monetary instability after the end of a 30 year war with discretionary policy involving flexible inflation targeting (printing money to push inflation up when the credit system recovers from the last currency crisis of the soft-peg).

There can be no currency crises without a peg.

It was coupled with output gap targeting (printing money to push growth after the credit system recovers from the last collapsed of the soft-peg).

To calculate the output gap and give clues to trigger happy interventionists to print money the International Monetary Fund gave technical assistance to calculate an output gap.

In 2018 the central bank printed money and created a currency crisis despite tax hikes and a fuel price formula and triggered a currency crisis showing that under flexible inflation targeting/output gap targeting no amount of fiscal fixes will bring results.

Foreign borrowings ratcheted up at both central government and also Ceylon Petroleum Corporation as output gap targeting created forex shortages, making it difficult to pay for oil or repay debt through the purchase of dollars.

In 2020 taxes were also cut saying there was ‘persistent output gap’ and the central bank also borrowed abroad as money printing led to forex reserve losses and the CPC and the Central government could not borrow. (Colombo/May08/2022)