Lanka Free Library

ECONOMYNEXT – State-run SriLankan Airlines has explained the need to lease replacement aircraft with leases of a number of aircraft running out in the near future, and newer used aircraft being 20 to 40 percent cheaper now compared to its existing fleet.

Leases of three aircraft had expired during the Covid pandemic and 09 others were due to expire from 2022 to 225.

Without a direction to shut down the airline from the major shareholder, the government, not replacing the aircraft without a specific direction to shut down the airline “such failure to act would have been a dereliction of duty on the part of the Board of Directors,” the airline said.

The airline had made an operational profit in the March 2022 quarter for the first time since 2006.

Sri Lankan had 878 million dollars in debt mostly to state banks, and the Ceylon Petroleum Corporation and a dollar bond.

The airline would make a large forex loss after the central bank printed money and broke the rupee’s soft peg with the US dollar.

The forex loss on 878 million US dollars when the rupee falls from 200 to about 360 so far would be around 140 billion rupees. The same would apply to all other enterprises with US dollar debt including CPC.

SriLankan said 85 percent of its revenues were in US dollars.

Ceylon Petroleum Corporation, which had little dollar revenues had been made to borrow around 3.6 billion US dollars by authorities, whenever money printed to target an output gap (stimulus) created currency crises, analysts have said.

SriLankan said when it advertised for proposals from prospective lessors on April 10, the Board had no knowledge that on April 12 Sri Lanka would suspend payment on debt.

While the sovereign rating downgrade would lead to a rise in risk premium, the airline believed that it would still benefit from lower lease costs.

The statement from SriLankan in the form of an faq is reproduced below:

3 May 2022; Colombo – SriLankan Airlines Ltd. welcomes and respects the rich debate in the public space on matters concerning the Operation of the Airline in General and the ‘Notice of Procurement’for the Lease of Aircraft in specific.The Board and Managementare of the opinion that the discussion on these topics would benefit from more full information.

At the outset, we believe that the response to the following questionwould set the foreground for a more informed analysis of the areas of interest.

What was the Rationale of the Proposal from Management, and Approval by the Board, to Explore Aircraft Leasing Options in the Global Market?

The proposal from Management was primarily focused on the replacement of Twelve (12) expiring/expired aircraft leases.Nine (09) Aircraft will leave the fleet commencing year-end through to 2025 and Three (03) have left the fleet already during the pandemic period.

Not taking timely actionto explore the global market for lease options would effectively translate to scaling down the Airline through route cancellation.In the absence of a Direction or Decision by the Shareholder (Government of Sri Lanka – GoSL) to Scale Down or Shut Down the Airline (along with the dire consequences of such action to debt holders including the State Banks), such failure to act would have been a dereliction of duty on the part of the Board of Directors.

The interplay between Sri Lanka’s Foreign Currency Crisis and the Operational strategies of SriLankan Airlines was also an important consideration. This topic is dealt with in more detail through specific questions and answers, but the salient fact is that SriLankan, with 85% of its earnings being from overseas, is a foreign currency earner, similar to an export business. Shrinking the foreign currencyearning capacity of the Airline through fleet contraction would in fact be negative to the Country’s foreign currency situation.

The Management proposal was also centered on the fact that the lease market rates are very low at present (savings of 20%-40% relative to the current fleet). The Airline also has the further opportunity to significantly reduce operating costs through the securing of Aircraft which are more fuel-efficient and cheaper to maintain. These are all factors that would improve the USD Cash Flows of the Airline.
The Management additionally sought approval to explore the viability of expanding the fleet by up to Nine (09) Aircraft during the period 2023-2025to exploit forecasted tourism demand in the years ahead at lower lease and operating costs.

The above and other salient subjects and discussion points are further addressed through the Specific Questions which follow.

At this stage, has SriLankan Airlines Committed to the Lease of (even a single) Aircraft – No

Even at a future stage of the process, if for whatever reason the Airline wishes not to proceed with Leasing Aircraft, would the Airline be still compelled to Lease 21 Aircraft? No, the Airline would be free to Lease as few or as many aircraft as it wishes or to cancel the entire process. The entire process is on a Strictly Non-Binding basis.

Was the Intent of the Airline to Lease Brand New Aircraft? No, the Airline’s focus was on exploring the Global Market for Used Aircraft, to significantly reduce its operating cost structure.

Would Aircraft leases burden the State? No, all leases will be funded through the company’s foreign currency cash flows.

When would the Airline need to take a Decision whether (or not) to Lease Aircraft – and the related quantity, aircraft type, aircraft age,etc.?From the Airline’s perspective, it would be ideal if the Procurement Process was progressed to the level of decision making by October 2022. Failure to do so may result in the cancellation of several routes from March 2023 onwards and the contraction of revenues.

Does SriLankan Airlines draw on Foreign Currency Resources of the Sri Lankan Economy? No, SriLankan with 85% of its revenues in foreign currency is a net foreign currency earner under normal operating conditions. It should be noted, however, that the Airline Business is susceptible to major disruptions such as the pandemic or a country specific situation that deters tourism and international travel. s

Should SriLankan Airlines consider Replacement of Expiring Leases and Aircraft Additions when Sri Lanka was facing a Foreign Currency Crisis? Since the Airline’s operations generate foreign currency inflows, shrinking the fleet and resulting foreign currency cashflows will have a negative impact on the inflow of foreign currency to the country, while growing the foreign currency cash flows would have a positive impact. The Airline should therefore continue to evaluate the business case for Aircraft Replacement at a lower costand the very selective addition of new cash generating routes, in the best interest of the Company and the Shareholder.

What are the steps which need to be completed for the Board to be able to make a recommendation to the Shareholder (Government of Sri Lanka)by the end of 2022?
Identification of Bona-Fide Bidders for Aircraft Leasing through a transparent process
Calling for lease Proposals from eligible bonafide bidders through a transparent process
Evaluation of the bids
Preparation of a Recommendation in terms of Timing, Quantity, Aircraft Type, Age and specifications.

Is it normal practice to make a public announcement of the intent to lease aircraft? It is Best Practice in the interest of Full Transparency and to allow any Potential Lessor to participate. This level of transparency we believe is a significant enhancement to the Airline’s Lease procurement process and should be a consistent practice within the overall governance framework going forward.

What is the current status of the Process?The current stage (Notice of Procurement) was limited to the Submission of Credentials to enable the identification of Bona Fide Bidders with requisite certification and Aircraft Supply over the period up to 2022. No pricing information was called for at this stage. The next stage would be to issue an RFP document to the Qualified Bona Fide Bidders. Based on the suggestion of the COPE, the progress to the next phase of Price Exploration has been deferred by 3 months.

What considerations would be taken into account prior to deciding whether or not to lease aircraft and in the former case,quantity, price and aircraft type,etc.?

Business Caseformulation and evaluation for each and every Aircraft Lease (whether a replacement for an expiring lease or for route addition).

Financial Situation of the Airline at the time under multiple scenarios

Macro-Economic Conditions at the time and projected going forward

The Business Case Evaluation for Aircraft Replacement and/or Addition would necessarily have to factor in the Risk of Exceptional Situations and their mitigation.

What other considerations are relevant to the decision to survey the Global Aircraft Leasing Market?
The Aircraft Leasing market is currently very favorable, with a high likelihood of SriLankan Airlines being able to secure savings of 20%-40% relative to lease rates being paid at present.
The additional opportunity to significantly reduce operating costs through the securing of Aircraft which are more fuel-efficient and cheaper to maintain.

The Notice of Procurement points to the Potential number of Aircraft to be Leased up to the Year 2025 as 21. How is this number derived?

The quantity being explored includes 12 replacement aircraft. Nine (09) Aircraft will leave the fleet commencing year end through to 2025 and Three (03) have left the fleet already during the pandemic period. The Management is also exploring the market conditions for a further 9 Aircraft during the period up to 2025 in line with Tourism and International Travel Forecasts published by reputed International Organisations such as IATA (International Air Transport Association).

Sri Lanka announced the Selective Suspension of External Debt Servicing on 12th April – what impact would this have?

The downgrade of Sri Lanka’s ratings to default levels is likely to result in potential lessors adding a risk premium to pricing levels in the market. It is nevertheless likely that Lease Costs inclusive of such premium would remain more favorable than lease rates paid by the Airline at present.

To what extent was the Board aware of the Economic Crisis in Sri Lanka

The Board was fully aware of the deteriorating economic conditions in Sri Lanka, which have impacted day to day operations and have been extensively deliberated.A large number of strategic initiatives were launched to mitigate the impact of the crisis on the various dimensions of the Airline’s operation. The strategies adopted by the Airline enabled it to deliver an Operating Profit for the January-March Quarter notwithstanding the worsening economic conditions

With specific reference to the Commencement of a Process to Investigate Pricing of Aircraft leases, for reasons explained above, there was no reason to hold back such an initiative since circa50% of the fleet leases are expiring and initiatives targeting Direct Cost Savings and the continuation and growth of foreign currency Cash Flows, will directly benefit the company and the Shareholder (GoSL).

The Notice of Procurement was released on the 10th of April 2022. As stated before the COPE, the Company had no knowledge of the intent of the government to announce a Selective Suspension of External Debt Servicing on 12th April. As explained above, this would have some impact on Lease Prices,but it is likely the Airline would have the opportunity to benefit from lower (than current) lease prices regardless.

What is the Financial Situation of SriLankan Airlines?

Promisingly, the Airline has recorded a Group Operating Profit in US Dollar Terms for the January – March Quarter of 2022(unaudited). Thiswas the first profitable Quarter (in USD terms) after 6 Years. Significantly it is also the first 4thquarter profit (in USD terms) since 2006.

The Airline has, however, over a long period of time, accumulated an unsustainable level of debt which currently stands at USD 878 Mn.

Significantly, and notwithstanding the Operating Profitability achieved in US Dollar Terms, the carriage of USD Debt would, due to the recent devaluation of the LKR by over 50%, result in the recording of avery significantnon-cash exchange loss (due to revaluation of debt) in the LKR statutory financial statementsfor the year ended 31 March 2022 (unaudited).

A majority of this debt is held by the State Banks and the Ceylon Petroleum Corporation (CPC). Other significant debt includes a Government Guaranteed USD Bond for USD 175 million reissued in 2019.

Over the Past months, based on enhanced operating profitability and foreign currencycash flows, the Airline has commenced paying down debts to CPC, in addition to ensuring timely servicing of interest ofother term debt.

What were the main drivers of improved operational performance

Operating Profit during December 2021 and January to March 2022, has been achieved through a two-pronged strategy – Cost Restructuring and Opportunistic New Revenue Capture based on new routes, and adapting capacity to demand for both passenger and cargo traffic

Cost Restructuring at SriLankan is based on several phases and the Initiative to Rebase the Cost of Leases to Current (favorable) prices is a critical phase moving forward

What was the Impact of the Pandemic on the Global Industry and SriLankan Airlines in particular?

Globally, the devastating impact of the Pandemic resulted in 26 Airlines entering restructuring and 37 Airlines being shut down

Relative to the global industry, SriLankan has fared reasonably well, with a post-pandemic operating structure that provides a foundation for profitable operations.

Several factors made this possible:

Sacrifices made by the employees of the Airline, a majority of whom took deep salary cuts over an extended period.

Equity injection by the Shareholder of LKR 45.7 billion in 2020.

Successful Cost Restructuring (which brought down operating costs by USD 100 Million during the pandemic) and Exploitation of Market Opportunities – Cargo Services, Repatriation Services, New Demand Capture – for example between India and Australia.

Shouldn’t SriLankan Airlines be Shut Down? Sold? Liquidated and Restarted etc.?

These are valid questions. The critical issue which constrains the Options available is the fact that insolvency or bankruptcy at SriLankan would have a serious impact on the State Banks and CPC which hold a bulk of the historical debt.

Restructuring or Capitalisation of debt and/or liquidation and restart (as some Airlines have done) are decisions that need to be taken by the Shareholder (Government of Sri Lanka) and are beyond the purview of the Board. The Board has however provided the Shareholder with several going forward scenarios along with envisaged consequences.

In the absence of such direction by the Shareholder, it is the fiduciary duty of the Board of Directors to maximize the operating performance of the company.

The focus of the Board and Management has been to achieve Profitable Operations and to Commence Paying down long outstanding debt.

How is the Board of Directors Appointed and Remunerated?

Board members are appointed by the Shareholder of the Airline – the Ministry of Finance

The current Board of the Airline was appointed in January 2020 shortly prior to the Pandemic

At the point of appointment, current board members resolved not to accept any remuneration or benefits whatsoever.

Board members extended time and effort towards the management of the Airline on a purely honorary basis.

ECONOMYNEXT – China will provide an additional 300 million renminbi (worth over 45 million US dollars) in aid to cash-strapped Sri Lanka for the urgent purchase of medicines, food, fuel and other essentials, the Chinese embassy in Colombo said on Tuesday (03).

The embassy tweeted in the early hours of Tuesday that the new grant will increase the total emergency aid from China to 500 million renminbi (over 75 million US dollars).

To support #SriLankan people at this trying times, #China has decided to provide another 300 million RMB of aid to #SriLanka for the urgently needed drugs, food and fuels etc., which increases the total emergency grant from China to 500 million RMB (approximately 76 million USD). pic.twitter.com/uk1NY91nDy

— Chinese Embassy in Sri Lanka (@ChinaEmbSL) May 2, 2022

Meanwhile, Reuters reported on Monday (02) that Beijing’s ambassador Qi Zhenhong told Sri Lankan Finance Minister Ali Sabry at a meeting on Monday that China supports the island nation’s decision to work with the International Monetary Fund (IMF) to restructure its debt.

“Ambassador Zhenhong also assured Minister Ali Sabry that as a major shareholder of the IMF, China is willing to play an active role in encouraging the IMF to positively consider Sri Lanka’s position and to reach an agreement as soon as possible,” Reuters quoted Sri Lanka’s finance ministry as saying in a statement.

Earlier, on April 29, Central Bank Governor Nandalal Weerasinghe China will be treated equal to all other external creditors and will not be given any preferential treatment when Sri Lanka carries out its debt restructuring.

Sri Lanka on April 12 announced that it was suspending all foreign debt repayments as it had run out of foreign currency reserves and it will be restructuring all its external debts.

Related:

China won’t get special treatment in Sri Lanka’s debt restructuring – CB Chief

Media Minister Nalaka Godahewa said on Monday that Sri Lanka is also in discussions with China on how to proceed with debt following a suspension of payments as they are seen to be unwilling to re-structure debt as required under the IMF agreement.

India, too, has extended a fuel credit line to Sri Lanka by another 200 million US dollars which will enable the latter to import another four fuel shipments while another 500 million US dollar credit line is also under discussion, Power and Energy Minister Kanchana Wijesekera said on Monday. (Colombo/May03/2022)

ECONOMYNEXT – Sri Lanka’s worsening economic crisis cannot be solved without first resolving the prevailing political gridlock and, as his party is opposed to an interim government under President Gotabaya Rajapksa, an election must be called, opposition Janatha Vimukthi Peramuna (JVP) leader Anura Kumara Dissanayake said.

Speaking at a May Day rally in Colombo on Sunday (01), Dissanayake said the Marxisist-Lenninist JVP or the National People’s Power (NPP) alliance it leads will not under any circumstances be party to an interim or all-party government as long as President Rajapaksa remains in power.

“What is the point of an all party government with President Rajapaksa still at the helm? Calls coming from protestors around the country is for Gotabaya Rajapksa, [his older brother and Prime Minister[ Mahinda Rajapaksa and rest of the government to call it a day,” said Dissanayake, to shouts of “Gota, go home” from the crowd.

Thousands of ordinary citizens have been taking to the streets against President Rajapaksa and his government over what has become Sri Lanka’s worst economic crisis in its 74-year post-Independence history. A crippling dollar shortage brought about by ill-advised tax cuts, dwindling remittances and tourism revenues and excess money printing have led to severe shortages in fuel, cooking gas, medicines and other essentials.

“The people are demanding an end to a 74-year curse. The demand is not for some all-party nonsense with Gotabaya Rajapaksa still in charge,” said Dissanayake.

The JVP leader said the Sri Lanka Podujana Peramuna (SLPP)-led government is the most stable government the country has seen in years and yet is facing an unprecedented political crisis.

“This government has executive powers and a two-thirds majority, so what went wrong? The people do not accept the president or his administration. That has made it unstable,” he said.

“People are surrounding the homes of the president and the prime minister, demanding that they leave,” he  added.

Referring to recent comment by Prime Minister Mahinda Rajapaksa that he could still run with the youth calling for his resignation, Dissanayake said: “So, run. Run all the way to Medamulana.”

Medamulana is the ancestral home of the Rajapaksa family.

The JVP’s solution to the crisis, according its leader, is an election where the people will be given the opportunity to elect a government that is acceptable to them.

The main opposition Samagi Jana Balavegaya (SJB) headed by Opposition Leader Sajith Premadasa, too, is unfit for governance, said Dissanayake.

“Sajith says in Mawenalla the he too is coming to catch thieves, to applause from Rajith, Kiriella, and Harrison at the back. Thankfully, Ravi is no longer with the party,” he said inviting laughter from the audience.

The NPP leader also highlighted allegations of misappropriation of the Central Cultural Fund from 2016 to 2019 during the tenure of Premadasa as Minister of Housing, Construction and Cultural affairs.

Dissanakaye insisted that only a JVP-led government can fight corruption and bring various parties accused of corruption to justice. Their government alone can solve Sri Lanka’s crises, he said, without elaborating on proposed solutions.

“The people must given an opportunity to elect a government of their choice. There is no other answer. An interim government won’t end this stalemate. It’ll be the same people. Three of us, 222 of them,” he said, referring to the three NPP legislators including himself.

Responding to questions about the country’s ability to afford an election at this juncture, Dissanayake said his party has a duty to “save” the people and the country when they’re i peril. (Colombo/May02/2022)

ECONOMYNEXT – Sri Lanka health authorities warn of a possible rise in dengue cases with data showing a spike in the cases during the first quarter with the health ministry is facing a shortage of chemicals to control dengue mosquitoes amid a severe shortage of dollars.

Sri Lanka is facing its worst economic crisis since the independence from the British Colonial rulers in 1948 with shortages of essentials like cooking gas, medicines, and fuel due to acute shortage of dollars.

“We have run out of chemicals that we use to control the dengue (mosquito) population. We see the cases are rising especially in Northern and Western provinces,” Chairman of the Public Health Inspectors Union Upul Rohana told EconomyNext.

“And we have run out of fuel as well and chemicals that are being use to do full blood count test in order to identify dengue patients have also run out.”

The total dengue cases in the first three months of 2022 has increased to 17,123, nearly half of 35,924, the total dengue cases in 2021 when the country was mostly locked down.

Rohana said, with measures to prevent the mosquito population and the dengue cases being disrupted, the number of dengue infected people and possibly the fatalities will increase.

The National Dengue Control Unit (NDCU) has identified Colombo, Gampaha, Kalutara, Kandy, Galle, Matara, Jaffna, Batticaloa, Trincomalee, Kalmunai, Puttalam, Rathnapura and Kegalle districts as high risk dengue areas in the country.

According to the data issued by the NDCU, in the month of March 2022 alone 3,040 dengue patients have been identified, an increase by 31.4 percent from 2,312 a year earlier.

The Director of the NDCU, Sudath Samaraweera stated that pesticides which are needed for prevention programs are running out of stock.

“Some of the pesticides we have are low in stock. We have identified it now and we have informed it to the ministry. And we have been informed that those stocks will be refilled as soon as possible,” Samaraweera told EconomyNext.

“So far we do not have any issues because the unit request the necessary funds for programs from the Ministry and they will issue that,”

Samaraweera said that the dengue prevention plans are being continued as planned and the health officers are already implementing strategies in high risk areas to control the dengue cases.

“There is a 22.6 percent increase in week 16, compared to the previous week. Of all reported cases 47.3 percent were from Western Province [Colombo Municipal Council – 5.0 percent, Rest of the Colombo District – 16.4 percent, Gampaha District – 10.5 percent and Kalutara District – 15.4 percent],” NDCU report showed.

“Jaffna 8.1 percent, Ratnapura 5.3 percent, Galle 6.5 percent, Matara 4.7 percent and Kandy 4.6 percent districts also has reported higher number of cases.” (Colombo/May 2/2022)

ECONOMYNEXT – Sri Lanka’s ex-Prime Minister Ranil Wickremesinghe who failed to privatize state-run Sri Lankan Airlines during almost five years in office has quoted a parliamentary oversight official as saying the airline should be sold.

SriLankan Airlines drew fire from the opposition when it called for proposals to lease 20 aircraft at a time when the country is facing a forex crisis due to money printing by economists who favour an unstable soft-pegged exchange rate regime which collapses suddenly.

“On the other day Chairman, Committee on Public Enterprise Charitha Herath said, all finances are being controlled,” ex-PM Wickremesinghe said in parliament.

“If you have control, how can the Air Lines lease 21 aircraft? He said this organization is making losses and needs to be sold.”

However Wickemesighe who headed an administration which critics say was suffering from policy fright, failed to privatize the airline during his term of office from 2015 to 2019, despite being a structural benchmark in an International Monetary Fund program.

During Wickremesinghe’s time the economists who ran the central bank printed money and created two forex crises, driving the rupee down from 131 to 182 to the US dollar.

The central government borrowed sovereign bonds heavily and the Ceylon Petroleum Corporation which had no dollar revenues was also made to borrow from state banks like SriLankan.

Wickremesinghe also set up the National Medical Regulatory Authority which created shortages with price controls and was also charged by critics of helping create monopolies by restricting competition.

State Minister of Aviation and Export Zones Development, D.V.Chanka, however, said the proposal is not to lease aircrafts immediately as it takes time and it had to replace 8 aircraft on which leases were expiring in the ndxt xx year.

The airline has said it made a profit in the quarter.

“Sri Lankan Airlines do not use government money to sustain themselves. When the new government came into power there were 27 aircrafts in the airline’s fleet,” Chanka said.

“We have returned 3 aircrafts out of that within this one and a half year due to the end of lease period and we have reduced 25 million US dollars, approximately 8,250 million rupees after discussion with financial institutions who provided us the lease,”

He said, within the next three years the airline has to return 12 aircraft after the lease period ends and one of them is due to end by the end of this year.

“Out of 12 Wide body aircrafts we have to return 8 and also 4 narrow body aircraft,” Chanaka said.

“We are not talking about getting them at this moment. According to the procurement processes it takes about 1.5 years and we are not using government money for these leases.”

The airline has been given tax breaks and also gets credit from the Ceylon Petroleum Corporation.

“For the first time we are paying Ceylon Petroleum corporation beforehand when purchasing fuel for the aircrafts and for the last 8 months we are not sustaining with the government money,” Chanka said.

The airline has asked for proposals to lease-up 21 aircraft aiming to increase its fleet from the current 24 to 35 aircraft by 2025 while replacing equipment on which leases were expiring.

SriLankan said on April 18 said it had made a profit of 1.7 million US dollars in the March 2022 quarter, which was the first quarterly profit reported since 2006.

The airline said during 2021-22 financial year it had cut staff costs and overheads; renegotiated supplier contracts; increasing cargo revenue and grew traffic to meet pent up demand.

Sri Lankan said passenger revenues had reached 75 percent of what it had in the fourth quarter of 2019-2020 after which the country closed airports due to the Coronavirus pandemic. (Colombo/May01/2022)

ECONOMYNEXT – Facing a severer shortage of essential drugs due to lack of dollars to import them, Sri Lanka raised commonly used drug prices by 40 percent as it sees its worst economic crisis since its independence.

Health Minister Channa Jayasumana issuing a gazette notification announced the new prices for 60 commonly used drugs following an acute shortage for drugs. For details: Maximum retail prices of medicines

The government is unable to import drugs as it has run out of dollars in its reserves while private sector firms have said they are unable to bring the drugs into the country as they are deprived of opening letter of credit amid dollar shortage in private banks.

The 84.5 billion economy has already suspended paying 51 billion US dollar foreign debts from April 12 after it had no reserves.

Already medical practitioners individually and collectively have appealed from donors and Sri Lankan expatriates to send essential medicines amid reports that hospitals are struggling to cater the public demand for drugs.

Sri Lanka maintains a free healthcare system and most of the medicines are given free of charge at state-run hospitals. However, patients are forced to buy essential drugs for cash in private pharmacies as state-run hospitals have run out of drugs.

The price hike also comes after nearly 75 percent depreciation in the rupee currency. The island nation imports most of its medicines. (Colombo/April30/2022)

ECONOMYNEXT – Sri Lanka’s rupee has started to slow the pace of its fall and will stabilize and start to appreciate in the year future based on policy action being taken, Central Bank Governor Nandalal Weerasinghe said.

“When we float the currency, there is an overshoot. But now the pace of the fall is less,” Governor Weerasinghe said.

“At some level it will stabilize. I agree that it has not completely stabilized.”

The rupee fell from 203 to the Us dollar to around 360 to the US dollar over the past month after a non-credible peg (an exchange rate held without the monetary policy to back it) was allowed to fall from March.

Governor Weerasinghe hiked the policy rate from 7.50 percent to 14.50 percent as soon as he took office and also allowed Treasury bill yields to go up.

The high rates will reduce money printing, drive more private savings to the deficit, and also reduce private credit and private investment curtailing imports.

Weerasinghe also slashed a surrender requirement where the central bank was buying dollars from banks by force to 25 percent of receipts to 25 percent.

Analysts have said that a float is a suspension of convertibility (the central bank stops intervening in either direction and stops altering bank rupee reserves through international transaction fixing reserve money) but the surrender requirement made it a peg.

To restore the lost credibility of a peg higher interest rates are needed than required to restore monetary stability through a clean float, analysts have said.

This week newly appointed Treasury Secretary Mahinda Siriwardene also ordered capital expenditure cuts which will also reduce the deficit financing needs, pressure to print money and imports.

“I am cannot give guarantees that it go to this price or the other,” Weerainghe told reporters calmly.

“I can tell clearly that the exchange rate will stabilize and turn (appreciate). nI my 10 years of experience in managing the exchange rate I know it will happen. We are taking the action necessary to make it happen.”

Sri Lanka has an intermediate regime central bank (a soft-peg) where economists print money to boost growth (output gap targeting) and trigger currency crisis.

It is the worst central bank is South Asia after Pakistan. Monetary instability has worsened in recent years under flexible inflation targeting with output gap targeting triggering three currency crises in seven years and default in 2022. (Colombo/Apr30/2022)

ECONOMYNEXT – Sri Lanka’s 2022 economic growth estimate has been revised down sharply to 1 percent, its annual report released on Friday showed, from as high as 5.5 percent in January this year.

Former central bank governor Ajith Nivard Cabraal, who resigned early this month in line with the resignation of the Cabinet, had predicted the island nation’s troubled economy to grow at around 5.5 percent this year, with a recovery in tourism also helping. Cabraal has been blamed for the economic mismanagement by the opposition and analysts.

However, since he resigned, New Central Bank Governor Nandalal Weerasnighe has raised the key monetary policy rates to almost doubled and allowed the interest free one-year government treasury bill rates to be increased to over  24 percent in a move to ease the pressure on the rupee and curb record high inflation.

“Sri Lanka’s economy is envisaged to grow modestly in the near term as the economy is to reset with a debt restructuring programme and long overdue structural reforms alongside an economic adjustment programme to be supported by the IMF, which is expected to facilitate the economy to gather momentum over the medium term,” the central bank said in its annual report.

“The build-up of macroeconomic instability in the economy, stemming from the heightened vulnerabilities on both the external and fiscal fronts, rising social unrest and political instability, effects of the pandemic, the domestic energy crisis, and elevated commodity prices both globally and domestically are expected to significantly dampen the growth prospects in 2022 and have lingering effects in the immediate future leading to a slowdown in growth.:

“Also, economic activity is likely to further slowdown amidst the announcement of a suspension of external debt servicing by the Government for an interim period and commitment to a debt restructuring programme.”

The island nation has already announced it was suspending all the repayment of foreign debts as it had run out reserves.

Sri Lanka is facing an unprecedented economic crisis with people are deprived of essentials like medicines, food, and fuel as the central bank’s usable foreign currency reserves are already depleted to near zero level.

The absence of fuel also has led to extended power cuts that has hit manufacturing sector while over 75 percent depreciation of the rupee has hit the economy across the sectors.

The 84.5 billion dollar economy has already started talks with the IMF to seek assistance to come out of the debt and balance of payment crisis. (Colombo/April30/2022)

ECONOMYNEXT – Sri Lanka’s rupee traded at 367 to the US dollar in the interbank market Friday market participants said, while banks were quoting 360 for telegraphic transfers for small transactions.

Some importers said they were getting dollars at higher rates.

Sri Lanka is facing the worst currency crisis in its history after two years of money printing to keep rates down.

In order to keep an exchange rate stable, a central bank has to be subject to strict rules and its ability to print money through open market operations curtailed.

The central bank on Friday said the government will soon issue a regulation banning open account imports to reduce Undiyal/Hawala premiums.

This week the kerb market ended around 392.50/395.00 to the US dollar.

People pay high premiums to get money out due to exchange controls and lack of dollars in the formal banking system due to money printing. (Colombo/April29/2022)

ECONOMYNEXT – Sri Lanka plans to remove a forced conversion rule of services exports as part of plans to gradually relax controls imposed in recent months, Central Bank Governor Nandalal Weerasinghe said.

The central bank imposed a series of controls on forcing exporters of goods and services to convert dollars by force and also imposed outward exchange controls as money was printed to keep rates down over the past two years driving up credit and excess demand creating forex exchange shortages.

“In the case of services exports like IT and tourism, we will remove the mandatory conversion requirement,” Central Bank Governor Nandalal Weerasinghe said.

“Goods imports are made through customs. We have no way to track these services. We have been told that some person are not bringing these money in at all because of the forced conversion rule.”

“We want to progressively remove this also.”

The central bank was also planning to relax a rule that required tourists to pay hotels in dollars only.

Governor Weerasinghe immediately slashed a surrender requirement which made banks transfer 50 percent of export and remittances to the central bank for new money, to 25 percent.

Analysts and economists have pointed out that the steep depreciation of the rupee during an attempted float (suspension of convertibility) was due to the surrender requirement which made the regime a peg with ‘strong side convertibility’, a rule that should be use when the exchange rate was appreciating.

Central bank purchases of dollars pushes a peg down.

When a third world intermediate regime central bank prints money, the controls imposed rapidly worsen the crisis. Analysts had pointed at the time that the conversion rules were similar to those imposed by Zimbabwe which was printing excess RTG dollars.

It is not clear to what extend the existing controls fall foul of International Monetary Fund rules on capital flow measures and multiple currency practices.

“We want to progressively remove control step by step,” Governor Weerasinghe said. “For the time being these have been done to stabilize the foreign exchange rate market.”

Governor Weerasinghe said the exchange rate was not being controlled and expatriate workers and other were getting a fair rate now.

Under Governor Weerasinghe policy rates were raised to 14.50 percent from 7.50 in a bid to end the fundamental cause of the currency crisis which is money printed to keep interest rates artificially low.

Treasuries yields have also been allowed to go up, which will drive private savings to the budget deficit instead of to areas like construction and capital goods imports, creating forex shortages for items like medicines.

There have been no major food shortage due to the use of Undiyal payments through open account imports.

Newly appointed Treasury Secretary has also ordered a temporary halt in capital expenditure which will also reduce the deficit, the need for money printing and high rates and construction related imports. (Colombo/Apr30/2022)