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ECONOMYNEXT – 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, the island nation’s Central Bank Governor Nandalal Weerasinghe said on Friday (29).

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.

A Sri Lankan delegation led by Finance Minister Ali Sabry including Weerasinghe held talks with the International Monetary Fund (IMF) on its plans for debt sustainability while requesting an IMF funding to overcome the financial crisis.

China was in discussion with Sri Lanka on lending a 1 billion US dollar to repay existing Chinese loans due in July and another 1.5 billion US dollar credit line to purchase goods.

Chinese Ambassador to Colombo this week said the discussions have been temporarily halted as Beijing was waiting to see the outcome of the IMF talks on debt restructuring.

China has openly told Sri Lanka that it is not in favour of debt restructuring as it will have to do the same to other debtors, Colombo government officials have said.

“All the external creditor will be treated equally. There is no question about that. India, China, Paris Club, Non Paris Club all will be treated on the same basis,” Weerasinghe told reporters in Colombo. 

“It is unfair by others if we are going to treat somebody with preferential treatment and others won’t come on board,” he said.

“We do not repay any loans now. We will be starting repaying only once we reach consensus on the debt repayments. If one party delays, then we won’t be able to start repayment.”

China has lent over 5 billion US dollars to Sri Lanka mainly for infrastructure projects amid allegations by the West and India that China has dragged Sri Lanka into a debt trap by financing big infrastructure projects which do not generate revenue.

However, Sri Lanka President Gotabaya Rajapaksa has said China has never created a debt trap while Beijing has maintained its lending to Colombo accounts for around 10 percent of the total external debt.    

Cabinet Spokesman Nalaka Godahewa this week said Sri Lanka will discuss with China on the issue and hopeful that Beijing would consider the current crisis as a special circumstance. 

Weerasinghe said once the restructuring is announced with the basis of equal treatment, creditors can negotiate with Sri Lanka if they have concerns. 

“Once we announce that we are going to treat them equally, then our part is done. The creditors will have to negotiate with us on that basis,” he said.

“We have made it very clear. If we offer a concession to one creditor, then we have to give the same concession to all the creditors. Otherwise it won’t happen.” (Colombo/April29/2022)

COLOMBO (News 1st); 96.2% of Sri Lankans believe that all politicians should be audited and all their unaccounted wealth should be confiscated by the state, a recent poll has found. According to this poll by the Center for Policy Alternatives, nine out of ten Sri Lankans hold the opinion that Prime Minister Mahinda Rajapaksa should CPA Poll: 96% Sri Lankans want all Politicians Audited

ECONOMYNEXT – Sri Lanka’s officials who handled the economic policy misled President Gotabaya Rajapaksa by painting a “rosy picture” and that led to the current economic crisis, Media Minister and Government Spokesman Nalaka Godahewa said on Thursday.

The island nation on April 12 announced it was suspending all foreign debt repayment as it did not have adequate foreign currencies which also has resulted in shortage for fuel, medicines, cooking gas, and milk powder amid extended power cuts.

Since President Rajapaksa was elected in November 2019, the key economic decisions were taken by former presidential secretary P.B. Jayasundera, former Treasury Secretary Sajith Attygala recently resigned central bank governor Ajith Nivard Cabraal and his predecessor W D Lakshman.

“I think what happened was for whatever the reason, ignorance or deliberate, they didn’t pass that information to the president. He was comfortable with his advisors who were painting a rosy picture,” Godahewa told a meeting with Foreign Correspondents Association (FCA).

“Because he is not an economist, he has to be advised. When you keep telling the President nothing to worry, things will get sorted out, probably in the initial days when his focus was elsewhere, he was excited about implementing the manifesto.”

The President slashed value added tax to 8 percent from 15 percent in one month after he was elected to provide some relief to the public citing they had been under pressure of higher taxes imposed by the previous government.

Disaster Recipe

Godahewa, a management accountant and a telecom engineer by profession, said he was against the sharp tax cut as he anticipated the current economic crisis when President Rajapaksa took office.

“I saw this crisis, even before the President came to power. I told the President that the tax reductions proposed by Dr. Jayasundara is going to put us in trouble. I told this many times openly,” he said at his new office at the Media Ministry.

“I didn’t agree with the tax reductions. That was proposed by Dr Jayasundara who was going to come in as Treasury secretary. At that time, the President was convinced by him.”

“I always recommended tax reductions because the previous government has increased taxes significantly. Double virtually, from 9 percent of the GDP to 13-14 percent of the GDP within one year.

“So I said we must reduce taxes, and we must simplify.”

“But when Dr. Jayasundara came up with that list, I immediately thought it was not going to work. I didn’t calculate at the time, but I told the President looking at it, it’s going to be a disaster.”

The tax cut was followed by a double digit fiscal deficit in 2020.

To prevent the extra money in the hands of private players coming back to the budget through bond auctions, ceiling rates were place on them to prevent their sale to the public under the powers available to the central bank creating new money as they were bought by the central bank.

Though the price controls were lifted after a change in the leadership of the central bank and bond rates started to go up, policy rates were kept low with overnight injections.

Reserves lost as the peg was defended against the new money and growing domestic credit with economic activity recovering, putting more pressure on the balance of payments with growing imports.

“Not Telling the Truth”

“So those officers are very much responsible for not telling the truth to the people in the public, and not taking proper action,” Godahewa, who was appointed as the cabinet minister on April 18 said.

However, Godahewa claimed crisis had been brewing since 2009 as the country started to borrow annually around 2 billion US dollar commercial loans at a higher rate.

“Nobody can say they (officials) only created this crisis. They aggravated and they couldn’t prevent it. They’re responsible for that. But the crisis is history,” he said.

“We did not put in place a system to generate adequate money to pay back. They built infrastructure which is necessary.”

The crisis has already hit the road with thousands of people having been protesting for nearly three weeks near the Presidential Secretariat demanding the resignation of President Rajapaksa.

Under heavy criticism, Cabraal, Attygala, and his own finance minister brother Basil Rajapaksa resigned.

They were replaced with – retired senior deputy central bank deputy governor Nandalal Weerasinghe as the new Governor, another deputy governor Mahinda Siriwardena as the Treasury Secretary, and Justice Minister Ali Sabry, a lawyer as the new Finance Minister.

A delegation including the three top officials had initial discussion with the International Monetary Fund (IMF) for a loan. Since Weerasinghe’s appointment, the central bank has almost doubled the key policy rates and raised the risk-free treasury bill yields to over 24 percent, more than inflation.

Godahewa said now the President is well informed on economic policy matters.

“Today he is involved in economics. That is why he’s changing the system and he is bringing new people, he is asking the questions now. He knows details. If you ask now, today, he knows exact details,” Godahewa said.

Officials have said they were carrying out government policy.

One of them asking not to be named said the government was now looking for scapegoats to wash their hands off from the failure.

“This is not true. But this blame game is unproductive. It was a government policy and we worked as per the guidance and direction of the president and the government,” the official said. (Colombo/April 29/2022)

COLOMBO (News 1st); Sri Lanka Railways said that the train services that were disrupted following a trade union action on Thursday (28) is being restored. The Railways Control Room said several office trains that were scheduled for early morning on Friday (29) commenced operations. Railway workers decided to join a trade union action on Thursday Railway services to return to normalcy after Thursday’s (28) nation wide protest campaign

ECONOMYNEXT – Sri Lanka has no food shortages at the moment except milk which are imported by a few large companies, but drugs and medical items are facing deadly shortages after the central bank created dollar shortages with money printing.

Sri Lanka is estimated to import around 200 million US dollars of foods a month including onions, potatoes, sprats, lentils and cereals and some types of rice from time to time.

Sri Lanka’s drug shortages are primarily created by the National Medical Regulatory Authority ,a deadly price control agency created by the ousted Yahapalana administration along with the central bank which is running the flexible exchange rate.

When the NMRA imposes price controls importers cannot sell at the current costs with the central bank depreciating the currency with money printing and a surrender rule. Therefore there are shortages.

They also cannot open Letters of Credit at banks due to dollar shortages created by money printing and the surrender rule.

The easiest way to create food shortages is to clampdown on the Undiyal/Hawala markets, open account food imports and force Pettah traders to open LCs or set Customs authorities on food importers who do not fully settle bills through official channels.

The Consumer Affairs Authority can also contribute to food shortages with price controls.

Starting NMRA without ending flexible inflation cum output gap targeting

This column warned as far back as 2015 when the then Monetary Board was printing money claiming inflation was low as commodity prices collapsed that restraining by law the central bank’s flexible policy was the answer not the NMRA. (Sri Lanka’s pharma control Neros fiddling while Colombo burns with falling rupee)

In 2018 when the outcome of the flexible inflation targeting cum output gap targeting gap become clearer, pointed out that Sri Lanka was not Greece where the currency was stable but a Latin America style central bank where the rupee collapses very steeply hitting consumer prices.

Flexible exchange rates or soft-pegs are the most dangerous monetary regime ever cooked up by economists or mercantilists.

This is what the column said at the time in (Sri Lanka is not Greece, it is a Latin America style soft-peg: Bellwether)

“Under Euro a local company can still repay foreign loans. They can also borrow domestically or use their bank deposits to repay foreign loans. There is no problem with importing goods as the Euro is accepted abroad.

“The prices of fuel or electricity did not go up steeply. They were same as any stable country in the Euro area like Germany or France. As there was no explosion in inflation the value of bank deposits were intact. While there is sovereign default and possible hair cuts on state debt there is no private default or haircut.

“But a falling currency imposes a hair cut on all state and private debt including bank deposits in solvent banks. Pensions are made worthless hitting old people the hardest.

“A collapsing soft-pegged currency will put all citizens other than the very rich, in severe difficulties unlike a strong floating exchange rate like the Euro.

Three sins and a currency collapse

“In a soft-pegged monetary regime like in Sri Lanka, the currency continues to fall each time the central bank intervenes in forex markets and then prints money to keep interest rates down.

“As long as the currency is not floated, there is no end in sight for exchange rate depreciation, especially if interest rates are not raised and credit does not slow. What usually happens in Sri Lanka and other soft-pegs is that in the end rates have to be hiked and the currency floated. This is the phenomenon been referred to as ‘rawulath ne kendeth ne’ in this column.

“In Latin America – unlike Greece – when the currency falls steeply, prices go up, and people ‘s living standards melt as most of the money goes to food and medicines. This makes the many businesses fail as demand collapses.

“Then banks have bad loans and suffer losses.

“Unlike in Greece, the government of a soft-pegged country cannot raise money from domestic markets and repay foreign loans even at prohibitive interest rates. The government may default. Downgrades will compound the problem, pushing interest rates up.

“As prices move up with currency depreciation the value of bank deposits evaporates. If the currency falls by 50 percent, local companies will now have to borrow more to repay foreign loans, making massive holes in their balance sheets even if forex was available to buy.

“If exchange controls come, there will be no dollars to buy with the domestic money they have borrowed.
“It is not possible to import goods freely when a soft-peg collapses because there will be forex shortages due to sterilized intervention. Import controls may also come.

“As the cost of fuel or electricity goes up (oil prices are now falling and there is rain in Sri Lanka) if prices are not raised, more money will be printed to subsidize energy, pushing the currency down.
“In Latin America, energy price controls have led to money printing and rationing. There can be power cuts and fuel shortages.

“In Sri Lanka because of price controls of the National Medicines Regulatory Authority medicines, drugs can go off the shelves.

“In Latin American soft-pegs many price controls were imposed. Instantly goods go off the shelves and black markets appear.

“With import controls more businesses will fail. People will be laid off as revenues fall. Banks will make more losses. Rates will rise eventually. More businesses can fail.

“If this situation continues for several months, there may be runs on banks. If money is printed to bail them out, the currency falls even more. This phenomenon was seen in many Latin American soft-pegs and also Indonesia during the East Asian crisis.

“Debt to GDP will explode until inflation catches up. The share of foreign debt will also increase. This is what happens in Latin America. It is not Greece.

Monetary Meltdown

In 2021 when bad central bank policy continued this column warned that if a float was botched running out of reserves due to ‘fear of floating’ that is found in flexible exchange rate central banks, default and a meltdown was likely.

Soft-peggers do not float in one go but tries to adjust the currency little by little. However it can backfire. The IMF also advised the central bank to adjust little by little. It was done. Two months after the float the rupee is still adjusting little by little.

This column warned against this type of half-hearted floating and half-hearted bond auctions. It is extremely disappointing to this columnist to see these warnings coming true.

This column has said in the past that dire warnings are made in the hope that the central bank’s usually flexible policies would be abandoned.

This is what was said in 2021 when the central bank continued with trying to target an output gap with the peg already broken in Sri Lanka’s monetary meltdown will accelerate unless quick action is taken: Bellwether

“The central bank itself is likely to be insolvent on its dollar liabilities before the end of the year unless money printing is halted.

“However any kind of half-hearted Treasury bill and bond auctions, partially failed bond or bill auctions with some volumes of printed money will lead to progressively higher interest rates but the reserve losses and currency depreciation will continue.

“Soft-peggers are not good at floating. Partial interventions (flexible exchange rate) will lead to even higher interest rates and more losses of confidence.

“In Argentina, short term rates went up to 60 percent due to the ‘flexible exchange rate’ (which is neither floating nor pegged) that had caused so much damage to Sri Lanka since 2015 coupled with an unsterilized disorderly market conditions (DMC) rule, which also lacks credibility.

“The high interest rates can kill many businesses. The high rates from partial floating can kill finance companies and banks.

“When dying banks are bailed out with printed money, it is generally even more difficult to control the exchange rate.

“Inflation and cash shortages will lead to a consumption collapse which will also destroy businesses. Low reserves will lead to a default on foreign debt as happened to the Weimar Republic.

CAA, NMRA a big threat

“When the rupee starts to fall, the price controls will come. The Consumer Affairs Authority (CAA) had already stopped Laugfs Gas.

“It will impose many more price controls. Many more shortages will occur. It will be a big threat to the ordinary people. People will be branded ‘black marketers’.

“The money printers are already getting ready to hike the fine on those who break price controls by 100 times.

“The National Medicinal Drugs Authority (NMRA) could be an even bigger threat. NMRA price controls will make it impossible for drug importers to operate. There may be shortages of some types of medicines.

“The import substitution firms, also called ‘cronies’ will manage.

“It is even possible that oil imports will have to be curtailed, if more money is printed to pay state “workers and meet other expenses.

“What happens to soft-pegs countries is that eventually the currency is floated when it becomes apparent to the Keynesians driving policy, that there is no way to rebuild reserves. When the rupee is floated price controls may again cause havoc.

Avoiding Worst Case Scenario – Monetary Meltdown

“So what is the worst case scenario?

“The worst case scenario is that the nothing will be done and the central bank will continue to print money to keep the ceiling yield on Treasury bill yields.

“Whatever Keynesian or post – Keynesian economist, have been taught at university, reality always hits eventually. Keynesian models are fine in theory, but they do not exist in the real world. The Hicks-Hansen model (IS-LM) was dismissed by Hicks himself later.

“The central bank itself is likely to be insolvent on its dollar liabilities before the end of the year unless money printing is halted.

“However any kind of half-hearted Treasury bill and bond auctions, partially failed bond or bill auctions with some volumes of printed money will lead to progressively higher interest rates but the reserve losses and currency depreciation will continue.

“Soft-peggers are not good at floating. Partial interventions (flexible exchange rate) will lead to even higher interest rates and more losses of confidence.

“In Argentina, short term rates went up to 60 percent due to the ‘flexible exchange rate’ (which is neither floating nor pegged) that had caused so much damage to Sri Lanka since 2015 coupled with an unsterilized disorderly market conditions (DMC) rule, which also lacks credibility.

“The high interest rates can kill many businesses.

“The high rates from partial floating can kill finance companies and banks. When dying banks are bailed out with printed money, it is generally even more difficult to control the exchange rate.

“Inflation and cash shortages will lead to a consumption collapse which will also destroy businesses. Low reserves will lead to a default on foreign debt as happened to the Weimar Republic.

Food Heroes

When a country defaults trade takes a big hit because foreign suppliers refused to accept Letters of Credit. But in Sri Lanka’s case this happened in incremental steps from around late 2020 when the country was downgraded to CCC.

First some suppliers stopped accepting LCs of local banks which were not counter signed by an international bank. Suppliers need LCs to get packing credit. Then banks in Japan and Western countries stopped counter signing them. For a while Indian banks did it at a high premium.

The Indian banks also stopped counter signing. They also stopped giving supplier credit against Sri Lanka LCs.

Then as the central bank tightened controls, surrender rules and so on, without halting money printing banks stopped giving LCs because they could not find dollars to settle them on time.

However Sri Lanka’s Pettah traders, like a mother hen feeding her chicks under the greatest challenges continued to import food using traditional relationships, sometimes running back several generations, with suppliers sending goods on open papers.

Farmers are also doing it despite the lack of fertilizer. Some fertilizer is smuggled from India to feed the people (boat urea).

Suppliers in South Asia and Dubai are familiar with Undiya/Hawala and are willing to trust personal relationships more than LCs. Their word is their bond.

Food importers will tell that banks only give small amounts of money. They have in fact cleared most of the containers in the port.

That is why there is food. Through the Undiyal/Hawala system they get priority. And they can get a dollar at 20 rupees higher and feed the nation while banks have to listen to various dictates of authorities and powerful suppliers including in building materials.

The Undiyal/Hawala system is not a threat to anyone. It does not create new money and drive up excess liquidity of the good banks, unlike the surrender rule of the ‘official channels’.

It does not reduce the rupee reserves of state banks in particular and lead to printed money borrowing from the SLF window unlike the ‘official channel’.

It is harmless a gross settlement system where the currency floats without influencing reserve money. It is feeding a nation with remittances.

What should be done is not to force food importers to use LCs, but to fix the broken peg (rates have already been raised which will reduce domestic credit and investments and imports in a step in the right direction) or have a clean float so that imports can be done freely.

Forcing food importers to use LCs can create food shortages. Setting the CAA hounds after the food heroes will also create shortages. (Colombo/Apr29/2022)

ECONOMYNEXT – Sri Lanka’s newly appointed cabinet is likely to be dissolved when majority at an all-party meeting with President Gotabaya Rajapaksa agrees on Friday, Cabinet Spokesman and Media Minister Nalaka Godahewa said.

President Rajapaksa, who is under heavy criticism for the current economic crisis, has called for an all-party conference and has pledged to go for an all-party cabinet once the consensus is reached at the meeting which is scheduled to be held Friday morning.

The earlier cabinet resigned on April 3 and a new cabinet has been appointed, aiming to ease some pressure from the protesters.

“My understanding is unless something drastic happens in between, it is very likely that the cabinet will be dissolved and a new cabinet be appointed,” Godahewa told at a meeting with Foreign Correspondents Association (FCA) on Thursday (28).

“I think we are heading towards that direction. If majority of them agree to form a cabinet, definitely current cabinet will be dissolved.

“If the opposition parties don’t come, it boils down to the original team that are there, then the issue will be what is the cabinet? What is the composition? Who’s going to lead? So those things have to be resolved. I don’t know, the final outcome yet.”

The youth-led protesters have been demanding the resignation of President Rajapaksa and Prime Minister Rajapaksa, Both have defied to step down, but agreed to go for constitutional changes to reduce the powers held by the president.

The protesters have been agitating for the 21st consecutive day on Friday (29) near the presidential secretariat in the heart of capital Colombo near a range of luxury hotels.

People across the country have joined the protesters and have been backing them to bring in a new change in the country’s political system in which many have lost confidence.

The protests were started after shortage of essentials including medicines, fuel, and milk powder led people across the country to stay in queues, sometimes for days amid extended power cuts.

Rajapaksa government has so far not found any sustainable solution to shortages of dollars which has resulted in shortages of essentials as the government could not import the essentials.

“It will at least bring stability inside the parliament,” Godahewa said when asked if a new all-party cabinet would help ease shortages. ‘

“Right now even to pass an act or any drastic action that we have to take in this economic crisis, certain drastic decisions will have to be made. So if you can’t pass those in the parliament, nothing can be done.”

“So you need a strong government, first of all, to face this economic crisis. But it will not necessarily solve the mood outside, I think that will continue for a while.”

“But you have no other way to solve that, unless you put the economy back on track. To put the economy back on track, you will need parliamentary democracy established and a strong government. So that’s the first step you’re trying to achieve.” (Colombo/April29/2022)

ECONOMYNEXT – Sri Lanka is hopeful of reaching a staff-level or initial agreement with the International Monetary Fund within two weeks, Ceylon Chamber of Commerce quoted Central Bank Governor Nandalal Weerasinghe as saying.

Governor Weerasinghe had addressed the committee of the Chamber on April 28.

“Noting that encouraging progress had been made towards establishing a macro-fiscal policy framework and initiating structural reforms, he expressed confidence that a staff-level agreement with the IMF is likely to be reached within the next two months,” the Chamber said.

Sri Lanka has a soft-pegged exchange rate regime, which is neither a clean float nor a hard peg and there is a balance of payments deficit and a currency peg collapses whenever the central bank prints money to keep interest rates down artificially.

Unlike clean floats of hard pegs where balance of payments crises are impossible, soft-pegs or flexible exchange rate frequently end up at the IMF usually also with political upheavals and social unrest.

After the end of a 30 -year war monetary policy radically deteriorated with flexible inflation targeting (discretionary policy where money can be printed on multiple excuses) with output gap targeting (printing money for stimulus) triggering a series of currency crises, analysts have said.

In 2018 output gap targeting triggered a currency crisis despite tax hikes and market pricing of oil. During each money printing period – which created forex shortages – the country borrowed heavily abroad including through what was called active liability management and the Ceylon Petroleum Corporation was also made to borrow.

The currency collapsed from 131 to 182 during two soft-peg now called crises

In the 2020-21 crisis the central bank borrowed and it now has net debt.

Eventually Sri Lanka defaulted on its external debt on April 12, despite the country being at peace and the IMF said it will have to re-structure external debt to keep down the gross financing need.

Sri Lanka will not re-structure domestic rupee or dollar debt, Governor Weerasinghe has said.

The staff level agreement has to be approved by the IMF board after all prior actions which are deemed to be absolutely required are completed. A key prior action is debt – restructuring according to what is now known.

The central bank has hiked its artificially low policy rate which hit the rupee and triggered reserve losses from 2020 to 2022 to 14.5 percent after triggering a currency collapse from 182 to 355 so far party accelerated by a surrender rule which was pushing the peg down, analysts have said.

With the peg still broken and generating forex shortages in 2022 Sri Lanka is now on another foreign borrowing spree calling it ‘bridging finance’.

A country also has to end forex shortages and match outflows to available inflows before the first tranche is disbursed, the prevent the IMF money from being frittered away in ‘bridging finance’ style activity. (Colombo/Apr28/2022)

COLOMBO (News 1st); Trade Unions from several areas across the country reached Occupy Galle Face protest site on Thursday (28) afternoon. Many Government, non-Government and private-sector workers from various sectors such as the Management Service Union, Bank Employees Union, the Government’s Exclusive Officers, the Export Development Board, Development Office, and Lawyers took part in the LEAVE! Trade Unions march to Galle Face demanding President step down

ECONOMYNEXT- Sri Lanka is facing its worst performing cultivation season in more than a decade during the ongoing Yala season and there is a possibility of a looming food crisis in the coming months,” a group of Agriculture experts have warned.

President Gotabaya Rajapaksa’s ban on chemical fertilizer a year ago is now taking the toll on the agricultural sector with the paddy production has plummeted nearly by 50 percent.

Rice is Sri Lanka’s staple food and nearly 80 percent of the 2.2 million Sri Lankan farmers cultivate paddy in 800,000 acres of land, the biggest by any crop.

“This season has not yet begun, but it is already finished. There is no hope for it,” K.K.I.U.  c, a crop science professor at University of Ruhunu told reporters on Wednesday (27) in Colombo representing Academics’ Movement to Safeguard Agriculture in Sri Lanka.

“If we cannot get enough seed paddy for next season at least, Sri Lanka will have to depend on imports even in 2023. We cannot see this crisis coming to an end.”

The fertilizer ban has led Sri Lanka to import rice from India, Pakistan, and Myanmar while China has agreed to grant 5,000 metric tons of rice.

Critics say the government’s objective of chemical fertilizer ban is lost because the island nation has to spend more dollars on imports while people are compelled to consume rice grown under agrochemicals in a foreign country instead of Sri Lanka.

The experts also said apart from rice,  yield of corn, a crop largely used for animal feed, went down by over 70 percent. while decline in tea production has led to a fall of 52 million US dollars in the first quarter due to fertilizer ban. They also said vegetable yield also had also gone down by 30 percent.

President Rajapaksa and his cabinet ministers were stubborn on organic fertilizer. The government first imported organic fertilizer from China, but the consignment was rejected because the authorities said the shipment contained harmful bacteria. Later it imported liquid Nitrogen fertilizer, but farmers complained that they do not prefer to use them due to bad odour.

Last week, the President said banning chemical fertilizer was a mistake and he would reverse the decision for the this Yala cultivation season.

Experts said a looming food shortage could be due to farmers temporarily abandoning Agriculture due to the unsustainable costs of the occupation.

“Fertilizer prices have gone up by seven folds, and farmers no longer receive subsidies. A 50kg of fertilizer was 6000 rupees in the past. Now it is over 45,000 rupees. Large commercial farms can cover the costs, but most farmers decided to reduce production area or temporarily stop agriculture,” Academics’ Movement to Safeguard Agriculture in Sri Lanka said.

The initial ban on chemical fertilizer in April last year resulted in widespread protests by the farming community. After the ban is lifted, now fertilizer scarcity is haunting the farming  community hard.

Arunakumara stated that importers were finding it difficult to open letters of credit due to the forex crisis, and that the Russia Ukraine war, as well as China’s export ban on chemical fertilizer was also impacting the scarcity.

Experts noted that the lack of weedicides, pesticides and insecticides also had a huge impact on crops, especially on corn, which is highly affected by growth of weeds.

Professor Saman Dhamakeerthi from University of Peradeniya told Economy Next that the reduction of corn production could have adverse effects on the animal husbandry industry, particularly poultry farms, and that meat prices would also increase as a result.

Experts stated that Sri Lanka was self-sufficient in paddy since 2008, producing on average an excess of 800,000 metric tonnes of paddy per year, except for two years of extreme drought. In contrast, Sri Lanka had to import 650,000 kg of rice since the ban on chemical fertilizer, experts say. (Colombo/Apr27/2022)

ECONOMYNEXT – Sri Lanka has recorded a budget deficit of 12.2 percent of gross domestic product in 2021, with 1,225 billion rupees printed under output gap targeting with flexible inflation targeting, official data show.

The debt ratio with Treasury guarantees and net central bank foreign debt was had risen to 115.9 percent of GDP.

Sri Lanka has raised 1,457 billion rupees in revenues in 2021 or 8.7 percent of GDP, down from 9.1 percent of GDP or 1,373.3 billion rupees in 2020, according to fiscal data released.

Output Gap Targeting

In 2019, the government raised 1,890.9 billion rupees of 12.6 percent of GDP until the country’s economists cut taxes to target an output gap.

“The switching of resources from unproductive public expenditure to the private firms and individuals will be growth friendly in a context where there has been a persistent output gap,” the Finance Ministry said in December 2019. (Sri Lanka fiscal stimulus to close output gap)

“Higher growth will have a positive impact on the overall debt dynamics of the country as well.”

To prevent the extra money in private hands from going back to the budget through bond auctions, the central bank then imposed price controls on bond auctions and bought large volumes of securities with printed money.

There have been claims that 600 billion rupees a year in taxes were lost a year due the tax cuts.

However in 2021, twice the value of the tax cuts or 1,225 billion rupees was printed as the balance of payments was blown wide open, losing the ability to repay foreign loans and an import boom started with the excess money.

The central bank has discretionary independence to whatever it’s Governor and Monetary Board wants going against its mandate of maintaining economic and price stability in Section 5(a) of its governing law using other provisions and its involvement in a Treasury securities auctions committee. (Sri Lanka central bank to work closely with finance ministry in developmental state: Governor)

Ironically the tool to calculate the output gap was given by the International Monetary Fund.

Sri Lanka began ‘flexible inflation targeting with output gap targeting (stimulus with printed money) after 2015 eventually driving a country without a war into default with three currency crises in quick succession.

Flexible policy unconstrained by law

The output gap targeting was done with a flexible exchange rate, which is neither a clean float nor a hard peg leading to anchor conflicts and currency collapses.

The flexible exchange rate or a soft-peg is the third rate unstable intermediate used in many third world countries that go the International Monetary Fund with balance of payments trouble. Balance of payments crises do not take place in hard pegs of clean floats.

From 2015 to 2019 two currency crises were triggered by money printed to target an output gap under ‘flexible inflation targeting.’

At the time money printing was justified on the claim that “output gap stabilization is an important concern in a flexible inflation targeting regime” and that it “argues for a relaxation of monetary policy.”

During the ousted Yahapalana regime a new law was brought to legalize flexible and discretionary policy instead of committing the Monetary Board to a rule of law and reducing its discretionary powers. The law also sought to indemnity staff.

Deficit

As total revenues went up to 6.1 percent to 1,457 billion rupees current spending went up 2.8 percent to 2,747 billion rupees.

The current account deficit or the gap between total revenues and only current spending was 1,290 billion rupees flat from 1,298 billion rupees a year earlier.

Capital spending was 774 billion rupees, down 0.6 percent from 791 billon rupees a year earlier.

The overall budget deficit (after grants) was 2,057 billion rupees or 12.2 percent of GDP compared to 2,085 billion rupees of 13.9 percent of GDP in 2020.

The Finance Ministry had claimed the deficit was 11.1 percent of GDP in 2020 by shifting some arrears to the previous year.

Foreign borrowings were a negative 13.9 billion rupees with the rating steadily downgrade since 2015 under flexible inflation targeting with output gap targeting and eventually being locked out of capital markets in 2020.

Money Printing

In 2021 1,225.2 billion rupees was printed, up from 505.8 billion rupees in 2020.

In the 2018 currency crisis when the then administration gave full independence to the central bank they were unable to stop 247 billion rupees from being printed or to stop output gap targeting.

Then Minister Harsha de Silva pleaded with the central bank to raise rates, but the pleas were ignored.

In 2019, 109 billion rupees in central bank credit was reversed, but output gap targeting began from August ending pushing the balance of payments into negative territory.

The deficits are still continuing with a broken pegged regime.

The central government debt of GDP ratio went up 104.9 percent from 98 percent. With government guaranteed debt it was 113.6 percent of GDP.

The central bank also became a net dollar borrower in 2021. When negative net foreign assets are added, the debt to GDP ratio was up to 115.9 billion rupees.

Analysts and economists have called for legal changes to the central bank’s law and the removal of provisions that allows it to practice flexible inflation targeting, output gap targeting and trigger economic and price instability and commit it to a rule of law.

The output gap targeting under flexible inflation targeting which triggered three currency crises from 2015 to 2022 and brought a country at peace into default and the flexible exchange rate to collapse is likely illegal under section 5 (as) critics say. (Sri Lanka has a corrupted inflation targeting, output gap targeting not in line with monetary law: Wijewardena)