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ECONOMYNEXT –  Sri Lanka President Gotabaya Rajapaksa has given his consent “in principle” to an all-party government to be appointed upon the resignation of Prime Minister Mahinda Rajapaksa and the cabinet, a private broadcaster reported on Wednesday (27).

According to the privately owned NewsFirst network, a statement from the president’s office which has yet to be publicised has said the president plans to meet leaders of parties and independent groups that represent parliament on Friday (29) at 10.30am.

“As a solution to the crisis facing the country right now, I agree in principle to an an all-party government representing all parties in parliament be formed,” the statement quoted the president as saying.

The composition of said all-party government, which will be formed after the resignation of Prime Minister Mahinda Rajapaksa and the cabinet, the duration of its term, appointments to be made in that government and other relevant matters need to be decided upon discussion, the statement said.

This is the first time President Rajapaksa has commented on widespread calls for his government’s resignation. However, his statement made no mention of the main demand of protestors islandwide that the president himself step down.

Meanwhile, Sri Lanka’s main opposition Samagi Jana Balavegaya (SJB) is collecting signatures for a no confidence motion against the increasingly unpopular government. Former energy minister and now dissident government MP Udaya Gammanpila claimed 120 MPs will back the motion. The legislature comprises a total of 225.

The island nation is going through the worst economic crisis in the country’s history due to a crippling dollar shortage brought about by, among other things, relentless money printing. Protests have erupted islandwide demanding the resignation of the government and President Gotabaya Rajapaksa.

Some government MPs themselves have called for the resignation of Prime Minister Mahinda Rajapaksa, who has said he has no plans to leave. (Colombo/Ap427/2022)

ECONOMYNEXT – Sri Lanka’s Finance Ministry has ordered capital expenditure cuts in the budget for 2022 to trim spending and imports in a bid to save the rupee which has been hit by money printed to keep interest rate low.

Newly appointed Treasury Secretary Mahinda Siriwardene in a circular to government departments, provincial councils and statutory boards has ordered all new projects and those that have been started and stalled due to lack of raw materials to be suspended.

“Enhancing the government revenue is a crucial requirement to control this challenging situation,” Siriwardene said.

“However as it takes a certain time, public expenditure needs to be well-tightened, making it available only for the most essential services for a certain period.”

In the case of half completed projects, negotiations have to be held with contractors.

Officials have also been asked to stop acquiring lands of other assets.

Requirements which have commenced but where letters have not been issued should be delayed.

Circulars issued earlier on containing current spending would continue.

Sri Lanka’s state finances got into fix from 2015 due to ‘revenue based fiscal consolidation’ where the usual spending based consolidation was abandoned.

Recurrent spending was pushed up from 1.2 trillion rupees in 2014 to 2.4 trillion rupees by 2019 and total spending rising from 17.2 percent of GDP to 19.4 percent by 2019.

As part of the flexible inflation targeting, money was printed output gap targeting was adopted (go policy) leading to revenue falls when the breaks were applied to stop the resulting currency crisis (stop policy).

As currency crises triggered forex shortages sovereign bonds built up at central government levels and dollar borrowings went up at the Ceylon Petroleum Corporation.

From 2020 an large volume of money was printed under an output gap targeting exercise called developmental state/production economy where taxes were also cut, releasing more money into private hands.

To prevent the money from ending up back in the budget via bond markets through slightly higher interest rates (which would have happened under a fixed exchange rate), the central bank ordered price controls on bonds, bought securities with printed money and triggered an external crisis.

Unable to borrow from capital markets due to downgrades, foreign reserves were run down in from 2021 to 2022.

In early 2020 Finance Minister Basil Rajapaksa offered a 20 billion rupee ‘relief package’ in the first quarter which further de-stabilized the budget and put pressure on domestic credit.

The currency has collapsed from 203 to 345 after an attempt was made to float the currency without removing a surrender rule or sharply raising rates to stop private credit and avoid printing money.

Policy rates were hiked to 14.50 percent which will reduce private credit. The capital expenditure cuts or spending based consolidation would also reduce domestic credit.

However on Friday about 18 billion rupees were printed which would make forex shortages persist and rates to be elevated. (Colombo/Apr27/2022)

ECONOMYNEXT – Sri Lanka’s Tamil  National Alliance (TNA) is still undecided on a proposed no confidence motion (NCM) against the government, apprehensive that the premiership will be retained by the ruling Sri Lanka Podujana Peramuna (SLPP) or will otherwise go to a person who supported the 20th amendment to the constitution, an TNA MP said.

TNA parliamentarian M A Sumanthiran told EconomyNext Wednesday (27) morning that the party will arrive at a decision once there is clarity.

“We don’t know what will happen after the NCM. We don’t want to fall from the frying pan to fire. We don’t want anybody from the SLPP or people who voted for the 20th amendment to become the PM. We will decide once we have clarity,” he said.

The main opposition Samagi Jana Balavegaya (SJB) is currently collecting signatures for an NCM against Sri Lanka’s increasingly unpopular government. Former energy minister and now dissident government MP Udaya Gammanpila claimed 120 MPs will back the motion. The legislature comprises a total of 225.

Sri Lanka is going through the worst economic crisis in the country’s history due to a crippling dollar shortage brought about by, among other things, relentless money printing. Protests have erupted islandwide demanding the resignation of the government and President Gotabaya Rajapaksa.

Some government MPs themselves have called for the resignation of Prime Minister Mahinda Rajapaksa, who has said he has no plans to leave. (Colombo/Ap427/2022)

ECONOMYNEXT – A currency board for Sri Lanka would bring immediate confidence to investors and help stop the economic crisis, top emerging market investor Mark Mobius who has experience in investing in stable countries with fixed exchange rates said.

“I like the currency board idea. It has worked around the world. Provided you have a really ethical board of directors of the currency board, to make sure that they do not deviate (from the currency board rules),” Mobius said in an interview in Colombo.

“But that to me is the solution. It will immediately bring confidence.”

Mobius said he had been investing for a long time in Hong Kong which has a currency board.

Hong Kong set up a currency board in 1983 after the currency became unstable and has kept its exchange rate at 7.8 to the US dollar and is a territory which has among the highest economic freedom in the world.

A currency board cannot buy Treasury bills to create forex shortages and the exchange rate is permanently fixed.

As result non-classical economists or mercantilists cannot engage in ‘stimulus’ or output gap targeting to create forex shortages and balance of payments crisis.

Soft-pegged currencies (central banks with foreign reserves) collapse due to liquidity injected through open market operations to keep interest rates down when domestic credit picks up.

They also cannot depreciate the currency in the pursuit of temporary trade gains (mercantilist objectives), give short term zero-sum profits to export firms at the expense of workers and trigger strikes and social unrest.

However the currency board has to have its own law and had to be a “true currency board” not like the case in Argentina where it was claimed to be currency board but operated in a different way Mobius said.

“The law has got to be changed,” he said.

Argentina had a ‘convertibility system’ under the same Latin America central bank law and the exchange rate collapsed in 10 years. Soft-pegs generally collapse in the second Fed cycle as the ceiling rate is brought down.

Mobius said he saw opportunities in Sri Lanka’s equity markets in companies “with strong balance sheets, high returns on equity which can grow profits in dollar terms” which can survive a crisis.

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Sri Lanka equities, sovereign bonds an investment opportunity: Mark Mobius

He had bought an apartment in Sri Lanka and had hired a decorator who had quoted a dollar price because some material had to be imported.

However when he went to the bank to get the money he had been told only rupees would be released. He was wondering what to do and ‘waiting for the answer’ since the rupee was falling and if the money was withdrawn their were doubts whether material could be imported.

However in the case of sovereign bonds, were traded off shore and money did not have to be brought into Sri Lanka, he said.

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Re-instating Sri Lanka’s currency board would control deficits, inflation, give stability: Hanke

Sri Lanka had a currency board from 1885 to 1950 and it was broken legislatively in favour of an intermediate regime. Currency boards are generally set up in crises.

The Ceylon currency board was set up by British colonial administration after the Eastern and Oriental Bank (a note issuing chartered bank failed and closed its doorz leading a 50 percent depreciation of the Ceylon Rupee.)

Singapore also kept is currency board after independence to avoid inflation and balance of payments crises. (Colombo/Apr27/2022)

ECONOMYNEXT – Sri Lanka is get 400 million US dollars in consumption loans from the World Bank ‘shortly’ including for LP Gas, a statement said after Country Manager Chiyo Kanda met President Gotabaya Rajapaksa.

“This financial assistance will be provided to meet medicinal drugs and health needs, social security, agricultural and food security and gas needs,” the President’s office said.

“The World Bank representatives also stated that they will continue to provide assistance to Sri Lanka in overcoming the current economic crisis.”

The World Bank has agreed to provide up to 600 million dollars in aid for the country which was struggling to import goods after a soft-peg or flexible exchange rate which is neither a consistent float nor a hard peg failed after two years of money printing.

The money is likely to come from Contingency Emergency Response Components (CERC) in already approved loans and re-allocation of existing facilities, analysts said.

Sri Lanka has defaulted on foreign loans and is struggling to pay for imports after an unstable intermediate regime (soft-peg) failed due to highly discretionary policy coupled with output gap targeting (stimulus).

An attempt to float the currency (suspend convertibility) failed due to the existence of a surrender rule (strong side convertibility) which then led to strong side convertibility (the dollars were given back for imports) and money pritning continued, driving forex shortages (making outflows greater than inflows of dollars).

Unable to restore monetary stability (a clean float or a working peg) Sri Lanka is chasing several billion dollars of import consumption loans, despite suspendign debt payments calling them ‘bridge finance’. (Colombo/Apr27/2022)

ECONOMYNEXT – Sri Lanka cabinet has agreed to amend the Petroleum Products Act making provisions to issue licenses to “properly identified parties” to import fuel, a cabinet spokesman said on Tuesday, to tackle the ongoing crisis due to forex shortage in the country.

Sri Lanka’s state-owned Ceylon Petroleum Corporation (CPC) is the sole importer of fuel and distributor to all other sectors at the moment. However, the CPC failed to import adequate fuel in the face of a severe dollar shortage despite a 500 million dollar fuel credit from India.

Cabinet on Monday agreed to give permission to legal draftsmen to draft a bill to amend the Petroleum Products (Special Provisions) Act, to give the opportunity to import fuel needed by the relevant sector to continue operations.

“With the situation in the country during the past few days, people were suffering due to the issues arising in fuel importing and distribution,” Cabinet spokesman Ramesh Pathirana told reports at the weekly Cabinet briefing on Tuesday (26).

“In order to minimize those issues, it was identified that the best option will be to provide the license to import fuel to a selected number of sectors, such as electricity, fishing and export sectors.”

Due to the ongoing forex shortage, Sri Lanka is struggling to provide fuel to the demand of the public and other industries. That has led to extended power cut – as high as 13 hours in a day while fuel shortage has hit the businesses across the country.

With a limited number of fuel consignments being imported and the excessive public demand, the authorities are struggling to meet the increased demand while providing the necessary fuel to generate electricity.

“Fuel is essential for all economic activities in the country. Therefore, it has been identified that it is appropriate to issue licenses to selected specific sectors of the economy to import and use the fuel they require individually,” Patirana said. (Colombo/ April 26/2022)

ECONOMYNEXT – Sri Lanka is in talks with China over Beijing’s alternative proposal for debt restructuring and the Finance Minister is expected to inform about it in parliament in detail, Cabinet Spokesman Nalaka Godahewa said on Tuesday.

Government sources have said China has disagreed on restructuring its debts amounting over 3 billion US dollars and Sri Lanka has decided for a debt restructuring to save its few dollars to pay for essential imports amid seeking assistance from the International Monetary Fund (IMF).

“Though the West is mostly in the process of extending their help for debt restructuring proposal which has the IMF backing, China has expressed its stance that since it has been lending for many countries around the world, debt restructuring for one country could have an impact on the other countries as well,” Godahewa told a weekly cabinet briefing.

“Instead of debt restructuring, China has said that it is ready lend us another loan to repay its loans.”

“It is on preliminary discussion stage and I hope the Finance Minister will explain this in the parliament in detail.”

Chinese Ambassador Qi Zhenhong on Monday said China did its best to help Sri Lanka not to default but Colombo “went to the IMF and decided to default”.

He also said the discussion for another 2.5 billion loans has been halted temporarily until there is clarity on the debt restructuring from the Ambassador Qi told reporters at a media briefing in Colombo.

Godahewa said Sri Lanka needs around 4-5 billion US dollars for emergency requirement to face the economic crisis, which has now blown into a political crisis with people demanding the resignation of President Gotabaya Rajapaksa and his brother, Prime Minister Mahinda Rajapaksa.

Sri Lanka on April 12 declared that it was suspending the repayment of foreign loans as the country had run out of foreign reserves. Since then the country has been downgraded four times by global rating agencies. (Colombo/April26/2022)

ECONOMYNEXT – Sri Lanka will give long term resident visas for foreigners who buy apartments or deposit over 100,000 US dollar in commercial banks, Information Minister Nalaka Godahewa said.

“The cabinet approved a proposal to issue long term resident visas for foreigner who buy apartments,” Minister Godahewa said.

“A lot of apartments are coming up and if there are no buyers there can be a crisis.”

Visas of between 5 and 10 years would be given based on three categories of 75,000, 150,000 200,000 dollars paid for apartments.

Foreigners who deposit 100,000 US dollar in commercial bank recognized by the Central Bank of Sri Lanka will also get 10 year resident visa.

Sri Lanka printed money for two years and gave housing loans at 7.00 percent under to create a so-called ‘development state cum production economy’ after also cutting taxes despite having a flexible exchange rate (soft-peg) blowing the balance of payments apart and driving the country to default.

A key fallout of inflating money supply is mal-investments which turn into excess capacity when interest rates normalize and consumption falls off.

The construction sector now has to be slowed to restore credibility in the soft-peg which has collapsed from 203 to around 345 rupees to the US dollar.

The developmental state/production economy is a more extreme form of flexible inflation targeting/output gap targeting exercise followed from 2015 to 2019 which triggered two currency crises and led to a jump in sovereign bonds and dollar debt and Ceylon Petroleum Corporation. (Colombo/Apr26/2022)

ECONOMYNEXT – China is hopeful of resumption of stalled free trade agreement (FTA) with Sri Lanka in the near future with the island nation has appointed a chief negotiator for Colombo, Chinese Ambassador Qi Zhenhong said on Monday.

China has signaled the desire to re-start a stalled Free Trade Agreement talks with Sri Lanka to boost exports and come out of an economic crisis, during a visit of Foreign Minister Wang Yi in January. However, Sri Lanka has yet to give a strong signal, Colombo government officils have said.

“To be frank, since January the situation I Sri Lanka is changing very fast and it has an impact on internal process of the Sri Lanka government. It is unavoidable and it is very regret to see that,” Qi told reporters in Colombo.

“But we notice that in the recent week there are some positive response from Sri Lanka’s side.”

“As far as we learned, the secretary to the prime minister has already ben nominated as chief negotiator and he has conducted several rounds of discussions with the chambers and some internal departments. Hopefully the FTA could be resumed the dialogue.”

Free trade talks with between China and Sri Lanka hit a hurdle in 2018 after six rounds of talks under the last administration because Beijing disagreed with Colombo’s demand for a review of the deal after 10 years according to officials familiar with the issue.

China has invested billions of dollars building ports, airports, roads and power stations in the Indian Ocean island nation just off the southern toe of India as part of its Belt and Road Initiative to increase its trade and other connections across Asia and beyond.

Under the last administration, which tried to neutralize a pro-Chinese investment policy, concerns were raised that such investments were driving the country of 22 million people deeper into debt and undermining its sovereignty, prompting greater scrutiny of deals with China.

Sri Lanka consumers and businesses import more goods from China than it at the moment, some of which are inputs for exports to third countries.

Ministerial level discussions about an FTA agreement have not been held since March 2017 while lower-level discussions between officials have made little progress after the deadlock over a 10 year review, Colombo officials have said.

Free trade benefits the poor, but can hurt the profits and revenues of companies which previously charged higher than world prices from consumers under tariff protection.

The review clause that Sri Lanka requested in 2017 would allow it to change some of the deal terms if they were hurting the island nation’s businesses.

“China will not dominate in FTA because Sri Lanka’s portion is very very minutes compared to Chinese trade globally,” Qi said.

Officials from the last government had said that China wanted zero tariffs on 90 percent of goods the two countries sold to each other as soon as an agreement was signed while Sri Lanka wanted it to start with zero tariffs on only half of the products concerned and expand gradually over 20 years.

China’s push for free trade pacts with the Maldives in 2017 drew criticism from opposition political groups who said it had been rushed through parliament with less than an hour of debate.

Sri Lanka in 2018 has wanted more time to negotiate the deal as it was not sure about the economic impact of a rushed deal on its economy.

China has overtaken India as the top importer since 2019, the official data showed.

Sri Lanka imported $3.5 billion worth of Chinese goods in 2020 which is 22 percent of the total imports, mostly raw materials for garments, machines and electronics, metals, transport equipment and chemicals, followed by India which accounted for 19.2 percent of the total imports in the same year. (Colombo/Apr25/2022)

ECONMYNEXT – China is “sad” that Sri Lanka went to the International Monetary Fund (IMF) and defaulted on its debt, Ambassador Qi Zhenhong said, adding that China is watching the island nation’s negotiations with the Washington-based lender.

“China has done its best to help Sri Lanka not to default but sadly they went to the IMF and decided to default,” Ambassador Qi told reporters at a media briefing in Colombo.

“The debt restructuring definitely will have an impact on future bilateral loans,” he said.

Ambassador Qi said in March that China was considering a request for 1.5 billion US dollars in buyer’s credit and another billion-dollar loan.

The IMF determined that Sri Lanka’s debt was not sustainable or could not be repaid with macro-economic adjustments involving rate and tax hikes alone and had to restructure debt to reduce the gross finance need to a manageable level.

On April 12, Sri Lanka said it was suspending payment on foreign debt and will negotiate with creditors.

Now China was waiting for IMF talks to progress and wanted more information on debt restructuring. Sri Lanka will negotiate with the Paris Club of western donors, other lenders like China and India, multilateral and separately with bondholders.

“We are closely monitoring the IMF discussion between Sri Lanka and IMF,” he said.

“Countries that colonised Sri Lanka have more obligations to help at this juncture.”

However China will continue to disburse old loans as agreed, he said. (Colombo/Apr25/2022)