Lanka Free Library

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)

ECONOMYNEXT – Sri Lanka’s essential food importers are still waiting for money from the Indian credit lines, and industry official said as banks were short of dollars due to money printing and high domestic credit.

“Several round of discussion have been held with the Trade Ministry,” spokesman for Essential Food Importers and Traders Association (EFITA) Spokesperson Nihal Seneviratne said.

“They are trying but so far no money has come.”

The Association represents about 90 percent of the essential food importers of the country he told reporters in earlier in April at a forum of joint chambers.

Sri Lanka needs 200 million dollars a month for food imports, he said. After 1978 almost all the foods are imported to the country by the private sector.

Other than milk powder most items were available up to now though prices are rising, he said.

Food importers had brought good to feed the people on credit since banks were not giving enough dollars and many companies were in trouble after the rupee fell in March in a botched float.

“The suppliers just trust us and send the goods to Sri Lanka (without LCs),” Senevirtne said. “That has been hampered for the last six months and there is a problem of continued supply.”

He said suppliers are reluctant to ship and are asking for money upfront.

“We can do it up to a certain extent. But there is a crisis. Up to now other than milk powder we have managed to bring food.”

He said firms which imported goods under credit were facing massive losses after the rupee fell in March.

“Some will even bring under credit terms. What we brought under credit terms, has already been sold calculating the dollar at 203 rupees.

“Now importers are faced with 50 million dollars (of supplies credit) which we have already sold. So they are facing banktruptcy.” (Colombo/April24/2022)

ECONOMYNEXT – A currency board for Sri Lanka would automatically lead the country into low deficits (a hard budget constraint) and stability, top economist Steve Hanke has said as the island is facing galloping inflation from money printing.

A currency board is ‘hard’ or ‘credible peg’ where the government or interventionist economists cannot devalue the currency by open market operations or financing the budget deficit, because Treasury bill purchases are banned.

Sri Lanka had a currency board from 1885 until 1950, having a 1 to 1 fixed exchange rate with the Indian silver rupee (India later shifted to a gold standard).

Sri Lanka’s rupee has collapsed from 182 in 2019 to 340 so far in 2022 economists engaged in output gap targeting (Keynesian stimulus) after also cutting taxes for more stimulus to created a production economy with a developmental state.

In 2018 despite taxes being raised, deficits being brought down, and fuel being market priced, money was printed mostly through over aggressive open market operations (call money rate targeting) for output gap targeting the rupee was busted from 153 to 182 to the US dollar.

In 2015/2016 the rupee was also brought down from 131 to 151 through mostly through open market operations but the breaks were hit in a few months (stop-go policy) with rate hikes to limit the currency fall and inflation.

Quantity Theory of Money

Using the quantity theory of money (QTM) Hanke calculated a ‘golden growth rate’ for Sri Lanka’s money supply for the period of 2010-2019.

The QTM states that MV = Py, where “M” is the money supply, “V” is the velocity of money, “P” is the price level, and “y” is real GDP.

I then rearrange the QTM identity and solve for percentage growth in “M,” which is equal to the inflation target (5-pct) plus average real GDP growth minus the average percentage change in velocity.

“According to my calculations, for the period 2010–2019, Sri Lanka’s golden-growth rate was: 5 percent + 4.4 percent – (-6.4) percent = 15.8 percent,” he said writing in National Review, a US-based publication.

“For 2010–2019, the average growth rate of the money supply (M3), which was 15.5 percent, essentially matched the golden-growth rate of 15.8 percent.

“This resulted in an average inflation rate of 5.2 percent per year for that period — right on Sri Lanka’s average inflation target of 5 percent per year.

Hobbling the stimulus

However money supply growth began to skyrocket and peaked at 23.8 percent per year in February 2021.

“M3 growth exceeded the golden-growth rate of 15.8 percent per year from August 2020 to October 2021. As a result, inflation is soaring,” Hanke said.

“What can be done to end Sri Lanka’s economic crisis? It should adopt a currency board. Ceylon established a currency board in response to the failure of the Oriental Bank Corporation on May 3, 1884.”

The Oriental Bank Corporation, one of two note-issuing banks that issued Ceylon Rupees collapsed and closed its doors.

“At the urging of the Madras Bank and other businesses, the governor proposed a government-note issue so that the government might recoup its losses and prevent future problems,” Hanke says.

“The imperial government conceded reluctantly. Ceylon’s Paper Currency Ordinance (No. 32 of 1884), passed on December 10, 1884, and with that, a currency board was established.

“Three commissioners — the colony’s secretary, treasurer, and auditor — supervised the board.”

“Like all currency boards, the Ceylon board issued notes (of five to 1,000 rupees) convertible on demand into a foreign anchor currency (Indian silver rupees) at a fixed rate of exchange.

“It held anchor-currency reserves equal to 110 percent of its monetary liabilities. Most important, the board could not loan money to the fiscal authorities, imposing a hard budget on Ceylon’s fiscal system.

“The net effect was economic stability — and while stability might not be everything, everything is nothing without stability. That’s why today, the reinstatement of Sri Lanka’s currency board is just what the doctor ordered.”

Empty Promise

Sri Lanka abolished the currency board in 1950, as part of US led efforts to break the so-called ‘Sterling Area’ pegs and set up dollar pegs in newly independent nations where reserves would be invested in US government debt.

Maldives escaped the carnage as it was still under the British. The US later did an about turn after the collapse of the Bretton Woods and started to put pressure break the harder pegs in East Asia claiming they became export powerhouses at the expense of the American trade deficit.

The carrot held out in the immediate post World War II time, was that Ceylon country would have ‘monetary policy independence’ or the ability to print money and control rates as well as dollar pegged exchange rate.

Economists trained at Western Keynesian universities embraced the idea gleefully.

The promise turned out to be hollow and social unrest followed.

The country lost most of the 11 months of reserves the central bank inherited from the currency board, exchange controls were slammed in 1952 (there is free trade and free capital movements in a hard peg).

In 1953 there was a ‘hartal’.

In 2022 there are widespread protests around the country in with the rupee having fallen to 340 to the US dollar, parallel exchange rates are higher. Official inflation hit 21.5 percent in March 2022 with the effects of the exchange rate still not passed on fully.

Hanke says based on a purchasing power parity (read how it is calculate here) Sri Lanka’s inflation is running at 74.5 percent a year. (Colombo/Apri24/2022)

ECONOMYNEXT – The International Monetary Fund said it will work closely with Sri Lanka following a request for a bailout and the first talks with a team led by Finance Minister Ali Sabry and Central Bank Governor Nandalal Weerasinghe were “fruitful”.

“Going forward, the IMF team will support Sri Lanka’s efforts to overcome the current economic crisis by working closely with the authorities on their economic program, and by engaging with all other stakeholders in support of a timely resolution of the crisis,” IMF’s Sri Lanka mission chief Masahiro Nozaki said.

Sri Lanka is likely to need an Extended Fund Facility, with debt re-structuring as a prior action.

The IMF also endorsed Sri Lanka halting the repayment of foreign debt and begin a re-structuring process saying it welcomed a “plan to engage in a collaborative dialogue with their creditors.”

The IMF has said Sri Lanka’s debt is not sustainable (cannot be repaid with macro-economic adjustments like rate hikes and tax hikes only) and needs at least maturity extensions which will reduce the gross financing need in the near term.

Sri Lanka’s sovereign bond holdings shot up from 5 billion US dollars to 14 billion through two currency crises between 2015 and 2019 and the country lost access to capital markets during the third from 2020 up to now.

There is a billion dollar maturing in July but no foreign reserves after two years of money printing. The central bank itself has net dollar liabilities.

Initial talks were on “recent economic and financial developments in Sri Lanka, the need for implementing a credible and coherent strategy to restore macroeconomic stability, and the importance of stronger social safety nets to mitigate the adverse impact of the current economic crisis on the poor and vulnerable.”

Sri Lanka is prone to currency crisis due to the country’s soft-peg or flexible exchange rate which is neither a clean float with a domestic anchor nor a credible hard peg with an external anchor.

The currency collapses whenever money is printed through aggressive open market operations to target an output gap (stimulus) or to sterilize forex sales (printing money to keep rates down after central bank finance of imports or other outflows) or both.

The failing peg has so far led to 16 IMF programs since the unstable monetary arrangement was set up in 1950 under a law set up by a US money doctor in the style of Argentina’s Banco Central de la República with extensive sterilization powers, open market operations and central bank securities.

Sri Lanka attempted to float the currency in March or ‘suspend convertibility’ after all the foreign reserves behind the peg were lost to sterilized sales failed due a surrender rule (weak side convertibility) which makes the regime a peg and pushes it down.

Policy rates were also low at 7.50 percent, but has since been raised to 14.50 percent and Treasuries yields have gone to around 20 percent which can bring more money from private saving to pay the salaries of state workers and also help roll-over maturing debt as paper.

The rupee has since fallen from 203 to 340 to the US dollar from March to April 2022 and inflation is rising, with the poor bearing the brunt of the soft-peg as it had in the past.

The IMF said initial discussion with Sri Lanka’s team in Washington covered “recent economic and financial developments in Sri Lanka, the need for implementing a credible and coherent strategy to restore macroeconomic stability, and the importance of stronger social safety nets to mitigate the adverse impact of the current economic crisis on the poor and vulnerable. ” (Colombo/April23/2022)

ECONOMYNEXT – Sri Lanka’s top corporates have issued statements about the ongoing economic crisis, with some expressing solidarity with mass protests taking place islandwide, with others calling for social, political, economic stability as the financial meltdown is precipitating a political crisis and social unrest.

John Keells Holdings (JKH), one of the largest conglomerates having businesses in hospitality, leisure, logistics, real estate, and consumer foods, said in a statement on Thursday (21) that it is gravely concerned about the current situation in the country and wants immediate measures to be taken.

JKH, one of the country’s top employers and dollar earners, called on the country’s leadership to take decisive action and heed to the people’s call for good governance and change to avoid unrest.

For Sri Lanka to rise from the current challenges, the company advises all the parties to come together to ensure social stability and pollical stability to avoid an economic catastrophe.

“We urge all key parties to reach consensus, within the construct of the constitution of the country and due process being followed, in respecting the will of the people.”

Other top business leaders and organisations have shared similar views.

Kasturi Chellaraja, Group CEO of Hemas Holdings, in a statement shared on her social media on Thursday said the company supports its staff’s freedom to non-violently express themselves and called on the government to take measures to set the country on a corruption-free path.

“We call upon our nation’s leaders to hear the cry of our people and come together to immediately undertake the necessary political and economic reforms and set our country on the right path, based on the principles of good governance, free of corruption and ethnic division,” she said.

Hemas has business in health care, personal care, leisure, transportation and strategic investments.

Both Hemas and JKH had previously issued statements on April 04 regarding the wave of protests that have erupted across the country against the government of President Gotabaya Rajapaksa.

Meanwhile, Softlogic Holdings, which has interests in retail, leisure, financial services information technology and healthcare, said Sri Lanka’s ongoing crisis is a result of policy irregularities spanning over 70 years.

“The problem in the country today is the product of successive policy irregularities spanning a period of 70 years. In an ideal society, all sections of society should benefit from a benign policy regime which are essentially long term and hard to find. But we are optimistic that the right people have been put in the right positions to discuss these processing matters with the international funding agencies and bi-lateral partners, which is the need of the hour,” the conglomerate said in a statement on Friday (22).

Finding solutions to the crisis is going to be hard no matter what government is in charge, it said.

“Many countries are similarly facing these urgent challenges at the same time given the unprecedented post-pandemic recovery, while finding a solution to such persistent problems is not easy whatever government is in charge,” the statement said.

Urging all political forces to reach common ground and work together while shunning partisan views, the company said a stable government is a prerequisite for economic stability.

“It is the need fo the hour, to put the country first rather than to find political self-interest interfering with the emergence of a tractable solution,” it added.

Hospitality company Jetwing said in a statement that it has it expresses its concern at the events unfolding in Sri Lanka and effects the crisis has had on the economy, communities and individuals due to poor governance and near-sighted decisions.

“The people of Sri Lanka have long stood behind us and we stand with everyone who wishes to engage in peaceful protest and support the right to freedom of expression,” the company said.

Ceylon Biscuits Limited (CBL) expressed similar sentiments.

“As an organisation that takes immense pride in contributing to the growth of our nation, we are saddened by the pain and hardship faced by its people. CBL remains committed to supporting Sri Lanka’s recovery and to dong our part to catalyze positive change,” it said.

Telecommunications giant Dialog Axiata, meanwhile, said it stands firmly behind the call for systemic change and a future enriched with elevated levels of good governance, transparency and an empowered meritocracy.

“We believe that with bold and responsible action today, our resilient nation will emerge stronger than ever before.

“We call on those who have the power and opportunity to solve the prevailing crisis, to act selflessly towards the achievement of this greater good – a progressive and stable future for Sri Lanka and its people,” it said.

Apparel exporter MAS Holdings said on Wednesday (20) that, given the ensuing events, the company reiterates the need for immediate and decisive action to resolve the current economic and social crisis, in a peaceful and sustainable manner.

“As a responsible organisation, we unconditionally support the call for change and good governance, and earnestly request the nation’s leaders to heed the voice of the people and act on it, whilst respecting legal and constitutional due process.” (Colombo/Apr23/2022)