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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)

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.

Related

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.

Related

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)