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ECONOMYNEXT – Sri Lanka has asked for another one billion US dollar credit from India for imports as well as a 500 million US dollar loan for oil imports, Finance Minister Ali Sabry said as the country grapples with a broken soft-peg which has triggered forex shortages.

“The talks with India are very successful,” Finance Minister Ali Sabry told reporters in an online briefing speaking from Washington.

“In talks at official level with the Honorable Finance Minister of India (Nirmala Sitharaman) it has been agreed to give 500 million US dollar facility for oil. In addition we have asked for another billion US dollars for imports which they are considering.”

India has already given a billion US dollar loans from the State Bank of India for food and medicine imports. Of this so far only 200 million US dollars have been used, Sabry said.

India has also deferred cross-border payments due from Sri Lanka for imports under the Asian Clearing Union up 1.4 billion US dollars so far, he said.

India has agreed to defer payments up to January he said.

Sri Lanka is unable to limit outflows of dollars to inflows due to a soft-peg broken by open market operations (printing money) which is creating forex shortages.

Finance Minister Sabry and a team from the central bank and Treasury are negotiating with the International Monetary Fund for a program meeting top officials and also having technical level talks.

The IMF however does not disburse money until monetary stability is restored usually as a prior action.

If not its disbursements will be frittered away in central bank finance of imports like the Indian credits.

This time debt sustainability (restructuring debt to reduce gross financing needs) is also a prior action. IMF said any disbursement under a Rapid Finance Facility would also require debt restructuring as a prior action.

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An attempt to restore monetary stability by shifting the peg to a float by fully suspending convertibility (not selling or buying dollars) failed due to a surrender requirement (strong side convertibility) which pushes the currency down.

Unable to re-establish a clean float or a credible peg, Sri Lanka is therefore scrambling for dollars as ‘bridging finance’ getting inflows through the financial account boosting foreign debt which will in turn boost imports (expand the current account deficit).

Sri Lanka engaged in similar tactics during after triggering forex shortages (breaking the credibility o the peg) in 2015/2016 and in 2018 when taxes were raised and fuel was market priced and borrowing through international sovereign bonds.

In the 2020 soft-peg crisis however Sri Lanka was locked out of debt markets. State banks which has been loading the unfortunate Ceylon Petroleum Corporation with debt when money was printed also lost the ability to do so, and India is now giving oil credits.

In order for the CPC ‘buy rupees’ to ‘pay dollars’ to suppliers the central bank has to restore monetary stability.

To repay foreign debt ‘to buy dollars’ with rupees raised through taxes or borrowings (both of which will crowd out private sector imports as long as new money is not printed) the central bank has to restore monetary stability.

Instead of ‘buying dollars’ with rupees raised from the domestic credit system linked to the rupee monetary base, Sri Lanka started a Asset Liability Management Law where money was raised abroad through a credit system linked to the US monetary base (Euro dollar market) boosting external debt.

Sri Lanka is now trying to get ‘bridging finance’ with a broken peg despite suspending debt foreign debt repayments and potentially making roll-over saving at the gross financing level of the budget.

Sri Lanka is also in talks with the World Bank, the Asian Development Bank and China for new money.

Sri Lanka has a habit of blaming inherent policy errors of the intermediate regime central bank (soft-peg with anchor conflicts) on budgets, taxes, imports, the trade deficit, and the current account deficit in extraordinary mercantilism.

Sri Lanka’s rupee fell from 203 to around 340 to the US dollar in the failed float, triggering a monetary meltdown and which can also hurt the banking system. (Colombo/April23/2022)

ECONOMYNEXT – Sri Lanka owes India 1.4 billion US dollars in Asian Clearing Union payments up to now, and the neighbor has agreed to defer payments till January next year as part of ‘bridging finance’ Finance Minister Ali Sabry said.

India first deferred a 515 million US dollar payment in the first quarter of 2022 as the central bank printed money over two years, boosted imports and broke the credibility of a peg.

“Already we owe about 1.4 billion US dollars,” Sabry told reporters in an online briefing on April 22.

“There is an official assurance that they can be deferred every two months, up to January.”

The ACU is a clearing union set up in the 1970s among the worst money printing soft-pegged central banks Asia and West Asia which had foreign exchange trouble after the break-up of the Bretton Woods.

India is also giving credit lines for Sri Lanka to import oil and essential goods. An attempt to float the rupee (suspend convertibility) and restore monetary stability in March failed due to a surrender rule and low interest rates.

Analysts had warned that a failed float would have serious consequences.

Sri Lanka’s central bank is in its worst crisis in history after printing 2.1 trillion rupees over two years or about double the revenues lost from a tax cut and giving jobs to 50,000 unemployed graduates as an election promise and ending market pricing of oil. (Colombo/April/2022)

ECONOMYNEXT – China has pledged an urgent emergency aid of RMB 200 million (around 10 billion rupees) to crisis hit Sri Lanka to buy rice, medicines, and other essentials, the island nation’s Foreign Ministry said.

The pledge came after Foreign Minister G L Peiris met Chinese Ambassador to Colombo Qi Zhenhong on Thursday (21).

“The China International Development Cooperation Agency (CIDCA) has pledged an urgent emergency humanitarian aid of RMB 200 million to Sri Lanka, including 5000 tonnes of rice (with the previously announced 2000 tonnes), pharmaceuticals, production materials and other essentials,” the Foreign Ministry said in a statement.

“Furthermore, the Yunnan Province has announced a donation of RMB 1.5 million worth of food packages to Sri Lanka.”

Peiris briefed the Ambassador on the measures in the process by the government to immediately overcome the prevailing situation, including the ongoing discussion with the IMF for financial assistance as well as reformulating Sri Lanka’s debt, the ministry said.

“Minister Peiris requested further assistance from China, particularly in the field of bridging finance during a difficult time.”

Qi assured that the Chinese Government would continue extending assistance to Sri Lanka in every possible way including direct Chinese Government support, regional Government support and support through Red Cross China, the ministry said.

Chinese pledge comes as India has pledged to lent Sri Lanka with over 2.5 billion US dollars including a 500 million US dollar credit line. Delhi government also has granted a 1 billion US dollar to import essentials from India.

Peiris on Wednesday said Sri Lanka is in talks for 2.5 billion US dollars with China to overcome the current crisis. China in the past has said it will help Sri Lanka to face the crisis.

Sri Lanka’s economic crisis has resulted in shortages of fuel, medicines, cooking gas, and milk powder as well as extended power cuts. (Colombo/Apr22/2022)

ECONOMYNEXT – Sri Lanka’s central bank has removed interest rate caps on bank overdrafts, credit card advances, and gold-backed loans and also allowed deposit rates to go up after a rate hike made in a bid to halt a collapse of the rupee and galloping inflation.

“Licensed commercial banks shall adjust the deposit rates adequately, in line with the tight monetary policy measures adopted by the CBSL to attract deposits to the banking system,” Senior Deputy Governor T M Y J P Fernando said in a direction to banks.

The central bank hiked the key rate at which money is printed to create external pressure and inflation to 14.50 percent from 7.50 percent as the rupee collapsed from 203 to 330 to the US dollar after two years of money printing.

In March ceiling of 20 percent was placed on credit card loans 18 percent on temporary overdrafts and 12 percent on gold-backed loans (pawning).

Higher interest rates on credit card advances will apply from the next billing cycle. Credit card advances are interest-free if they are settled on the due date.

Overdrafts which are existing and renewed and new pawning advances will be allowed to charge higher rates.

Central Bank Governor Nandalal Weerasinghe said on April 12 he expected banks to keep to previously agreed rates in contracts including Covid moratoria until their term ended. Banks also got the benefit of fixed deposits.

Sri Lanka is now in the worst currency crisis triggered by the central bank

Sri Lanka has an intermediate regime central bank which can manipulate interest rates through ‘flexible inflation targeting’ by printing money and triggering monetary instability.

Analysts and economists have called for a single anchor monetary authority (a fully reserve backed currency board or clean floating regime with no reserves) to prevent currency crises.

Sri Lanka had three currency crises in quick succession in the last 7 years taking the rupee from 131 to 340 levels so far. (Colombo/Apri22/2022)

ECONOMYNEXT – Sri Lanka will not have access to an International Monetary Fund (IMF) Rapid Financial Instrument as a bridging facility until the government presents a viable fiscal plan, and any no confidence motion must be delayed until the return of Finance Minister Ali Sabry, after which broad consensus must be established on the best way forward, former Prime Minister Ranil Wickremesinghe said.

The United National Party (UNP) leader told parliament on Friday (22) that a call by the main opposition Samagi Jana Balavegaya (SJB) to go for a no confidence motion (NCM) against the government be postponed. He was responding to Leader of the House Dinesh Gunawardena who had earlier asked the SJB what became of the NCM the party had promised to bring in a week, two weeks ago.

“I’m the one who asked that the NCM be delayed so that we can get together and have a discussion after the Finance Minister’s speech. There’s no point going for an NCM till then,” said Wickremesinghe.

Finance Minister Sabry, Central Bank chief Nandalal Weerasinghe and Treasury officials on Thursday (21) met IMF Managing Director Kristalina Georgieva and First Deputy Managing Director Gita Gopinath. He is expected to make a speech in parliament upon his return to the island.

Related:

Sri Lanka Finance Minister, CB chief in talks with IMF’s Georgieva, Gopinath

“We expected a Rapid Financial Instrument (RFI). We were declared unsuitable for that. So what do we do? We have been told several things. The minister met the IMF director general and Nirmana Sathirmmana we must be grateful to her for her attendance. Gita Gopinath too. These are people who know us well.

“I agree with the opposition leader that we need a roadmap. Please provide it to us next week,” said Wickremesinghe.

Commenting on the IMF’s advise to restore debt sustainability, the former prime minister said:  “We have to devise a debt sustainability plan. There is special mention of China. Western countries give loans one way. China a different way. We’re caught in the middle. Do we call all friendly nations to a consortium? or separately? Because the economic issue can become a geopolitical issue.”

Wickremesinghe said Sri Lanka must go for an extended fund facility (EFF). RFI is a low access facility with around 100 percent of quota given to countries with high capacity to implement policy reforms where as EFF will help for a long term reform with around 100 percent of the quota.

Sri Lanka does not qualify for the RFI and such funding would see only a temporary budget support. Instead EFF comes with a long term disbursements along with reforms that are needed to put the country back into a path of sustainable growth and debts

“The [last EFF[ took us a year. We can’t wait a year. There is no medicine, fertilizer and fuel next month. The house has to discuss this. This is what the country expects of us.”

If Sri Lanka goes for EFF, analysts say Sri Lanka will be able to get an up to 3 billion loan, while the RFI will see over 700 million US dollar support.

“There is a political crisis in addition the economic crisis,” said Wickremesinghe.

“There is an instability here. We’re trying to make a government with 113 MPs. A government with 113 MPs cannot solve this issue. I was in the most powerful government in history, with a 5/6th majority. You need the support of 175 to 200 MPs. So we’ll have to deviate a bit from traditional politics. I have made a proposal on how to bring everyone together. The 40 MPs group have made their own proposal, as has the SJB with regard to a 21st amendment to the constitution.

Related:

Sri Lanka independent MPs propose 21st amendment; constitutional council proposed

“But first we need all together. Otherwise we too will be kicked out of here, and we’d also have to go to Galle Face and eat because there’ll be nowhere else for us to eat.

“We have to understand the ground realitty. Without understating it, there is no purpose arguing,” he said.

ECONOMYNEXT – Engineer Vijitha Herath, former chairman of Sri Lanka Insurance and Ceylon Electricity Board as well as a close ally of the ruling Sri Lanka Podujana Peramuna (SLPP), was appointed  as the chairman of state-run Litro Gas Lanka Limited.

Herath also serves as the Chairman of Sri Lanka Podujana Engineers Front, a leading engineering body with more than 5000 members.

The move comes a week after former Litro chairman Theshara Jayasinghe resigned on April 14, accusing the largest cooking gas supplier for institutional corruption and other irregularities.

Litro faced many controversies under Jayasinghe including supply shortage and explosion of gas cylinders that resulted in deaths and injuries.

The former chairman Jayasinghe in his resignation letter stated Litro was filled with “corruption and irregularities and did not even take part in any government audit,” since he took up the post in July of 2021. (Colombo/Apr21/2022)

ECONOMYNEXT – Sri Lanka’s coal power plants which are overdue for major overhauls for two years are now running out spare parts for routine maintenance, due to forex shortages, which can lead to breakdowns of multiple machines worsening an economic crisis, engineers have warned.

Sri Lanka three 300MW coal plants in the Lakvijaya complex in in Puttalam, providing about 40 percent of the country’s energy needs running as base load plant around the clock.

Technically the plants are expected to be up 80 percent of the time (plant factor) allowing for scheduled maintenance.

Unit 02 and Unit 03 scheduled maintenance are now delayed by two years and Unit 1 has to be overhauled now, maintenance engineers have warned CEB’s management.

If Unit 01 is also postponed for next year all three have to be overhauled in a single year with each Level A overhauls taking about 80 days.

But overhauls cannot be carried out on time due to lack of foreign exchange for spares and also to pay for service contracts.

Cabinet approved contract and spare for Unit 02, ‘Level A’ maintenance are held up due to lack of foreign exchange.

There are 95 spare parts tenders pending. Some parts have to be especially manufactured. There were 7 service contracts pending from original equipment manufacturers.

Engineers say so far routine maintenance has been done, despite the delays in major overhauls.

But now foreign exchange is not available for spares for routine maintenance, sharply raising risks of a coal plant breakdown.

About 12 million US dollars and 270,000 Euros were needed for spare parts 9.1 million dollars for service contracts.

Delays in opening letters of credit and placing order have delayed spare part purchases, engineers said.

“If adequate spare parts are not received, there is no other option than to shut down the machine,” engineers said, urging high priority to be placed on getting foreign exchange to prevent a collapse of the power sector.

Sri Lanka runs into frequent currency crises because intermediate regime central bank (flexible exchange rate or soft-peg) which every time economists print money to further their interventionism.

In recent years currency crises were triggered by money printed for flexible inflation targeting with a peg (2015/2016), output gap targeting with a peg (2018) and developmental state/production economy (2020/2021) with a soft-peg. (Colombo/Apr21/2022)

ECONOMYNEXT – As protests intensified islandwide amid a fast deteriorating economic situation and a worsening political crisis, Sri Lanka Prime Minister Mahinda Rajapaksa on Tuesday (19) proposed that parliament restore the 19th amendment to the constitution subject to”timely amendments” as a short term solution.

“I believe that, as a first step, the 19th amendment to the constitution with essential and timely amendments should be democratically implemented as a short term solution,” said Rajapaksa, addressing parliament on the first day after the traditional Sinhala and Tamil New Year.

It is important that a solution to the multiple crises is found on a solid economic, political and social foundation, he said.

Sri Lanka is in the midst of one of the worst economic crises in the country’s history due to a crippling forex shortage which has all but brought the country to a standstill. Protests demanding the resignation of President Gotabaya Rajapaksa and his Sri Lanka Podujana (Peramuna)-led government have heightened in intensity over the New Year holidays as shortages continued and prices soared.

“I believe a constitutional change must take place. As a start, I believe implementing the 19 amendment with necessary and timely changes is the best short term solution for the current situation in the country,” said Premier Rajapaksa.

The Rajapaksas and the SLPP won the presidency and the parliamentary election that followed on a platform of scrapping the 19th amendment that was passed by the previous United National Party (UNP)-led Yahapalana (good governance) government. In its stead, the 20th amendment to the constitution was passed in 2020, restoring much of the powers of the executive presidency that the 19th amendment had clipped.

“With the blessings of the president, we must walk towards broader constitutional reform in the future,” said Rajapaksa.

Supporting the prime minister’s remarks, former Prime Minister and UNP leader Ranil Wickremesinghe, whose government carried out the 19th amendment, said incumbent President Rajapaksa was voted in under the 19th amendment.

“I am happy to take the 19th amendment back to the nation as the former PM who proposed it,” Wickrmasinghe told parliament on Tuesday (19).

“The only request I have is, respectfully, abolish the 20th amendment as soon as possible to bring in the 19th amendment. That has to be done since the president won the majority of votes when the 19 amendment was in place and not under the 20th. He does not have the right to work under the 20th amendment,” claimed Wickremesinghe.

The sole UNP parliamentarian said the protestors gathered in their thousands at the Galle Face Green in Colombo in front of the presidential secretariat are demanding change through constitutional reform. At the time of writing, the peaceful protest at Galle Face is continuing for the 10th day running with the participation of Sri Lankans, many of them young, with seemingly no affiliation to any political party. The loudest demand of the protestors appears to be that President Rajapaka and his government step down.

“These youths have not started a riot or a coup. They are peacefully saying they need a solution through the constitution,” said Wickremesinghe.

“That’s what they’re telling this parliament, and everyone in parliament should listen to their voice. It is their future. We have no future left. Let’s listen to them and arrive at a solution,” he said.

The UNP leader also called for a redesigned budget to provide more relief to the public. Committees must be appointed to oversee efforts to manage the ongoing crisis, he said.

“We have a duty to stop all capital investments. We must appoint several committees. A food committee, a bank and financial services committee, and an economic situation committee, and do not give the permission to the CBSL to print money without the permission of the parliament,” Wickramsinghe said.

Meanwhile, opposition National People’s Power (NPP) leader Anura Kumara Dissanayake told parliament that no solution under the incumbent government is acceptable. The current economic crisis is the result of a series of bad decisions taken by the government fully aware of the consequences, he said.

“If a country comes to this situation automatically, it is the responsibility of us all to face that issue. But this is an issue created by this government. Therefore, it is useless to talk with the creators of the problem on how to solve the problem,” said Dissanayake.

The Janatha Vimukthi Peramuna (JVP) leader accused former agriculture minister Mahindananda Aluthgamage of making baseless allegations against the opposition party for criticising the government’s disastrous inorganic fertilizer ban.

“He said we had taken money from fertilizer companies to criticise the decision,” he said.

“When farmers came to protest, they said there was a political hand behind it, but yesterday the president himself admitted that the fertilizer decision was a mistake,” he added, admonishing the president for realising his costly “mistake” after the damage was done.

President Rajapaksa in a speech made on Monday (18) admitted that the decision to make inorganic fertilizer unavailable to farmers was wrong.

Dissanayaka said the only punishment of taking wrong decisions and putting the country in jeopardy must be to resign from office.

Then when the parliament said not to print money, state minister Cabral said, printing money does not result in inflation and that is being done according to a new monetary theory to increase production in the economy. Now look what’s happened. Did this happen automatically? No, [the spike in inflation] was created by this government,” he said.

Economists have been harshly critical of the government’s insistence on subscribing to the modern monetary theory and printing inordinate amounts of excess money to keep interest rates artificially low.

Dissanayake said after CBSL let the rupee float, the rupee devaluated to 330 rupees against the US dollar in the market and 450 rupees in the black market.

“After spending all the forex in the treasury, they let the rupee float. It is like Cabraal wearing a sarong and doing a hand stand. We have lost 2.8 billion US dollars of foreign remittances from last July to this February, and till now it is about 3.2 million US dollars,” Dissanayaka said.

“That is why we do not have money to bring in fuel or anything. Then public came to the streets initially asking for fuel and gas. But you did not care. Now they are demanding that the government go home.”

Commenting on Sri Lanka’s ongoing power crisis – with daily scheduled power cuts due to lack of fuel for thermal power still the norm – Prime Minister Rajapaksa claimed it was the result of not building power plants to cater to increasing demand.

The government will reduce power cuts even by a minute if it were possible, said Rajapaksa, adding that authorities believe the power situation will come under control with the assurance given by the Ceylon Petroleum Corporation (CPC) of acquiring fuel and also with the start of the rainy season for hydro generation.

“A government never puts the people in difficulty willingly. But we must accept that the people are facing many difficulties. Power cuts, fuel shortages, the gas crisis are but a few of what we can see.

“This is a moment that we must all work together to overcome this crisis. I don’t believe this is the time to fish in troubled waters politically. The people are watching all of us. They’re trying to see who genuinely loves the country,” said the premier.

“We cannot evade our responsibility,” he added.

“To overcome the crisis, managing the economy is important. Economic specialists with international experience have been appointed for this purpose. An internationally renowned expert has been appointed to head the central bank and the financial system. We have already commenced discussions with the IMF, the World Bank, the Asian Development Bank and other intentional organisations.”

“Even if solutions aren’t provided within 24 hours, we will not let people stand in queues for much longer,” he said. (Colombo/Apr 19/2022)

COLOMBO; Last week, Indian PM Narendra Modi told US President Joe Biden that India was ready to ship food to the rest of the world following supply shocks and rising prices due to the war in Ukraine. Modi said India had “enough food” for its 1.4 billion people, and it was “ready to supply food Can India feed the world during the Ukraine war?

ECONOMYNEXT – Sri Lanka’s state-owned Ceylon Petroleum Corporation (Ceypetco) raised fuel prices from the mid night of Monday (18) to minimize the losses after sharp rupee depreciation and high global oil prices.

It also removed a fuel rationing policy it implemented last week to limit the volume of fuel supply at pump to ensure fair and efficient distribution.

The latest price hike will see the price of mostly used Octane 92 rising by 33.1 percent to a record 338 rupees a litre while auto diesel jumping by 64.2 percent to 289 rupees, in par with the prices of Lanka IOC, the Indian Oil Corporation unit .

Since the central bank on March 7 announced a flexible exchange rate, the rupee has fallen nearly 70 percent to around 340 rupees. The Lanka IOC raised prices thrice since the central bank’s decision to allow flexible exchange rate, though the Ceypetco has increased only once.

The move came after thousands of motorists turned to Ceypetco as Lanka IOC prices were expensive. Some Ceypetco filling stations ran out of fuel, as a result.

Ceypetco chairman Sumith Wijesinghe on April 11 said the state-owned fuel retailer was losing between 800 to 1000 billion rupees a day as it was losing 110 rupees per litre of diesel when it was sold at 176 rupees and 52 rupees for a litre of petrol when it was priced at 254 rupees.

The Lanka IOC has been raising fuel prices in line with the global market price, but Ceypetco, under pressure from the government, was not allowed to raise prices because such move would be make the ruling Sri Lanka Podujana Peramuna (SLPP) unpopular.

Sri Lanka is facing its worst economic crisis since the independence from the British colonial rulers in 1948. The island nation last week announced a “preemptive default” on its sovereign debts.

The government is facing strong protests from both public and opposition parties for mismanagement of economic policies. A youth-led protesters have spearheaded a campaign, demanding President Gotabaya Rajapaksa and his government to resign due to their failure.

A severe shortage of fuel was seen in the last few weeks because the Ceypetco also has to supply for power generation amid extended power cuts as high as 13 hours in some days.

When prices are not raised and losses are financed with bank credit, which in turn is re-financed by the central bank through its 13.5 percent window, inflation goes up. The money printed to finance losses also creates forex shortages.

The dollar shortage has led to a lack of fuel and extended power cuts, crippling many industries related to manufacturing and transport, and disrupting the country’s economic activities. (Colombo/April 19/2022)