Sri Lankan President admits suspending chemical fertilizer was a mistake –...
Sri Lanka to strengthen state finances, reduce money printing: Treasury secretary
ECONOMYNEXT – Sri Lanka is planning to strengthen public finances and reduce money printing to stabilize the economy Treasury Secretary Mahinda Siriwardene said ahead of beginning discussions with the International Monetary Fund.
Secretary Siriwardene said a circular to cut current spending will be issued immediately.
Money Printing
In April 125 billion rupees was printed taking the central bank’s outright Treasury bill stock to 1,853 billion rupees, from 1727 billion rupees at the end of March.
Finance Minister Ali Sabry told parliament on April 07 that 123 billion rupees of salaries and festival advances had been paid by April 06.
When state workers spend the money, and appropriate the goods on shelves or fuel at pumps, there is no foreign exchange to import goods and re-stock the shelves, as the money had been created through central bank credit.
Meanwhile Siriwardene told reporters that state finances will have to be strengthened to reduce money printing.
He will issue a circular to all spending agencies to cut spending (spending based consolidation).
“Problems in public finances are a cause of many problems in the country,” Siriwardene said. “We have to carefully manage resources and reduce the budget deficit.
“There had been a lot of discussion about the money issued by the central bank. That is happening because of problems in public finances.
“There is not enough revenues. We cannot get foreign loans. So the entire amount is financed domestically. There are limited domestic resources. So the next step is to go the central bank and get it.”
“What we have to do is reduce the demands made for the central bank to buy Treasury bills. It is difficult to do it in the present circumstances. So we have to strengthen state finance. That is what we want to do in the future.”
Flexible Instability
However analysts have pointed out that the central bank created a currency crisis in 2018, when then Finance Minister Managala Samaraweera raised taxes because money was printed under flexible inflation targeting and output gap targeting.
Unless laws are brought to force the central bank to operated consistent single anchor monetary framework (a hard peg with reserves or clean floating rate without reserves) analysts say the country would continue to have external instability, inflation and social unrest as it had for 72 years.
Analysts have blamed flexible inflation targeting, peddled by Washingon-based Mercantilists, coupled with output gap targeting (stimulus) for worsening anchor conflicts of a reserve collecting soft-peg and driving the country to default and monetary meltdown, that was not seen even during a 30-year war.
Under flexible policy and two currency crisis, the government sovereign bond holdings went up from 5 billion US dollars to 14 billion as forex shortages were created, and the Ceylon Petroleum Corporation also accumulated dollar loans for exactly the same reason.
In 2018 the CPC borrowed dollars despite having a price formula due to forex shortages flexible inflation targeting/outgap targeting. When the rupee collapsed it made a forex loss of 80 billion.
This year CPC’s forex losses are estimated at over 250 billion rupees and climbing.
After printing money and creating forex shortage Sri Lanka is now borrowing from India for oil as the CPC borrowed dollars from state banks in the past. However state banks can no longer give dollar loans to the CPC and are themselves in difficulties.
Repeating Crises
The central bank was set up in 1950 abolishing a currency board (fixed exchange rate) which could not print money to create high levels of inflation or trigger balance of payments deficits.
In 1950 when the central bank was set up it had 190.4 million dollars of reserves (11.5 months) inherited from the currency board. Money printing began from the next year when the Federal Reserve tightened policy rates following a battle with the US Treasury.
In 1952 and exchange control law was brought as reserves fell to 163 million dollars. By 1953 after more money printing reserves fell to 114.3 million dollars and there was a ‘hartal’. After two years of money printing and reserve losses and inflation people are on the streets today.
Siriwardene said fiscal consolidation would be a part of discussions with the International Monetary Fund.
Asked whether value added tax would be raised to 15 percent he said, specifics of fiscal reforms would be made known later.
No decision was taken to halt domestically financed capital projects as of last week, Siriwardene said responding to reporters.
Domestically finance capital projects are an important part of imports, which take away foreign exchange from energy and medicines when money is printed usually to pay state salaries.
Central Bank Governor Nandalal Weerasinghe had hike the policy rate to 14.5 percent and allowed Treasury bill rates to go up.
Last week the Treasury bill yield went up to 23 percent, which Weerasinghe said was an ‘overshoot’.
High yields bring more money to debt markets, help finance the deficit and state worker salaries, reduce private credit and can help stabilize the external sector and eventually interest rates.
Sri Lanka’s Finance Minister Ali Sabray, as well as the Treasury Secretary and Central Bank left for Washington on Saturday night. Discussions are expected to begin this week with the IMF and the World Bank.
Unless laws are brought to control stimulus and the economists who want to maintain unstable intermediate regimes, Sri Lanka will remain a top customer of the IMF and doomed to monetary instability, critics say.(Colombo/Apr18/2022)
Sri Lanka stagnant for 7-year in output gap, flexible inflation targeting
ECONOMYNEXT – Sri Lanka has experienced 7 year of stagnation triggering three currency crises under ‘flexible’ inflation targeting, a failed attempt at operating a domestic anchor driven monetary policy despite having a reserve collecting peg.
Per capita gross domestic product recovered to 3815 US dollars in 2021, according to data from the state statistics office, after a Coronavirus pandemic depressed output to 3,695 dollars per persn in 2020.
The per person GDP in 2021 is lower than the 3,821 dollars recorded in 2014.
Sri Lanka is now in the midst of the most severe monetary instability triggered in the history of the island’s Latin America style central bank set up in 1950 with built in anchor conflicts.
Independent analysts and classical economists had warned for several years that a monetary meltdown and external default was inevitable under un-anchored monetary policy and the International Monetary Fund had also warned of the possibility of an economic implosion in 2022.
Un-anchored monetary policy
Sri Lanka began to follow discretionary or flexible policy where anchor conflicts explode into currency crises as money is printed under a data driven framework which intensify anchor conflicts shortly after 2015.
Under data driven flexible inflation targeting, rates are cut and money is printed as soon as inflation falls and private credit picks up which occurs about 18 months after the previous currency crisis, promptly pushing the credit system to another crisis.
The rate cuts from late 2014 were enforced by liquidity releases from term repo deals and outright purchases of Treasury bills.
In 2015 the Prime Minister Ranil Wickremesinghe openly admitted to Keynesian stimulus despite the country operating a reserve collecting pegged exchange rate regime, with the central bank intervening in forex markets in both directions (providing weak side and strong side convertibility).
In 2018 rate cuts were enforced and a call monetary rate was targeted with a combination of overnight reverse repo injections, term repo injections and outright purchases of Treasury bills and bonds from commercial banks.
Output Gap Targeting
‘Flexible’ inflation targeting was backed up by calculation of a so-called potential growth number or output gap.
Rates are cut or money is then injected rates and injected money to close the ‘output gap’ which is also a for on Keynesian stimulus, which at the time estimated around 5 percent or higher.
In August 2019 the central bank said it was printing money because growth was 3.1 percent, potential growth was 5.0 percent and “output gap stabilization is an important concern in a flexible inflation targeting regime and that again argues for a relaxation of monetary policy.”
Under the last administration there was an attempt to usurp the monetary law, legalize both flexible inflation targeting and a flexible exchange rate and indemnify officials.
Analysts have faulted the International Monetary Fund for peddling flexible inflation targeting to pegged third world central banks with ‘fear of floating’ and also for teaching Sri Lanka to calculate a potential growth number which Mercantilist can then use as an excuse to print money and drive the country headlong into balance of payments crises.
Top economist W A Wijewardena had said that output gap targeting was against the monetary law, which requires the agency to maintain price and economic stability.
Related
In December 2019 the finance ministry said it was cutting taxes to close a ‘persistent 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.
“Higher growth will have a positive impact on the overall debt dynamics of the country as well.”
Related
Sri Lanka fiscal stimulus to close output gap
In the first quarter of 2020, the central bank cut rates, and slashed reserve ratios and later imposed price controls on bond auctions to print money and prevent the cash released from the tax cuts into private sector hand from coming back to the budget through higher interest rates.
In a hard peg a tax cut cannot de-stabilize exchange rate because the lost money would have ended up back in the budget deficit through higher bond yields as money cannot be printed to keep rates down.
However Sri Lanka does not have a hard peg (currency board) and the the rest is history. (Colombo/Apr17/2022)
Sri Lanka economic crisis protests led by youth see national unity
ECONOMYNEXT – Sri Lanka’s main protest site against President Gotabaya Rajapaksa by his secretariat building has become a rare sight of national unity with all communities coming forward in a show of national unity in diversity.
With the introduction of the popular vote by the British, politicians, the urban intelligensia and sections of Sri Lanka’s clergy have fired linguistic, ethnic and religious hatred to win votes or pass legislation to elevate one group over another after independence.
Separately legislation was made to make naturalization almost impossible in another fit of nationalism, while making a large group of people who were born in the country stateless, critics say.
Before colonial rulers brought the popular vote and parliament, Sri Lanka was ruled by a feudal class who intermarried with their kin in India and who were largely indifferent to linguistic hate, much like the monarchies of the rest of Asia and the world.
The “Gota Go Home” campaign, demanding President Gotabaya Rajapaksa to resign is a rare phenomenon in the island nation of 22 million people.
Many protestors however do not necessarily have a deep understanding of political theory or liberal values that place human lives above nationalism, but are driven by economic considerations, brought to a head by extraordinary levels of money printed by the central bank to keep rates down which created forex shortages.
The money was printed by economists backing the Sri Lanka Podujana Party who wanted to create a ‘production economy’ within ‘developmental state’.
“In the emerging developmental state, the central bank stands ready and is willing to join hands with fiscal and policy planning authorities to help open the vistas of prosperity for the benefit of the people,” Central Bank Governor W D Lakshman said delivering the 70th anniversary lecture of the agency.
“In this context, the Central Bank of Sri Lanka, with its 70 years history is being expected to play its role as an agent of development.”
Related
Sri Lanka central bank to work closely with finance ministry in developmental state: Governor
Instead providing economic and price stability under its governing law, the agency had earlier printed money under a ‘flexible inflation targeting’ creating two currency crises under ‘flexible inflation targeting’ fueling stagflation and helping bring President Rajapaksa to power. (Sri Lanka’s UNP pays the price for currency depreciation, REER targeting)
Flexible Exchange Rate Crisis
The forex shortages from the ‘flexible exchange rate’ which is neither a floating rate nor a fixed exchange rate has in turn triggered shortages of cooking gas, electricity, medicine and some foods like milk.
After two years of money printing, inflation hit 18.7 percent in March and food index is up 30.1 percent over the past year and 42.2 percent over two years.
“Budder-ter-kanna…(to fill the stomach),” chants a leader of one group of protestors. “Buth tikker nehe.. (there is no rice) answers his followers in chorus.
“Uyar gun-ner (to cook it),” the leader says. “Gasuth ne” (there is no gas) answers the group.
“Gedera in-ner (to stay at home),” starts the leader. “Light-uth ne” (there is no power) the protestors answer.
“Aye munter raver-ten-na,” (we will not be deceived by them again) chants a group in the Sinhalese language.
“Rata kun-ner-ter denneth ne (will not allow them to eat/consume the country)
The protest is within a stone’s throw of the country’s central bank which is responsible creating forex shortages by printing excess money to keep interest rates down.
In the two years to February 2022, the central bank had printed 2.13 trillion rupees, firing domestic credit and blowing the balance of payments apart.
The massive liquidity injections made under so-called Modern Monetary Theory during the tenure which makes it impossible to hold an exchange rate steady without losing reserves had been dubbed the ‘Lakshman shock’ by W A Wijewardene, a rare classical economist in the island full of Mercantilists.
The central bank operates an unstable soft-peg with the US dollar called a ‘flexible exchange rate’ which is neither a hard peg (consistent external anchor) nor a free floating rate (consistent domestic anchor), using shifting rules in a monetary regime called flexible inflation targeting, which had created three currency crises since 2015.
Newly appointed Central Bank Governor Nandalal Weerasinghe has hiked rates by a record 700 percent in a bid to protect the rupee by slowing economic activities and to reduce the inflation the agency would create in the coming months.
The central bank had had created high inflation and forex shortages for 72 years by printing money mis-using its ‘monetary policy independence’ granted by the parliament in 1950 through a law drawn up in the style of Argentina’s central bank to operate an unstable soft-pegged exchange rate regime.
From 1885 to 1950 the country had a hard peg (currency board) with no anchor conflicts which had steered the island through World Wars and a Great Depression.
The soft-pegged central bank brought increasingly draconian exchange controls from 1952 and an import control law was enacted in 1969 by an administration which printed money and created official parallel exchange rates, shortly before its ouster.
In the 1970s the two laws were extensively used in what is now called the ‘closed economy’ when shortages, rationing and black markets were widespread and profits were made by so-called import substitution oligarchs as now.
In the 1980s the economy was re-opened by the but continued money printing and depreciation in the to pursuit of competitive exchange rate continued to create economic hardships, widespread strikes and social unrest.
There were two insurrections in 1971 and 1988/89 led by Marxists Janatha Vimukthi Peramuna (JVP) who tried to take over the entire country, and a 30-year civil war waged by Tamil Tiger rebels from the early 1980s for a separate state.
Groups in the north also first became active in the 1970s, assassinating mainstream politicians. All three were controlled with equally harsh military action.
Multi-Festivals
The protestors in 2022 are peacefully demanding changes to the way the country is governed and want more young people to come to office.
The tech-savvy youth voluntarily gathered, self helped with the food and water supply, found ways to continue the protest despite a New Year celebrated by ethnic majority Sinhalese and minority Tamils, Easter week celebrated by Catholics, and Ramadan fasting observed by Muslims.
The protest has now started to attract popular artists, celebrities, sports stars and elders to the demonstration while forcing many others to openly repent for backing Gotabaya Rajapaksa in the November 2019 polls.
Buddhist Monks, Catholic and Islamic priests, and Hindu devotees all came together for the protest.
Buddhist monks chanting “pirith” to bless the protesters, Catholic priests questioned Rajapaksa’s long delay of 2019 Easter Sunday attack probe, Muslims held their iftar or break fasting and prayers at the protest – expressing a rare unity in diversity.
“This generation is faster, more driven and are determined to have a change,” an elder protester who voluntarily came to the protest told Economy Next.
“The issue we face now is that the people within the boundaries of the government are more laid back to their views and don’t seem to understand the pace of the new generation. So obviously the protests will be long lasting.”
The political savvy among them are calling for constitutional change, involving the abolishing of the executive presidency which had destroyed a once independent public service by ending an independent civil service commission.
Sri Lanka Podujana Party using its two third majority had ended a constitutional council set up by a 19th amendment to the constitution which sought to go someway in setting up an independent judiciary and public officers, though nothing had been done to appoint permanent secretaries to ministries.
Social Media
Thousands of protesters have now established small tents at the protest site, medical facilities, a library to read, a people’s parliament to express the views of all and portable washrooms.
Food is given away freely to support those who are there for the cause. The sentiment around the camp is “we won’t go home till Gota goes home”.
They named the protest site as “Gota Go village”. They also have established a “Gota shop” to collect food and water for the protesters. The collection is coordinated through social media.
Political analysts see the latest protest as the biggest apolitical movement against the government in the last 74 years since independence.
Many protesters are making use of a nine-day holiday this week to show their dissent, undeterred by the Government’s sealing off of the historic Galle Face Grounds “for repairs”.
Some are continuously staying, while others participate “in shifts” due to time constraints. Many are braving the sun and rain to keep the protest going.
“I feel fortunate about the opportunity to come and contribute to this historic moment,” said Hiranthi Lakshika, a 38 year old woman told Economy Next.
” People are suffering, but these leaders are continuing with misappropriation. I think people have understood something. That is why people have gathered here regardless of their ethnicities any religion for the first time in the history.”
“Despite all these problems, there is no plan for revival and there are hardly any brains in the government to think of any revival.
“Sri Lanka is not poor. We are very rich in terms of the country’s location. These politicians have repeatedly raped this country and many youths have already left this country. If all join hands, we can develop this country.”
“Rajapaksas have proven us repeatedly that they are corrupt and they have no concerns for the public. So Gotabaya and Rajapaksa family should leave. There is no compromise on that. If they don’t leave, you will find how these youths will force them to leave.”
In addition to money printing, a key policy error of the current administration was a fertilizer ban backed by the Government Medical Officers Association which had said ancient Sri Lankan lived for over 100 years before agro-chemicals came.
“Gotabaya has destroyed out agricultural economy. He has pushed this country back my many years,” said W Priyantha, a 42-year old farmer who has come from Ratnapura.
“He also has appointed all corrupt ministers and the country is suffering.”
Farmers were the first to protest against the administration last year during the fertilizer ban, long before the urban middle class started to protest.
Braving the elements
Protestors brave the sun and rain to stay in the protest site which has now been named GotaGoHome gama.
“I was there only for a few hours today, and I was exhausted. The heat was unbearable,” T N Nawas, who comes into Galle Face every day since the protest started.
“I can’t imagine what it’s like for the people who are there the whole day.
“People were protesting under umbrellas and holding their placards as shades. The weather is just extreme, it’s extremely hot during the day and it suddenly starts to rain with massive lightning bolts.”
Protesters share news, thoughts, and anecdotes via WhatsApp, TikTok, FaceBook, Instagram, and Twitter among many other social media platforms keeping in touch with the rest of the country.
“I’m constantly updating myself and other people on social media, and building an archive of sorts of historical events that people might not be aware of,” said 20-year-old Sarasi Lakpura from Nugegoda.
She is unable to take part in the physical protests.
Rajapaksa’s ruling Sri Lanka PodujanaPeramuna (SLPP) ran an election campaign targeting Sinhala Buddhist majority and Catholics in the last two polls after the 2019 Easter Sunday attack by Islamist suicide bombers that killed at least 269 people mainly Catholics.
The SLPP also said choosing Rajapaksa was the only option to protect Sri Lanka’s sovereignty, national security, while promising justice to the victims of Easter Sunday’s carnage.
During their campaign Sri Lanka Podujana Party activists carried lion flags without the coloured strips representing minorities.
But the 2022 protestors wave the full national flag.
Some also drape themselves in it.
In recent months several persons linked to the Sri Lanka Podujana Party and others who were facing corruption charges were released with cases being withdrawn.
Last week lawyers protested in front of the Attorney General office demanding cases, which were withdrawn on technicalities to be re-filed.
More Protests?
The current protesters are from urban middle and middle class youth who are experiencing shortages and power cuts for the first time in their life. Most have never taken part in a protest in their lives.
They are protesting for a political system change to go back to their comfort zone.
However, with the economic crisis has started to trickle down gradually to the grass root levelsmore could join the “Go Gota Home” campaign soon.
Suffering at grass root levels is rising. However they cannot leave their job or livelihood to come and join the protests on a long term basis.
“If those people who are waiting in the kerosene lines join us, this whole situation will change drastically,” said protester Ravindra Wijesekera.
“They think in a different way. They won’t lay low and speak nicely. And if that happens it will be very hard for the government to control the situation,” he said.
To save the falling rupee the central bank has to now stop printing money and find money to pay the salaries of a bloated public sector by taxing people and businesses, under a planned International Monetary Fund program.
Though people now know that there were no shortages during earlier IMF programs or such steep currency falls, the coming tax hikes and to pay the public sector and high rates to sell domestic debt is likely to trigger a downturn in the private sector.
In a bid to reduce pressure on the domestic economy and release resources for a reasonable growth path eventually, the IMF has pushed the country to re-structure foreign debt.
Many of the protesters are angry not just with the Rajapaksa family, but 225 parliamentarians in general who enjoy tax free cars, pensions after five years for themselves and family members appointed as personal staff and subsidized luxury meals at parliament.
Suresh Udawatte is a committed protestor whose business is in shambles says as hardships increase more people will join the protests.
Udawatta serves shifts at the protest site to be a part of the “Go Gota Home” movement.
His sign reads, “Our children’s milk was stolen for the luxuries of your own children!”
The atmosphere at “Gota Go Village” is shown by its shiny new trilingual sign, and the feeling of community and energy that is there in the crowd, even as the protests continue well into the night.
“There’s a cohesive force that isn’t dying out until we have fulfilled our motives,” said a committed protestor asking not to be named holding a placard saying: “Sri Lanka is not Poor, we aren’t poor, we were robbed.” (Colombo/April 13/2022)
Sri Lanka coal plant may shut in fresh crisis unless two...
ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Board will be forced to shut down one of three 300MegaWatt coal plants, worsening a power crisis, unless payment is made for two ships anchored off the coast for days, power sector sources said.
Without coal the CEB would be forced to shut one of three 300Mega Watt coal plants adding to an economic crisis.
Two coal ships are anchored off the coast of Sri Lanka from April 08 awaiting payment and are likely to sail away on April 18, the next day that banks due to open unless letters of credit are established and payment made, power sector sources said.
The shippers have to be paid 80 percent of the value when the shipment arrives document are submitted.
High volumes of diesel generation, amid a drought has depleted CEB’s cashflow, with the rupee also falling from 203 to 330 level levels due to float failed by low policy rates and a surrender requirement imposed by the central bank.
The CEB was earlier without cash (in rupees) to give to banks to buy dollars or pay salaries, with the regulator failing to hike rates.
Sri Lanka’s CEB has been running three 300MW coal plants at the Lakvijaya complex in Puttalam providing the base load for at least several hours of electricity at a lower cost.
If the coal ships leave the CEB may have to shut down one of the coal plants from May 2022, sources said, worsening a power and economic crisis.
Though rains are starting to come, if the coal plant is shut, 300MW will have to come from diesel plants, which are already idling due to lack of fuel.
When the monsoon starts in May, the CEB is unable to unload the coal ships, which has to be done painstakingly using barges. Sri Lanka will then have to wait till the monsoon ends around September to get coal.
Sri Lanka can resume imports of fuel and other items if the central banks stop printing money and establishes a float.
So far attempts to establish a float has failed due to a surrender requirement as well as low interest rates. Rates have been hiked but a surrender requirement remains. (Colombo/April15/2022)
Sri Lanka’s Litro Gas chief resigns, slams ministers, govt for crisis
ECONOMYNEXT – The chairman of Sri Lanka’s state-run Litro Gas Company Ltd, Theshara Jayasinghe, has resigned blaming ex-ministers and the administration for the country’s economic crisis, in resignation letter addressed to President Gotabaya Rajapaksa.
Jayasinghe alleged that ministers and government officials under whom Litro operates did not support the decisions to combat wrongdoing.
“Majority of the ministers and members of the parliament representing the ruling party are trying to escalate the current situation rather than supporting the government to control it,” he claimed.
“The question I have is, is it because of the decisions I took from the start to stop the corruption within the organization?”
Jayasinghe said, he was able to stop the sale of 18-litre cooking gas cylinders which are through to have contributed to fires and explosions in cookers.
He claimed there was corruption in gas imports.
“After discussing with you regarding these international mafias which resulted in the loss of billions of rupees, I tried at my level best to stop all the corruption,” he wrote.
“However, it was hard due to the challenges faced by the authorities from the management and at the social level. It was clear all the incidents that happened from that moment were all according to a pre-planned script.”
Jayasinghe said the current gas shortage cannot be solved by discussions within the organizations, and all parties involved in the economy should support it.
“The devaluation of the rupee, forex shortage in importing gas, difficulties faced by the state owned and private banks and predictions regarding the economic situation of the country made by foreign investors are some of the issues that cannot be solved within the organizations,” Jayasinghe said.
“It is a nauseating experience to see the officers responsible for the national monetary policy and money handling, not taking adequate measures solve this issue easily and letting the general public in the country to suffer due to negligence or with knowledge.”
Sri Lanka is facing forex shortages due to money printed by officials running the island’s Latin America central bank.
Central Bank and the country’s ‘economists’ have destroyed the currency for 72 years though open market operations and direct finance of the budget to keep down interest rates and imposed import controls on the unknowing public.
Newly appointed Central Bank Governor Nandalal Weerasinghe has hiked interest rates, but a dollar surrender rule that hit the currency peg and blocks a float remains.
Jaysinghe calimed the current gas shortage still can be solved and the recommendation have been provided to the President and the authorities a few months ago.
He said, discussions have been made with the Indian High Commission and the initial facilities to import gas on credit is already in place in order to continue the gas supply in the country.
“For the first time in the history of the firm, the tenders were called from gas suppliers through all high commissions in the country with the utmost monetary transparency and I hope it will be carried forward,” he said.
Sri Lanka general public is still facing issues due to the gas shortage and many small and medium scale entrepreneurs connected to the food chain in the country along with households are facing difficulties.(Colombo/ April 15/2022)
Sri Lanka rations fuel to motorists as currency crisis continues
ECONOMYNEXT – Sri Lanka’s state-run Ceylon Petroleum Corporation (CPC) on Friday rationed fuel sales to most customers, saying it will speed up distribution and make more available fuel to more customers as the country grappled with the worst central bank crisis in the country’s history.
“This is to increase our efficiency in distributing fuel. This will be temporary,” the CPC chairman Sumith Wijesinghe told Economy Next.
Ceiling have been placed for most segments of customers from 1.00 pm Friday.
Motorcycles are given up to 1,000 rupees worth petrol which is less than 4 liters.
Three wheelers can get up to 1,500 Sri Lankan rupees ($4.5) worth or 6 litres of petrol or 8.5 litres of diesel.
Cars, Vans, and Jeeps are given up to 5,000 rupees ($15) worth fuel which is 19.7 litres of petrol or 28.4 litres of diesel.
Wijesinghe said in a statement that sales to buses, trucks and commercial vehicles are not rationed.
The move comes three days after Sri Lanka declared “preemptive default” on its all foreign loans saying it cannot service debt.
Sri Lanka is facing severe forex shortages after the central bank stopped interest rates from going up after taxes were cut in 2019 December and printed large volumes of money, creating forex shortages and pressuring a soft-peg with the US dollar.
The fuel shortage has hit the power generation and the government has been imposing extended power cuts – sometimes 13 hours per day.
India helped Sri Lanka with a 500 million fuel credit line which started in mid March. However, government sources say the Indian credit line is almost exhausted now.
The CPC chief early this week said they are discussing with India to secure another 500 million dollar credit line and looking for a number of other fuel credit proposals to manage the next few months.
Like now the central bank also printed money in 2015/2016 and 2018 created fore shortages and made the CPC borrow dollars. The central government also borrowed heavily in capital markets as forex shortages emerged, except in 2017 and 2019 when when monetary stability was maintained. (Colombo/April 15/2022)
Occupy Galle Face protest welcomes the New Year
Sri Lanka on track to be downgraded to ‘SD’ by S&P
ECONOMYNEXT – Standard and Poor’s has downgraded Sri Lanka to ‘CC’ from ‘CCC’ after the country said most foreign debt payments would be suspended pending a res-structuring, and said a selective default (SD) rating is likely to be given once actual non-payment starts.
The outlook is negative.
Sri Lanka said it will suspend debt repayments, from April 12 and invited creditors to negotiations.
“We are likely to lower Sri Lanka’s foreign currency ratings to ‘SD’ upon confirmation of nonpayment of interest or principal on any of its commercial foreign currency obligations, including coupon payments on its International Sovereign Bonds due April 18,” the rating agency said.
Sri Lanka printed 2.1 trillion rupees despite having a highly unstable pegged regime (flexible exchange rate) or soft-peg in the two years to February 2022, driving inflation up to 18.7 percent by March in addition to creating forex shortages.
The island had skated on thin ice since 2015 with ‘flexible’ inflation targeting, printing money to create currency crises is 2015/2016 and also 2018 driving up foreign borrowings steeply after losing the ability to settle maturing debt with inflows.
International sovereign bond borrowings rose from 5.0 billion US dollars to 14 billion during the period and the state-run Ceylon Petroleum Corporation also borrowed dollars after being barred from buying dollars due to forex shortages from ‘flexible’ inflation targeting.
Related
Shock revelation on how Sri Lanka’s CPC ended up with billions of dollar debt
How Sri Lanka’s IMF-backed ‘Young Plan’ fired a foreign debt death spiral: Bellwether
When forex shortages take place due to money printing, dollars cannot be ‘bought’ for rupees to pay for either imports or debt (inability to transfer real wealth from the domestic credit system linked to the rupee monetary base to the dollar credit system), a phenomenon known as the ‘transfer problem’.
Related
Sri Lanka debt crisis trapped in spurious Keynesian ‘transfer problem’ and MMT: Bellwether
Sri Lanka was progressively downgraded during ‘flexible’ inflation targeting when instability was triggered by call money rate targeting and output gap targeting (type of monetary stimulus).
Economists and analysts have called for single-anchor monetary regime to stop instability and overhaul of the central bank law to stop monetary impunity and accommodation of fiscal excesses.
In 2019, taxes were cut for fiscal stimulus and bond auctions were crippled through price controls and treasury bills were bought wholesale by the central bank, blowing the balance of payments apart again.
“There are limited upside scenarios to the ratings currently,” S&P said.
“Upon completion of any bond restructuring, we will assign new foreign and local currency sovereign credit ratings that reflect Sri Lanka’s post-exchange creditworthiness.”
Sri Lanka Foreign Currency Rating Lowered To ‘CC’ From ‘CCC’; Outlook Negative
Overview
Sri Lanka announced the suspension of normal external debt servicing on April 12, 2022.
• The government said most categories of external public debts would be suspended, pending formal restructuring under a potential program supported by the IMF.
• We lowered our long-term foreign currency sovereign credit rating on Sri Lanka to ‘CC’, from ‘CCC’, to reflect the virtual certainty of a default on some affected obligations. We also lowered our long-term local currency sovereign credit rating to ‘CCC-‘ from ‘CCC’. At the same time, we affirmed the ‘C’ short-term rating.
• The negative outlook on the ratings reflects the high risk to commercial debt repayment in the context of Sri Lanka’s economic, external, and fiscal pressures.
Rating Action
SINGAPORE (S&P Global Ratings) April 13, 2022–S&P Global Ratings today lowered its long-term foreign currency sovereign rating on Sri Lanka to ‘CC’ from ‘CCC’. At the same time, we lowered our long-term local currency sovereign rating to ‘CCC-‘ from ‘CCC’. The outlook on the long-term ratings is negative.
In addition, we affirmed our ‘C’ short-term foreign and local currency sovereign ratings.
We also revised down our transfer and convertibility assessment to ‘CC’ from ‘CCC’,
Outlook
The negative outlook on the ratings reflects the high risk to commercial debt repayment in the context of Sri Lanka’s economic, external, and fiscal pressures.
We could lower the foreign currency rating to ‘SD’ (Selective Default) upon confirmation that the government has missed a coupon or principal payment on commercial foreign currency debt, including its upcoming April 18 coupon payment on international sovereign bonds, or upon confirmation of debt restructuring terms.
We could lower the local currency ratings if there are indications of nonpayment or restructuring of rupee-denominated obligations.
There are limited upside scenarios to the ratings currently. Upon completion of any bond restructuring, we will assign new foreign and local currency sovereign credit ratings that reflect Sri Lanka’s post-exchange creditworthiness.
Rationale
Amid steeply rising external funding pressures, and alongside increasingly widespread social and political protests, the Sri Lankan government announced on April 12 that it will suspend debt servicing on its foreign currency obligations.
Sri Lanka has coupon payments due on April 18 for its 2023 and 2028 International Sovereign Bonds. We expect the government to miss paying these coupons, and therefore lowered our foreign currency sovereign ratings on Sri Lanka to ‘CC’.
The Sri Lankan government said it has approached the IMF for assistance in establishing an economic recovery program and for emergency financial assistance.
Until a comprehensive debt restructuring plan is formulated, servicing of foreign-currency-denominated debts will be suspended. Affected debt includes international bonds, bilateral government-to-government credit facilities excluding swap lines with the Central Bank of Sri Lanka (CBSL), credit facilities with commercial banks and institutional lenders, and amounts payable by the government or public sector entities on called guarantees. Obligations governed by Sri Lankan law may not be affected.
We are likely to lower Sri Lanka’s foreign currency ratings to ‘SD’ upon confirmation of nonpayment of interest or principal on any of its commercial foreign currency obligations, including coupon payments on its International Sovereign Bonds due April 18.
According to published reports, the government intends to continue paying its local currency debt obligations for now. Our ‘CCC-/C’ local currency sovereign ratings on Sri Lanka reflect ongoing severe economic and monetary pressures.
Although the central bank can technically create Sri Lankan rupees to meet upcoming obligations, doing so could have significant inflationary implications, with consumer prices already growing at a rapid 17.5% year on year in February.
Sri Lanka’s local currency debt also constitutes a considerable proportion of its overall indebtedness, and thus, its very high interest burden relative to revenues.
Sri Lanka’s debt restructuring process is likely to be complicated and may take months to complete. Negotiations with the IMF to establish a reform and funding program are in the early stages.
Sri Lanka has also experienced considerable political uncertainty in recent weeks, marked by the resignation of the entire government cabinet, in addition to the governor of the CBSL, in early April, and the ruling coalition’s apparent loss of majority representation in parliament.
Failure to establish a sustainable government could further complicate and hinder progress in discussions with the IMF, and, ultimately, delay a debt restructuring plan.
Sri Lanka to get US$10mn from World Bank for medicine
ECONOMYNEXT – Sri Lanka is expecting 10 million US dollars from the World Bank to buy supplies to the health system under emergency relief, Finance Minister Ali Sabry said as the country reeled from forex shortages from money printed to keep rates down.
Health sector officials have said medicines and supplies were running out and hi-tech diagnostic equipment were also under threat.
“It is not enough, but still a big amount considering the situation,” Sabry said in a discussion with Sri Lanka’s privately-run Hiru TV.
“We hope to receive it by the next week.”
The Secretary of the GMOA, Senal Fernando said due to the increasing shortage of medicine, health sector is moving towards a crisis greater than the Coronavirus, with shortages seen in 237 drugs.
The economic crisis has been created by ‘flexible exchange rate’ a highly unstable soft-peg operated through ‘flexible inflation targeting’ by economists who oppose rule-based monetary policy targeting a single anchor such as a currency board or a free floating rates without foreign reserves.
Meanwhile Government Medical Officers Association said, the health sector in the country is experiencing shortage of 237 essential drugs including antibiotics
“This is a crisis arised due to lack of foreign currency, and people may think this only affects the sate run facilities, no, this will eventually affect the private health facilities as well,” the Secreatary of the Government Medical Officers Association Shenal Fernando told reporters.
“According to this there is a shortage of medicine for every type of disease we are treating”.
Meanwhile, Sri Lanka Federation for Health Professionals (SLFHP) said the health sector is facing issues in maintaining CT scanners, MRI scanner, Linear Accelerator and some laboratory automation machines as well as ventilators used for patient management.
” Ministry of Health for owes over 5 billion rupees for equipment maintenance alone,” the Convener of the FHP, and the president of the College of Laboratory Professionals, Ravi Kumudesh told reporters.
“As this situation continues, those services will be discontinued and the lifespan and efficiency of those devices will be greatly compromised.”