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ECONOMYNEXT – An ally of Sri Lankan President Gotabaya Rajapaksa on Thursday admitted that the government should have sought International Monetary Fund (IMF) help to face economic crisis, float the rupee systematically, and  started debt restructuring.

The economic crisis due to shortage of US dollars, cooking gas, fuel, and milk powder amid extended power cuts has now turned into a fully blown political crisis with intensifying street protests by people mainly the youth demanding for the resignation of Rajapaksa.

President Rajapaksa attended the parliament in line with the constitutional requirement amid tight security with roads leading to the parliament closed while protests by the public continued across the country.

“I was within and outside the cabinet telling that we should have gone to the IMF a year ago,” Ali Sabry, former justice minister told the parliament.

“The rupee should have been floated in systematic manner and not like this. We should have started a debt restructuring. You all told the same thing and we also have told the same thing.”

Sabry did not reveal the Sri Lanka Podujana Peramuna (SLPP) members who opposed seeking IMF assistance, floating rupee, and debt restructuring.

“But now we must see how we can overcome the issue with the resources at hand and if we don’t there will be serious turbulence within the parliament and out of the parliament, on the road and not against only the government politicians but for all 225,” Sabry said.

Frustrated with economic mismanagementa and wrong police decisions, people have been protesting with a theme “Go Home Gota”, across the country demanding the president to resign,

The central bank allowed flexibility in the exchange rate on March 7 and the rupee has fallen around 60 percent since then. That has led to steep price increase in essential price and people have complained about high cost of living.

Protesters have been demanding all Rajapaksa’s to resign from the office and investigate them for looted money. Sri Lanka’s cabinet before the resignation on Sunday (03) included five Rajapaksas.

Ali Sabry said the protesters have been demanding to do something outside the constitution.

“It will be even more drastic. The constitution will be broken. We saw in Syria, in Libya, in Afghanistan, in Yemen and now seeing in Iraq,” Sabry said.

“Iraq in the last month, from oil alone got $12.1 billion in income for one month in February and still they can’t run, because structures have collapsed. So we need to understand and it’s a heavy bound issue.” (Colombo/April/2022)

ECONOMYNEXT – Sri Lanka’s foreign reserves dropped 372 million US dollars to 1.9 billion US dollars as money continued to be printed to keep rates down amid a large budget deficit and looming debt repayments.

Sri Lanka is following flexible inflation targeting a non-rule bound non-regime that has triggered repeated currency crises over the last 7-years including during an International Monetary Fund program.

During the last IMF program a ‘monetary policy consultation clause’ was easily circumvented to trigger a currency crisis in 2018.

Sri Lanka has printed large volumes of money from 2020 under Modern Monetary Theory, or post-Keynesian ‘alternative theory’ triggering the worst currency crisis in history and bringing the country to the brink of default.

Foreign reserves at 1.9 billion US dollars are about 1 months of reserves. Of this about 1.6 billion US dollars is from a Chinese swap.

A central bank without reserves has to float the currency and suspend convertibility.

In March an attempt was made to float but the 372 million US dollar reserve loss shows that a weak side convertibility in a peg was used. There is also a strong side convertibility undertaking in the form of a surrender requirement. (Colombo/Apr07/2022)

ECONOMYNEXT – A Magistrate Court in Sri Lanka on Thursday ordered to prevent former Central Bank Governor Ajith Nivard Cabraal from leaving the country after a political activist filed a legal case against him on alleged misappropriation.

Colombo Magistrate Court issued the order to prevent Cabraal leaving the country until April 18 after political activist Rajith Keerthi Tennakoon filed case citing Cabraal’s failure to disclose his relationship to some primary bond market stakeholders.

Tennakoon among his six charges against Cabraal said the former central bank governor had resulted to incur 10.04-10.06 billion rupee loss to the government during his 2006-2015 tenure as the governor of the central bank.

Cabraal was not immediately available for comments.

Cabraal was reappointed as the central bank governor in mid September last year when the signs of economic crisis was started to be visible.

Cabraal strongly opposed to seek International Monetary Fund to address the financial crisis, kept both interest and exchange rates artificially low amid excess money printing. The policy failure later created a severe shortage for dollars and the rupee has fallen nearly 60 percent since the rupee was floated on March 7.

Cabraal resigned from the post on Monday (04) after the ruling Sri Lanka Podujana Peremuna (SLPP) government’s entire Cabinet resigned on the previous day. (Colombo/April 07/2022)

ECONOMYNEXT – Sri Lanka should go for a tight reserve money program in any International Monetary Fund program with progressive falling ceilings on domestic assets and junk the flexible inflation targeting non-regime that has brought economic chaos to the country.

The highly discretionary flexible inflation targeting with a flexible exchange rate (soft-peg) had brought three currency crises in 7 years, caused misery to 20 million people and left politicians holding the can.

Why the IMF can help when India or China billions cannot

The IMF can solve the monetary crisis, which no billions of inflows from India or China can, because it addresses the core problem which is the central bank with a soft-peg which has lost credibility.

The problem is not the lack of inflows, but excess outflows (either through imports or capital flight) triggered or enabled by money printed to keep policy rates down.

In fact the Indian credit lines, far from solving the problem, will boost imports, widen the external current account deficit and leave the government or state enterprises with more foreign debt.

Therefore the core IMF program is to deal with the real problem, which will control the central bank’s domestic operations.

The core of an IMF program is a monetary program that will restrain any central bankers’ ability to print money and stop the printed money from spilling over the balance of payments creating forex shortages.

An IMF program has Performance Criteria (PCs) involving the central bank and the budget deficit which must be met in stages to go to the next level. Several of those, including monetary targets, foreign reserve targets, or deficits (which may be expressed as a domestic borrowing target) will be Quantitative PCs.

It has Indicative Targets to support the PCs. A failure to meet a performance criterion will lead to a suspension – failure to complete a review.

Prior Actions

Steep rate hikes are needed to save the rupee.

An IMF program starts with a float as a prior action to stabilize the currency – depreciation is an inevitable consequence of past money printing. An attempt to float the currency in March has failed due to low policy rate and a surrender requirement.

A float or re-peg is needed to for anything else to work.

Removing the surrender requirement to give 50 percent of inflows to the central bank should be removed forthwith. It can later be replaced with a Net International Reserve Target (see below)

Any structural benchmarks can be made into a prior action. Such as gazetting a value added tax amendment.

Core Monetary Program

The core IMF program should be a reserve money program where strict limits are set to limit its expansion. The central bank has lost its grip on reserve money as seen in recent data.

Performance Criteria – Reserve Money Target

When a peg is operated, whenever the peg is defended – reserves are used for imports – reserve money has to stop growing and interest rates have to rise. If it does not there is a balance of payments crisis under way.

However now reserve money is growing as the currency falls and money is printed through domestic operations to allow businesses to raise prices and make the price rises permanent through unrestrained expansion of reserve money.

Inflation is now galloping and can turn into hyperinflation if more money is printed to give salaries to state workers or subsidies before the exchange rate is stabilized. In March inflation was already at 18.7 percent.

Any reserve money growth must be from net foreign assets compatible with reserve targets.

Sri Lanka’s last IMF program failed primarily due to monetary policy consultation clause with a ‘flexible inflation targeting’ which allowed central bankers to run circles around the core performance criteria, create forex shortages and miss a foreign reserve target.

Performance Criteria/Indicative Target – A ceiling on domestic assets of the central bank

Based on the reserve money target, and expected fiscal financing coming from development partners, progressive falling ceiling must be set on the domestic assets of the central bank on its Treasury bill stock.

To sell down the Treasury bill stock rates must be raised to slow domestic credit and a working monetary regime must be established. The IMF usually does this by a float and then it is re-pegged loosely.

Performance Criteria – Net International Reserve Target

Complementary to the falling domestic assets target, a net international reserve target can be set. As soon as reserve money stops expanding, and the central bank can buy dollars, at a given exchange rate, the fall in domestic assets will equal the rise in monetary reserves.

PC or IT on Ceiling on central bank swaps

The central bank is currently has more liabilities than assets. It can default at any time.

The central bank should be forced to undo its swaps progressively. It should be barred from getting into swaps with interbank market participants in the future so that policy errors can be corrected fast before imbalances builds up.

The Lebanon central bank got into trouble by getting dollar deposits from banks instead of buying dollars by selling down its domestic assets stock after raising rates.

Getting deposits from banks at double digit rates, or rolling over swaps at high rates is a central bank Ponzi scheme.

The Disorderly Market Conditions Rule

The IMF usually sets a disorderly market conditions rule allowing the central bank to intervene in limited cases.

However theoretically, the disorderly market conditions rule makes no sense. Until a float is established there can be no interventions for DMC or otherwise. Take a page from the Russia’s float. A DMC can lead to a collapse of the exchange rate in a country subject to capital flight.

IMF programs fail – like Argentina- partly due to the DMC, even if it is unsterilized. A firm peg after domestic credit is slowed and after a float is established is more consistent, but is usually discouraged by the IMF due to internal ideology.

An unsterilized DMC is a currency board rule, but without the credibility that comes from a single unchanging credible exchange rate. Therefore DMCs fail often from Argentina to Pakistan.

Supporting Fiscal Program

How much money can an IMF program bring? It does not really matter.

The real benefits from the monetary program and fiscal fixes, not the money itself. The IMF money helps boost reserves up front and allows reserves to be collected later and repaid when the country stabilizes and begins to grow.

Under Covid-19 relaxation countries could potentially access about 5 times of quota under exceptional circumstances. Sri Lanka already owes about US$1.3billion to the IMF.

However it depends on the needs and repayment capacity and political willingness of the Executive Board.

However development partners give budget finance if the debt is made sustainable and there are reforms for budget.

PC on non-accumulation of external arrears (a non-default clause)

This is where debt re-structuring comes in. A fiscal program involving debt restructuring and deficit reduction is needed to keep down interest rates.

An IMF program is fully financed and there is no default. Therefore debt re-structuring is needed to ensure that the interest rate does not shoot up and enough resources are left for domestic consumption and investment a reasonable growth path.

It is irrelevant whether there are hair cuts or not. What matters is for debt to be rolled over to given a breathing space. This fixes the problem of the lost access to international markets.

Debt restructuring will reduce the Gross Financing Need (GFN) and the corrective interest rates needed to fix the country.

Haircuts, especially on Sri Lanka Development Bonds can contribute to banking crisis – depending on where the exchange rate is – which may have to be bailed out with government funds. It must be noted that SLDB holders have not been behaving like ISB buyers and have been behaving like senior creditors, re-financing them in a crisis.

Quantitative PC on domestic borrowings or a primary deficit target

Since interest rates shoot up in an IMF program, a deficit target before interest costs is needed.

The ultimate fix will come from reducing government spending and reducing the deficit. Revenue to GDP is not relevant except as a tool to reduce deficits. Deficit to GDP is.

Like the re-structuring of debt, raising taxes will reduce the interest rate needed to stabilize the country.

It must be borne in mind that revenue based fiscal consolidation without meaningful spending cuts will simply reduce growth as money will be taken from the private sector and mis-spent by the government.

The last program failed partly due to revenue based fiscal consolidation which boosted total consumption but did not have spending based consolidation (cutting spending such as limiting the expansion of the public service) and the money was used to pay salaries and subsidies.

Revenue based fiscal consolidation is politically naïve and economically unsound, as explained by classical economists like BR Shenoy to Sri Lanka as far back as 1966.

By boosting total consumption and encouraging rigid state spending currency crises and external defaults are made more certain when total state spending goes up. And that is what happened, in 2018 and it worsened after tax cuts from December 2019.

Under the last IMF program, spending to GDP went up from 17 to 20 percent of GDP, and there was a currency crisis in 2018.

Revenue based fiscal consolidation, without spending cuts will increase the likelihood of default by boosting domestic consumption, reducing private savings needed to re-build reserves.

A DMC without a credible fixed exchange rate can push up interest rates to high level and also lead to currency instability.

The capital budget which is financed by domestic borrowings must be cut.

The budget targets will be supplemented by a series of economic reforms set as structural benchmarks. Any of these can be made into prior actions which need to be done before the program is approved by the board.

IT on privatization

An indicative target or structural benchmarks on privatization will reduce the interest rates, boost budget revenues and reduce a long term drain on taxes to support them. A successful privatized firm will eventually bring in tax revenues.

Partner Funding

A strong reform program made up of structural benchmarks can supplement budget finance. At the moment with the Debt Sustainability Analysis being negative, budget or program finance is not possible.

China is the only country that has provided non-project budget finance to Sri Lanka in the recent past. China has said recently it will give a billion dollars.

With a good set of structural benchmarks it will be possible to get some money. The Indian credit line on food and medicine can be built into the budget. Medicine can be used to directly fund the health sector and any credit given to the private sector for cash can be used for budget finance.

Usually ADB, World Bank and Japan will chip in.

Structural Benchmarks

Tax hikes

This column had advocated a blanket 20 percent hike in the past to avoid steep currency depreciation. But now the rupee has fallen from 200 to 300 to the US dollar.

A 15 percent VAT hike in rupees will now be equal to 20 percent at 200 to the US dollar.

The last budget proposed new cascading taxes. But that further complicates the tax structure and must be junked.

Over the longer companies should have income tax rates of 15 percent as required by the Yellen tax.

Any domestic producer getting more than 20 percent import duty protection must have corporate income tax rate of 45 percent. Trade taxes should be reduced to 10 percent on the longer term.

The Strategic Development Act which allows tax holidays to be given to the highest bidder and foreign workers to be given tax free salaries must be re-considered.

Interim budget to parliament with new targets

This is tricky with the make-up of the current parliament. This is where that the opposition can support.

Fixing banks a priority

There is a ticking bomb in the state banking system in particular.

Banks have been mis-used in the past to give dollars loans to the Ceylon Petroleum Corporation whenever money was printed by the central bank to create forex shortages.

State banks have loaned 3.3 billion US dollars to the CPC which has essentially gone bad.

State banks have been mis-used to finance the CEB.

Privatizing the state banks will also prevent authorities in the future from forcing the CPC to borrow dollars when forex shortages occur.

Privatizing banks in the long term will also stop the financing of zombie state enterprises. Privatizing the CPC will also stop the price controls.

The long term solution is to fix the central bank so that forex shortages do not happen in the first place.

Any haircuts on SLDBs, which are financed by dollar deposits will also contribute to the problem.

There are also other problems in banks that need urgent attention. There are usually bad loans as consumption falls with currency depreciation. There can be margin loans.

All banks are having serious problems with limits with counterparty banks abroad being cut.

Fixing circular debt of CPC, CEB

The two energy utilities have circular debt and also owe money to IPPs. Pakistan which has a similarly bad central bank with a flexible exchange rate has identical problems as Sri Lanka.

The long term solution is to fix the central bank with a new law drawn up Monetary Law amendments drawn up outsiders so that the currency cannot be depreciated for competitive exchange rate or other purposes.

This problem is not addressed in the draft law prepared by the last administration and in fact makes it works.

Price formula for fuel, electricity

Price formula for fuel and electricity is a must. It can now be seen that the Indian credit line is going to fund losses in energy utilities, making an already bad problem worse.

If electricity is market priced the money from the India credit line can be used for budget finance.

There has to be some legal reforms to the Public Utilities Commission to make price hikes faster and prevent delays from adding to debt and currency crises. The current process is too cumbersome.

The monthly price changes adopted in Singapore by the regulator is an option.

To stop prices from going permanently up, and allow the price formula to work in both directions, the central bank has to be reformed by a law, which outlaws the flexible exchange rate (soft-peg), curtails open market operations, and commits it to a single anchor monetary framework.

Privatization

There are a number of state enterprises that can be privatized very quickly giving money to the budget. It is a low hanging fruit which was opposed by Wimal Weerawansa and the Rajapaksa family but does not make sense.

These include, Sri Lanka Insurance, Litro Gas, state hotels. There is list of such companies.

Sri Lankan Airlines is flying on increasingly thin air with a sovereign under pressure.

The sale of a stake in Sri Lanka Telecom giving full management control to the Malaysian investor will unlock value in the company and lead to growth.

The land sales could also be done. Each land should be sold separately.

Public sector burden

The burden of the public sector on the people must be reduced. This is where revenue based fiscal consolidation is going.

The increase in the retirement age must be scrapped. The public sector must be allowed to reduce through retirement as well as active voluntary scheme.

The military must also be given some scheme to retire if they wish. When the economy recovers, and if there is trade taxes are reduced there will be jobs.

Retirees who get jobs in the private sector will contribute to the provident funds.

A contributory state pension fund must be set up for all new employees.

This will end the incentive for crafty unemployed graduates to rob peoples’ taxes as salaries and non-contributed pensions.

Phasing out import and exchange controls

All import and exchange controls must be phased out.

Imports including cars can be allowed so that taxes will go up, as soon as the exchange rate is stabilized. There is no harm in maintaining high taxes on cars for the moment.

However the long term solution to end import and exchange controls is to reform the central bank law, curtail open market operations and commit it to a single monetary anchor.

These reforms are not rocket science. Whether is 2022 or 1966, the unfinished reforms are the same in this country. There are more reforms that can be done but have been omitted to save space.

Going beyond IMF

Sri Lanka’s economic death warrant was signed when the Latin America style central bank was set up in August 28, 1950, abolishing a currency board to become part of the Bretton Woods. Sri Lanka joined the IMF the next day.

The Bretton Woods soft-pegs flogged by people like John H Williams collapsed in 1971. Soft-pegs or flexible exchange rates are fundamentally flawed because they have anchor conflicts.

Despite having multiple currency crises Sri Lanka did not go down the Latin America default path in the past due to lack of commercial debt. Donor countries continued to fund Sri Lanka through crises.

But now Sri Lanka is staring at default.

A reserve money target based only on NFA is not contradictory. However a more neutral monetary regime is needed for strong growth and stability.

Sri Lanka’s high interest rates and the large interest burden relative to government revenue is entirely due to money printing and depreciation. Anyone can this with rates shooting up as warned in these columns before.

When the central bank was set up three month bill yield was 0.4 percent.

In single anchor monetary framework where capital is not evaporated by depreciation (inflated away) such as currency board or a pure clean interest rates starts plunge to low levels in about 1.5 Fed cycles.

A strong currency and low inflation will also reduce the current account deficit by reducing the need to import capital.

Sri Lanka’s fiscal problems involving a high interest burden will fall automatically as rupee bonds are rolled over at 2 percent inflation.

For that a rule bound currency board or clean floating rate with a rule bound an inflation target is required. Without a single anchor monetary framework, Sri Lanka will end up at the IMF – again.

Any former central bankers and others who are coming to help the country at this time should be admired.

However there is a risk that an IMF program will not be able to stabilize the country with political instability also building up.

In that case a re-financed new currency board or dollarization are options. As things stand, with political uncertainty triggered by monetary instability, spontaneous dollarization is also a possibility.

ECONOMYNEXT- Sri Lanka’s state-run hospitals are running out of essential medicine and medical equipment while the shortage threatens a major health crisis due to possible medicine supply chain collapse, a health sector trade union said.

Sri Lanka imports 80 percent of its medicines, but severe shortage of dollars due to the ongoing economic crisis has led to shortage of essential drugs and importers are struggling to meet the demand in the country.

Ministry of Health is also facing difficulties in importing the necessary medicine creating a drug shortage in state-run hospitals and pharmacies, affecting forcing hospitals to limit the medications for only for immediate and essential cases.

Indika Rathanayaka , the North Western Convener of the Government Medical Officers Association (GMOA), a doctors’ trade union, told reporters on Wednesday (06) that the current stocks in most hospitals will last only two weeks.

“We saw this problem a month ago. Within another month time, if this does not get solved, we are going for health crisis in the country as well,” Rathanayaka said.

Due to the shortage of gas and fuel, the government has allocated the remaining dollars to obtain fuel, resulting in commercial banks to decline the requests of medicine importers to open Letters of Credit to import drugs.

India has granted a 1 billion US dollar credit line including 200 million US dollars for essential medicine from the Indian suppliers, Sri Lankan government officials have said.

Tenders have been called from the Indian suppliers by the State Pharmaceutical Corporation to obtain a list of essential medical supplies given by the Medical Supply Division of the
Ministry of Health, officials say.

According to the State Minister of Pharmaceutical Production, Supply and Regulation, Channa Jayasumana, Sri Lanka is currently in need of 1,500 medicines and 3,000 surgical/medical equipment
for the state-run hospitals.

Due to the lack of medicine supplies several hospitals are forced to postpone or limit number of surgeries.

The Indian credit line only allows the government to purchase medicine and leaves private medicine suppliers to struggle to imports essential drugs.

An industry representative told EconomyNext that private sector drug supply to the market has fallen more than 30 percent due to the dollar shortage.

“The situation is much worse now than when we explained it earlier this month,” the source told EconomyNext.

“The banks do not entertain any LC applications and ask for credit for up to 180 days for both LCs and documents against acceptance documents.”

“In the absence of any forward booking mechanism, who knows what the rupee will be against the USD in 180 days? How do you cost your shipments?”

Over 50 percent depreciation of the rupee also has weighed on the drug imports now as the drug prices have risen nearly 30 percent since the central bank allowed depreciation.

A health official said the Treasury released 65 billion rupees to buy medicine and medical equipment, but the government needs further 15 million rupees to manage the price escalation after rupee fall.

“The ministry has sent request to the World Health Organization and other international health organizations to support in obtaining essential drugs for the country,” Saman Rathnayaka, the Secretary to the State Minister of Pharmaceutical Production told privately owned Derena, (Colombo/April 6/2022)

ECONOMYNEXT – Sri Lanka’s secondary market remained inactive on Wednesday (06) despite the yields in weekly bills auction soaring over 300 basis points, market participants said while the rupee was quoted at 310 rupees against US dollar in commercial banks.

Commercial Banks were offering to sell dollars for telegraphic transfers at between 310-313 rupees and buy between 295-300 rupees on Wednesday.

Dealers said the market did not have a proper two-way spot quote on Wednesday.

The central bank indicative spot rate remained flat at 307.78 rupees on Wednesday from the previous day.

Central Bank’s telegraphic transfer dollar rate was at 298.1/308.5 on Wednesday, up from 293.2/303.5 on Tuesday.

Sri Lanka’s rupee has been made more flexible but a clean float has not yet been established.

In the secondary market, there were no active bond rates following the bills auction, dealers said.

In the bills auction, 80 billion was offered and 72.5 billion was sold.

The debt office offered 40 billion rupees of 3-month bills and sold 64 billion.

20 billion rupees of 6-month bills were offered and 4.2 billion was sold.

20 billion rupees of 12-month bills were offered and 4.3 billion were sold.

The 3-month yield went up 120 basis points to 14.12 percent.

The 6-month yield went up 311 basis points to 12.25 percent.

The 12-month bill yield rose 341 basis points to 15.69 percent.

Over the weekend Sri Lanka saw anti-government protests spread across the country demanding the ruling government to step down for its mismanagement as the economic crisis throttled the common man.

Many government officials including the central bank governor Ajith Nivard Cabraal and ministers have tendered their resignation.

Following Cabral’s resignation, a monetary policy meeting that was scheduled to take place on April 05 was postponed.

Analysts say this was an important meeting in which rates were expected to be hiked further after inflation hit 18.7 percent in March.

The rate hike would have reduced money printing and domestic private credit.

Analysts had warned of triple defaults unless urgent action is taken to tighten monetary policy and restore a working exchange rate regime.

Nandalal Weerasinghe, the former Deputy Governor of the central bank is said to take over the governorship on April 07. (Colombo/Apr6/2022)

ECONOMYNEXT – Sri Lanka’s stock index fell over 1 percent on Wednesday (06) amid rising market interest rates and an economic crisis that has now turned into a political crisis, brokers said.

The main All Share Price Index (ASPI) ended 1.80 percent or 157.15 points at 8,580.93, after recovering over 5.87 percent in the previous session.

“Market did open positively and moved up a lot but we saw heavy selling interest coming because investors are extremely scared than before. So they are not holding on to the stocks,” a top analyst said.

“I feel the market has fallen significantly and it could stabilise at the current levels anywhere between 7,500 to 8,000 points.”

Some analysts expect the newly appointed central bank chief Nandalal Weerasinghe to raise the rates by at least 300 basis points at the next monetary board meeting.

“At the bills auction we saw the rates go up by over 300 basis points. This rate hike is much needed as it will stablise the rupee,” he added.

He also expects a lot of positive news to come from Sri Lanka’s IMF negotiations.

“We have hit the rock-bottom investor sentiment wise. So I think we will gradually have good news coming in to stablise< But the only thing is the money flow will definitely go in to fixed income which may push down the index lower.”

Sri Lanka’s entire cabinet resigned late on Sunday due to mounting pressure by the public protests over President Gotabaya Rajapaksa’s government failing to address an economic crisis that hit the public resulting in a shortage of milk powder, fuel, and cooking gas.

People also had to suffer from extended power cuts due to a severe shortage of dollars to import diesel for power generation.

SL20 of the most liquid stocks fell 2.60 percent or 74.74 points lower to 2,797.52 points.

Questions still remain as to how the country is going to face the mounting debt while the rupee continues to depreciate.

The day’s turnover was 1.9 billion rupees, a quarter of this year’s average daily turnover of 4.8 billion rupees.

Analysts said investors are trying to shift their savings to hedge against the rupee fall and inflation, which is at a record high and more than 5 percent higher than one-year Treasury bill yield. Brokers said investors opt for stocks to hedge against inflation.

Sri Lanka’s rupee has fallen nearly 50 percent since it was allowed flexibility on March 08.

The market has lost 23 percent so far in March after falling 11 percent in the previous month. Overall the market has lost 32 percent so far this year after being one of the world’s best stock markets with an 80 percent return last year.

Foreign investors bucked the trend and bought a net 146.7 million rupees worth of shares. However, the market has witnessed a total foreign outflow of 1.5 billion rupees so far this year.

LOLC Finance, Royal Ceramics and Hatton National Bank, dragged the index down on Wednesday.

Shares in LOLC Finance slipped 14.2 percent to close at 9.70 rupees a share, Royal Ceramics Lanka down 7.5 percent to close at 38.80 rupees a share while Hatton National Bank slipped 4.1 percent to close at 99.70 rupees a share. (Colombo/April06/2022)

ECONOMYNEXT – Sri Lanka’s rupee has plunged to a record low to become the world’s worst-performing currency,as President Gotabaya Rajapaksa struggles to contain a worsening economic and political crisis, Financial Times, a UK-based newspaper reported.

In a report published Wednesday afternoon Sri Lanka time, the newspaper said the rupee was hovering near 300 per US dollar on Wednesday, down 32 per cent year to date and lagging even Russia’s rouble, after Rajapaksa ended emergency rule just days after it was imposed.

The rupee collapsed from around 200 to 300 to the US dollar after an attempt was made float the currency with a surrender requirement, which made it a peg under severe pressure.

Rajapaksa revoked a public emergency he had declared last Friday (01) following a violent protest outside his private residence the previous night over his government’s handling of Sri Lanka’s worsening economic crisis. The protest sparked a wave of protests islandwide, participated by ordinary citizens with no affiliation to a political party, demanding Rajapaksa’s resignation.

According to the Central Bank of Sri Lanka (CBSL), the selling rate of the US dollar was at 308.4951 while the buying rate was 298.1064 as at 9.30am Wednesday. (Colombo/Apr06/2022)

ECONOMYNEXT – Sri Lanka’s Treasury bills yields rocketed up, with the 3-month bill yield rising 341 basis points to 15.69 percent, data from the state debt office showed, with the short term yield curve starting to slope upwards in a partial correction.

The 3-month yield went up 120 basis points to 14.12 percent.

The 6-month yield went up 311 basis points to 12.25 percent.

The increase of the highest one day gains in gilt yields seen.

The debt office offered 40 billion rupees of 3-month bills and sold 64 billion.

20 billion rupees of 6-month bills were offered and 4.2 billion was sold.

20 billion rupees of 12-month bills were offered at 4.3 billion was sold.

The central bank printed money for two years under Modern Monetary Theory, for stimulus and has triggered the biggest economic crisis in its history.

Sri Lanka’s rupee fell 200 to 300 to the US dollar after a float failed due to a surrender requirement and low policy rates.

The central banks long term policy of printing money to keep rates down, triggering currency crisis and raising rates to very high levels to stabilize the economy has been labelled ‘rawulath ne kendath ne’ by analysts.

There have been calls to tightly control the agency’s, ability to conduct open market operations, manipulate interest rates artificially down and create economic instability.

For 72 years Mercantilists have printed money created forex shortages and blamed it on imports and imposed trade controls on the people, without reforming or closing the central bank. (Colombo/Apr06/2022)

ECONOMYNEXT – Any International Monetary Fund (IMF) loan deal with Sri Lanka should be attached with addressing human rights and corruptions in loans, a New York-based international rights group urged the global lender.

Sri Lanka finally decided to seek IMF assistance last month to face an unprecedented economic crisis amid severe dollar shortage, import restrictions, and government’s failure to provide essentials like fuel, cooking gas, and milk powder amid an extended power cut.

Spiraling inflation resulted by the central bank’s excess money printing and over 50 percent depreciation in the rupee have led to a desperate hardship for millions of people.

The island nation has a grim past in handling the past IMF programmes with austerity measures including tax hikes and government spending cut have had adverse impacts on the most vulnerable people, analysts have said.

Any future IMF program in Sri Lanka should protect the human rights of low-income people, and address corruption and entrenched obstacles to the rule of law, the Human Rights Watch said in a letter to the IMF.

The latest request from the HRW comes as thousands of people protest in Sri Lanka on a daily basis demanding President Gotabaya Rakapaksa, who was earlier accused of a war criminal in the past by the HRW.

“The protests roiling Sri Lanka are a clear message about many people’s economic situation,” said Sarah Saadoun, senior researcher focusing on poverty and inequality at Human Rights Watch.

“The IMF and the Sri Lankan government should come to an agreement that supports people’s ability to afford life necessities and addresses the problems underlying the current crisis.”

The IMF on March 31 confirmed it will soon begin talks with Sri Lanka about a potential loan program. Major economic problems in the country have led in recent weeks to growing protests in Colombo, the capital, and across the country, highlighting the critical need for IMF support.

President Gotabaya Rajapaksa declared a state of emergency on April 1, then imposed a 36-hour curfew and blocked social media in an attempt to curb protests, in which scores have been arrested.

“The government should respond to the protests in accordance with international human rights standards, which prohibit the use of unnecessary or excessive force,” the HRW said in a statetment.

In February, the IMF issued an Article IV report, which includes policy advice for significant fiscal consolidation, achieved in part by increasing income and value-added tax rates, removing energy subsidies, and “rationalizing” the public wage bill.

The IMF report recognized that these adjustments would have adverse impacts on low-income people and said that the government should mitigate the impact by strengthening social safety nets “by increasing spending [and] widening coverage.”

Severe Economic Hardship 

“The IMF and the government should give priority to ensuring adequate investment in social protection programs before making any adjustments that would raise the cost of living,” Human Rights Watch said.

While inflation reached over 18 percent in March, severely exacerbating economic hardship, the value of the Sri Lankan rupee has rapidly declined, making imported necessities, including medicines, sanitary products, food, and fuel, scarce or unaffordable for many people.

In recent years, the IMF has given increasing importance to combating corruption, the HRW said.

“It is especially urgent for the IMF to include reforms to address corruption in Sri Lanka. The Rajapaksa administration, which took office in 2019, has repeatedly acted to block financial transparency and accountability by weakening independent institutions and by intervening to prevent investigations and prosecutions in high-profile cases,” the HRW said.

The HRW urged the IMF to assess the expected direct and indirect impacts of any adjustments on low-income people  in Sri Lanka, include a social spending floor as performance criteria, implement progressive tax measures that do not further burden people living in poverty, and urge the government to put in place policies to increase women’s access to employment by reducing barriers.

The rights organization also urged to include reforms to restore the independence of institutions, including the judiciary, auditor general, attorney general, and the Commission to Investigate Allegations of Bribery or Corruption, and require the Sri Lankan government to restore independent investigations into corruption allegations and prosecute those found responsible.

“Sri Lanka needs economic help, but to be effective the IMF program needs to be robustly negotiated and properly carried out,” Saadoun said.

“Reforms should ease people’s economic hardship, not exacerbate it.” (Colombo/April 06/2022)