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ECONOMYNEXT – Sri Lanka’s stock index plunged over 7 percent despite the trading was halted twice on Wednesday (30) as on-going economic crisis and extended power cuts prompted heavy selling amid margin calls, brokers said.

The main All Share Price Index (ASPI), however, recovered to close 3.66 percent or 352.66 points lower at 9,294.89, its lowest since September 27. It lost over 700 points during the day.

“All the possible negative factors in the market played a role in today’s plunge,” a market analyst said.

S&P SL20 of the most liquid stocks ended 4.25 percent or 141.84 points lower to 3,196.19 points. It nosed dived over 9 percent triggering two market halts.

On Wednesday, the country saw a 10-hour power cut despite officials assuring no lengthy power cut. The duration of power cuts has been further increased to 13 hours for Thursday (31). Analysts say power cuts and lack of fuel hurt the listed companies across the board though manufacturing firms are hut hard.

Analysts had cautioned that if the market falls below 10,000 mark there would be a spiral effect, creating a downward trend.

Analysts said many investors are still concerned over how the government is going to face the mounting debt as they are not still confident if it would really go to the IMF or drag the decision of seeking IMF help.

The day’s turnover was 3.29 billion rupees, around two-third of this year’s average daily turnover of 5.0 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 over 60 percent since it was allowed flexibility on March 07.

All commodity prices in Sri Lanka have been on the rise due to the currency fall.

Rising oil prices, policy rate hikes, a slowing economy, and shortage of dollars, fuel, and cooking gas along with extended power cuts continues to dampen the sentiment.

The market has lost 19.7 percent so far in March after falling 11 percent in the previous month. Overall the market has lost 23.9 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 367.9 million rupees worth of shares. However, the market has witnessed a total foreign outflow of 2 billion rupees so far this year.

Expolanka, LOLC Holdings and Hayleys dragged the index down on Wednesday.

Shares in LOLC Holdings fell 7.6 percent to close at 645.25 rupees a share, Hayleys fell 9.5 percent to close at 80.20 rupees a share while Expolanka plunged 9.1 percent to close at 223 rupees a share. (Colombo/March30/2022)

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Board (CEB) has imposed up to 13-hour power cut for Thursday (31) as acute diesel shortage has compelled the utility provider to increase the duration of power cuts from the previous day’s 10 hours.

The CEB has decided to cut power from 12am to 8am for the first time in the ongoing power crisis.

Areas ABCDEF and PQRS will see 3 hours of power cut from 3am to 6am, 4 hours from 12pm to 4pm and 6 hours from 6pm to 12am.

Areas GHIJKL and TUVW will experience 3-hour power cut from 12am to 3am, 4 hours from 8am to 12pm and 6 hours from 4 pm to 10pm.

Areas MNOXYZ, however, will witness only 5.5-hour power cut – 3.5-hour interruption from 5.30am to 9am and 2 hours from 4pm to 6pm.

Download the power cut schedule for March 30 from

Though the government has said the duration of the power cuts will be reduced gradually, the power cut has been extended mainly due to lack of fuel amid severe shortage of US dollars.

The lack of fuel also has resulted in large queues for diesel and petrol despite record price hikes. (Colombo/ March 30/2022)

ECONOMYNEXT – The number of power shedding hours could be increased to as high as 15 hours a day and private transports could be pulled out from the services if the Sri Lankan government fails to supply fuel, officials said.

The daily power cut duration has increased to 13 hours for Thursday with the main grid losing 800 MW for two days after thermal power stations were forced shut down.

Drought has reduced Sri Lanka’s hydro power generation capacity, while severe dollar shortage has hit the island nation’s capacity of ensuring timely import of fuel stocks for power generation.

The state-run fuel retailer Ceylon Petroleum Corporation (CPC) has announced that there will be no diesel for both power generation as well as consumption for personal vehicles until Thursday.

“It is clear that due to these circumstances, we currently have a 10 hour power cut and if this continues, the power shedding may extended for 12 or maybe 15 hours per day,” Anil Ranjith Induwara, President of the CEB Engineers Association told reporters on Wednesday (30).

Induwara warned that the country could be in dark during the upcoming new year in mid-April if the fuel shortage continues and the country receives no rains.

Sri Lanka’s foreign reserves have depleted and and the country is mainly depending on a 500 million US dollar Indian credit line for fuel.

Unexplainable Rise  

Fuel consumption has jumped nearly five folds in one year, CPC, Chairman Sumith Wijesinghe told reporters on Wednesday (30).

He said the total fuel consumption in January 2021 was 39,000 metric tons including diesel for power generation while it has increased to 180,000 metric tons in January 2022.

“We need to investigate the matter because there was no vehicle importation in the last two years. Therefore how can there be such increase in fuel consumption?”

On Tuesday (29) the CPC said no diesel will be delivered for power generation and public consumption on Wednesday (30) and Thursday (31) as it was unable to unload a 37,500 metric ton diesel a consignment at the main Colombo port.

Wijesinghe expects the CPC will be able to deliver diesel to the market only from April 01, 2022.

Grim Reality 

The Public Utilities Commission of Sri Lanka (PUCSL) has said the water level have decreased to 27 percent in reservoirs and it needs to utilized for drinking and agriculture as well as power generation.

The power crisis may further extended if Sri Lanka is unable to secure coal consignments in the next five months, officials say.

“We have not secured enough coal and for the last 4 consignments of coal, we have not paid due to the forex issue,” Janaka Rthanayaka , the Chairman of the PUCSL told reporters on Tuesday.

“It will be difficult to unload coal in the off season. If that happens, we will be in a much bigger issue than we are now in 5-6 months.”

Rathnayaka said, if the power shedding further extends, the ongoing economic crisis could worsen with all sectors being forced to seize operations during power cuts.

“Even if we get the fuel, until we get to the rainy season, we will face this power shedding and if the authorities do not invest in more power plants in the next two years, it will be much worse than now.”

Private Transport at Stake 
Private transport providers warned the government that the island wide transportation service providers will withdraw from the services next week on wards if the fuel shortage issues is not
addressed.

The President of the Private Bus Owners’ Association, Gamunu Wijerathna said the transportation is already being limited due to the diesel shortage.

“We ask the government not to test our patience and if these issues are not being answered by next week, we have already discussed with other association and we will withdraw from all transportation services island wide,” Wijerathna said.

Sri Lanka’s inter district school transport services association also warned to withdraw from school transportation from Friday on wards due to the fuel shortage.

“These days we are struggling to provide services. We are doing this mainly because of these children who will miss their education and due to exams days are coming,” N.M.K Harishchandra Padmasiri, President of the association, told reporters on Wednesday.

“We tried to talk with authorities but have not received any positive feedback. From this Friday on wards, if we do not get a proper answer we will withdraw from services.” (Colombo/ March 30/2022)

ECONOMYNEXT – A Saudi Arabian delegation will visit Sri Lanka to look into investment opportunities in renewable energy and other projects, outgoing Saudi envoy has told President Gotabaya Rajapaksa on Tuesday (29).

“A high-level Saudi delegation will soon visit Sri Lanka to explore the investment opportunities in the renewable energy sector and other sectors,” the President’s Media Division (PMD) said quoting the outgoing Ambassador Abdulnasser Hussain Al-Harthi.

“The President pointed out the vast opportunities available in Sri Lanka for direct investment in the pharmaceutical, technology and
apparel industries.”

Rajapaksa’s attempts to shift into renewable energy is yet to be prove success. Already U.S.-based New Fortress Energy is given green light for a Liquefied Natural Gas (LNG) project through an unsolicited project and India’s privately owned Adani group is given approval to build a solar plant in the northwestern coast of Mannar.

Another 100 MW solar power plant has been signed with India to build in Sri Lanka’s eastern port district of Trincomalee after a planned 500 million US dollar 500 MW coal-fired plant was cancelled due to environmental concerns.

Sri Lanka is facing energy crisis due to severe shortage of dollars deprived the island nation of importing fuel for power generation. The country is facing around 7.5 hour power cut on a daily basis.

President Rajapaksa also invited the Saudi government to explore investment opportunities associated with the Chinese-owned Colombo Port City and the proposed ship repairing and manufacturing facility to be built at the Chinese-managed Hambantota Port.

Rajapaksa thanked the Saudi Arabia for its development assistance provided through the Saudi Development Fund.

Outgoing Saudi envoy Al-Harthi stated that Saudi Arabia intends
to continually provide the assistance of the Saudi Development Fund to Sri Lanka. (Colombo/March29/2022)

ECONOMYNEXT – US Ambassador for Sri Lanka Julie Chung has hinted a credit line from  the United States Agency for International Development (USAID) for renewable energy projects in the island nation, President Gotabaya Rajapaksa’s office said on Monday (28).

The Ambassador said this when she called on President Rajapaksa at the Presidential Secretariat on Monday, the Presidential Media Division (PMD) said without giving any further details on the credit line.

The US Ambassador was not immediately available for comments on her pledge. However, Chung in her official twitter feed said she met President Rajapaksa to to discuss Sri Lanka’s economic challemges and human rights.

“The recent US-Sri Lanka Partnership Dialogue underlined our commitment to a democratic, prosperous, and sovereign Sri Lanka,” Chung said in her twitter message.

“I met with President Gotabaya Rajapaksa to discuss Sri Lanka’s economic challenges and how we can work together to promote inclusive governance and protect human rights.”

Sri Lanka is facing an economic crisis along with severe shortage of dollars which has resulted in extended power cuts due to lack of fuel imports and drought.

India has provided 500 million US dollar credit line to purchase fuel. However, government officials say the amount is only adequate for nearly 6 weeks.

A Liquefied Natural Gas (LNG) deal with New Fortress Energy, a US private company, has been delayed after it was challenged by many activists and legislators including former Energy Minister Udaya Gammanpila and Industrial Minister Wimal Weearawansa.

The Supreme Court dismissed the case soon after both ministers were sacked from their government by President Rajapaksa.

The deal was signed through a back-door process and could be worth up to 6 billion US dollars but is coming in as the sale of share of a power plant, engineers of the state power utility have warned.

They have also said energy security would also be undermined as the national grid would be dependent on a single company for the supply of LNG to the entire country and will also block state-run Ceylon Electricity Board from using cheapest energy source based on market prices.

ECONOMYNEXT – Sri Lanka’s central bank has banned money changers from selling US dollars above the commercial bank rates as the country grapples from a forex crisis triggered by money printed to keep rates down and a surrender requirement.

Sri Lanka has an exchange rate regime with anchor conflicts (flexible exchange rate) which is neither a true float with a domestic inflation anchor nor a credible peg (external anchor).

An attempt to shift to a clean float has so far not succeeded. The central bank has been urged by classical economist to hike rates and drop a surrender requirement to make the float work so that shortages in imported energy, medicines and food.

Sri Lanka has had external crises ever since a credible peg was abolished in 1950.

Stable single anchor monetary regimes (hard peg or clean float) have been relentlessly opposed by those who want to depreciate the currency and transfer wealth from the working class to business owners (competitive exchange rates).

Sri Lanka’s banks are offering to sell dollars at 285 to the US dollar. In the kerb market, the rupee hit 360 to the US dollar this week.

When money is printed to keep rates down and exchange controls are imposed, the kerb market and Undiyal rates go up with money trying to rush out of the country and pay for imports.

The outward flow of money at high prices in turn are financed by higher rates paid to inward worker remittances.

There now calls to set up a currency board to end 72 years of monetary instability and social upheavals from the dual anchor conflicting ‘flexible exchange rate’.

Related

Sri Lanka currency board will preserve rupee, impose discipline: Wijewardena

The full statement is reproduced below:

Department of Foreign Exchange
28.03.2022

NOTICE TO THE PUBLIC – MONEY CHANGERS

The public is hereby notified that in terms of the provisions of the Foreign Exchange Act, No. 12 of 2017, Money Changers have been prohibited from offering higher exchange rates to customers beyond the exchange rates offered to such Money Changers by Licensed Banks.

The Money Changers have been informed that their licenses would be suspended/ revoked if they transact any foreign currency transactions at rates beyond the rates stipulated by Licensed Banks.
The public is requested to inform the Department of Foreign Exchange via the following telephone numbers or the email address of any instances that a Money Changer offers higher exchange rates for any transaction.

Telephone :
0112398523
0112398827
0112477375
0112398568

Email : [email protected]

ECONOMYNEXT – India’s Foreign Minister S Jaishankar who is on an official visit in Sri Lanka met the island nation’s Finance Minister Basil Rajapaksa Monday (28) morning and discussed India’s assistance to its southern neighbour in battling a worsening economic crisis.

Began the visit by meeting Finance Minister @RealBRajapaksa.

Discussed the economic situation and India’s supportive response. We will continue to be guided by Neighbourhood First pic.twitter.com/D6K7Wq1JZd

— Dr. S. Jaishankar (@DrSJaishankar) March 28, 2022

Jaishankar also visited a Lanka IOC (Indian Oil Corporation) filling station in Colombo some hours later, where he was briefed by Lanka IOC Managing Director Manoj Gupta on the fuel supply situation.

Visited Lanka IOC in downtown Colombo. MD Manoj Gupta briefed me on fuel supply situation.

Indian LoC of US$ 500 million is helping Sri Lankan people in their everyday life. pic.twitter.com/1EmTpXmzSp

— Dr. S. Jaishankar (@DrSJaishankar) March 28, 2022

India has given a 500 million US dollar credit line for fuel, a 400 million dollar central bank swap, a billion US dollar loan for food and medicines as the island kept interest rates low to inject money and dollar inflows were siphoned out of the banking system through a surrender requirement for new money.

India wrapped up long delayed undertakings by Sri Lanka on a fuel tank farm and a joint venture power plant in Trincomallee in Eastern Sri Lanka. India is also to invest in renewable energy and have maritime co-ordination.

The rupee has fallen steeply under a so-called flexible exchange rate amid an attempt to establish a clean float which has not happened, as the rupee was allowed to fall gradually under a ‘flexible exchange rate’.

The Indian foreign minister is in Colombo to participate in a meeting of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), an organisation set up in 1997 for regional co-operation with Sri Lanka, India, Thailand and was later joined by Myanmar, Nepal and Bhutan. (Colombo/Mar28/2022)

ECONOMYNEXT – Power cuts of 5 hours for some areas in Sri Lanka and over three hours for other areas were approved in two blocks for March 26 Saturday, Public Utilities Commission Chairman Janaka Ratnayake said as a forex crisis creates power shortages in the dry season.

Areas PQRSTUVW will have 2 hours and 15 minutes of power cuts from 8.30am to 5.30pm and 1 hour and 50 minutes from 5.30pm to 11.00pm.

Areas ABCDEFGHIJKL will have 3 hours and 20 minutes of power cuts from 8.00am to 6.00pm and 1 hour and 40 minutes from 600pm to 1100pm.

Download the power cut schedule for March 28 from 28-03-2022-Power-Interruption-Schedule

Over the weekend the PUCSL increased the power cuts after demand went up. The regulator has not yet given a price increase for power and people are shifting to electricity as gas prices went up and shortages emerged.

Sri Lanka is facing forex shortages due to money printed to keep interest rates low and the country has run out of reserves and the currency has been floated.

However, the float has not yet taken place and the rupee has fallen from 203 to 275 to the dollar and prices are getting validated at that level. (Colombo/March28/2022)

ECONOMYNEXT – A currency board for Sri Lanka will stabilize the rupee for the future and impose discipline on both politicians as well as monetary authority officials who want to print money, top economist W A Wijewardena has said.

Sri Lanka had a currency board from 1885 to 1950 until a Latin America style central bank was set up under American advice.

Second Coming

“Sri Lanka is no stranger to currency boards,” top economist W A Wijewardena told EconomyNext.

“With Ceylon’s decision to abolish the currency we lost was the discipline on politicians and the ability of the central bank to maintain the value of the currency.

“A currency board will also impose discipline on the leadership of the monetary authority.”

“As a result of the depth of the crisis we are facing there is no alternative but to establish a currency board.”

Under a currency board no money can be printed for open market operations and all interventions are unsterilized and short term rates fluctuate freely.

However there were several challenges to setting up a currency board at this time which has to be overcome, Wijewardene said.

One was that new capital was needed to match the domestic monetary base (MO) as the credibility of a currency board comes from being fully backed by foreign reserves.

If invested in save securities of only one currency – the anchor currency – a currency board will make profits every year (seigniorage) which be used to set up an externally invested bank bailout fund.

Challenges

Sri Lanka’s reserve money was 1,780 billion rupees by March 24 and was rapidly growing with the currency fall being fully accommodated at a 7.5 percent policy rate.

Commercial Banks were selling US dollars to customers at around 295 to the US dollar by Friday.

At current exchange rates about 4.5 billion US dollars were needed to fully back the currency issue, he said.

“Central Bank’s assets were also negative by 3.2 billion dollars according to the latest data available,” Wijewardena said.

“That is a challenge.”

However there are options including taking the liabilities into a special purpose vehicle.

A currency board will prevent governments from destroying the value of money which the ordinary people earn though hard work, Wijewardena said.

Wijewardena’s comments came as US economist Steve Hanke tweeted that Sri Lanka should establish a currency board to end 72 years of monetary instability from the flexible exchange rate of soft-peg.

Related

Sri Lanka should set up a currency board to stop rupee depreciation: US economist

It is not clear where the rupee will eventually stop with surrender requirements and low interest rates hampering a clean float.

Usually a currency board is set up in a crisis country under Hanke’s formula after a free float is established for several weeks and the effects of previous money printing is fully dissipated in the banking system.

Monetary Authority Under the rule of law

Most Sri Lankans alive first learned about currency boards from Wijewardena.

Wijewardene had for many years showed the virtues of a currency board, pointing out how Singapore’s economic architect Goh Keng Swee maintained the ‘Colonial’ currency board as its foundation to build a free trading low inflation economy without social unrest.

Goh said the country did not believe in Keynesianism which became fashionable after the US Fed triggered the Great Depression but believed in hard work.

Sri Lanka’s monetary policy had deteriorated rapidly after Wijewardene retired as Deputy Governor of the Central Bank shortly after the country went through a massive civil war in 2009 amidst the collapse of the Greenspan-Bernanke bubble.

Observers say a country cannot depend on the personality and knowledge of one person to maintain currency and rogue policy and un-anchored or dual anchor monetary policy (flexible exchange rate) must be constrained by law.

From the time of his retirement when the rupee was around 114 to the US dollar and it is now around 295 to the US dollar and counting.

But knowledge about currency board was lost and unusual beliefs about currency boards were propagated at key UK universities (except LSE) and so-called ‘saltwater universities of the US, where Keynesianism was adopted as a ‘new religion’ as the saying went.

Wijewardene had dubbed the unusually volumes of money printed in the last two years the ‘Lakshman’ shock.

Independence to print money

A key reason for abolishing the currency board was to give ‘monetary policy independence’ to central bankers to practice rogue policy.

A key reason for setting up a currency board is that the general public and legislators no longer believe economists who want to engage in open market operations and competitive exchange rate to give profits to businesses at the expense of workers.

The Hong Kong Monetary Authority which operates on currency board principles raised policy rates by 25 basis points on March 17 after the US Federal Reserve raised its own rates.

Related

https://www.scmp.com/business/article/3170744/hong-kong-raises-base-rate-25-basis-points-first-time-2018-after-first-us

The UAE Monetary Authority which operates the Dirham on the principles very similar to a currency board (currency board like as dubbed by Hanke), also raised rates.

https://gulfnews.com/business/uae-central-bank-hikes-interest-rate-by-25-basis-points-1.1647457290932

Interest rates in countries with currency board are very low and barely above that of the anchor currency which can be the US dollar or any larger country with a very good central bank. The US dollar is generally chosen because it is a large importer of goods and has open capital markets.

Without the legal powers to depreciate the currency, a currency board cannot inflate away peoples wealth and push interest rates up by destroying real capital.

Currencies that collapse steeply lead to spontaneous dollarization as people adopt foreign currencies to make transactions and demand dollar salaries from their employers.

A central bank usually imposes legal tender laws to prevent the use of alternative currencies and force people to use their bad depreciating money.

Sri Lanka is now in the middle of the Powell bubble where US rates are going up. (Colombo/Mar28/2022)

ECONOMYNEXT – India’s Foreign Minister S Jaishankar has arrived in Sri Lanka for bi-lateral talks and to participate in a meeting of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation in Colombo as the island is in the grip of a monetary crisis.

“Arrived in Colombo for bilateral visit and BIMSTEC meeting,” Minister Jaishankar said in a twitter.com message after arriving in Colombo on the night of March 27.

“Look forward to my discussions over the next two days.”

The BIMSTEC meetings are to start on March 20. BMISTEC is an organization set up in 1997 for regional co-operation with Sri Lanka, India, Thailand and was later joined by Myanmar, Nepal and Bhutan.

At the time Sri Lanka was an outward looking nation and the so-called import substitution oligarchs that stifled the people with protectionist taxes did not yet have a strong influence on the polity.

India has been engaging closely with Sri Lanka as the island’s currency peg (flexible exchange rate) which has more than one anchor was shattered again by two years of money printing (monetary stimulus) and tax cuts (fiscal stimulus).

India has given a 500 million US dollar credit line for fuel, a 400 million dollar central bank swap, a billion US dollar loan for food and medicines as the island kept interest rates low to inject money and dollar inflows were siphoned out of the banking system through a surrender requirement for new money.

A tranche of money due to India for imports under a regional clearing arrangement was also deferred.

India wrapped up long delayed undertakings by Sri Lanka on a fuel tank farm and a joint venture power plant in Trincomallee in Eastern Sri Lanka. India is also to invest in renewable energy and have maritime co-ordination.

The rupee has fallen steeply under a so-called flexible exchange rate amid an attempt to establish a clean float which has not happened, as the rupee was allowed to fall gradually under a ‘flexible exchange rate’. (Colombo/Mar28/2022)