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ECONOMYNEXT – Sri Lanka’s public debt is unsustainable under possible budget improvements and state enterprise contingent liabilities could add to the burden the International Monetary Fund has waned as money printed to keep interest rates down has created foreign exchange shortages.

If money printing is continued Sri Lanka can default in the near term IMF has warned in a report issued after annual Article IV consultations as well as an economic shock. Sri Lanka authorities had pinned their hopes on external inflows.

External Arrears

“Unless the fiscal and balance-of-payments financing needs are met, the country could experience significant contractions in imports and private credit growth, or monetary instability in case of further central bank financing of fiscal deficits (printing money),” the IMF report warned.

“Should the unidentified external financing not be forthcoming, the country could experience a disorderly adjustment through severe import compression and potentially external arrears in the near-term,”

Sri Lanka has a soft-peg or a flexible exchange with conflicting domestic and external anchor which creates periodic balance of payments crises, but this time the problem has been complicated by a steep rise in international sovereign bonds over the past few years.

Both sovereign bonds and dollar debt of state-run Ceylon Petroleum Corporation went up as money was printed in 2015, 2016 and 2018, triggering forex shortages which were bridgeed with borrowings, despite tax hikes and a fuel pricing formula in 2018.

Analysts had warned that the country was following un-anchored monetary policy for several years under discretionary ‘flexible inflation targeting regime’ that gave room for the central bank to print money and create currency crises at will, including during an IMF program in 2018.

In 2019 tax hikes were reversed (state salaries were hiked in 2015).

Failed Treasuries auctions

From 2020, money printing was ratcheted up and redeeming the printed money for reserves to maintain a pegged exchange rate has depleted reserves using price controls in auctions. Unsold bonds were bought by the central bank with printed money.

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“Authorities temporarily imposed strict ceilings on interest rates in treasury security auctions, resulting in substantial auction shortfalls and primary T-bill purchases by the CBSL,” the IMF said.

“To help finance the government, the CBSL provided 3.5 percent of GDP in direct financing in 2020 and around 5 percent of GDP in the first 3 quarters of 2021.”

Sri Lanka’s gross financing needs were high with market access cut off with downgrades and high and not possible with simple reduction of budget deficit, indicating debt restructuring.

“Based on staff analysis, fiscal consolidation necessary to bring debt down to safe levels would require excessive adjustment over the coming years, pointing to a clear solvency problem,” the report said.

The gross financiability index was 23.8, which was high.

“Staff assesses that Sri Lanka’s public debt is unsustainable. Left unaddressed, persistent fiscal and BoP (balance of payments) financing shortfalls will constrain growth and jeopardize macroeconomic stability in both the near and medium term.

The government gross public debt was estimated at 118.9 percent of gross domestic product by end 2021 and gross financing needs were 30.1 percent of GDP. But it could rise to over 50 percent based on risks in the near term.

SOE debt was 15.8 percent of GDP and 6.6 percent of GDP was covered by explicit guarantees.

Sri Lanka halted state enterprise reform and privatization under a policy articulated by Sri Lanka’s Janatha Vimuthi Peramuna (selling national assets) which was embraced by the Rajapaksa administration.

Successive administration then stopped market pricing energy also following a JVP championed policy called ‘removing the plug’.

The central bank also had debt.

The report said Sri Lanka was at risk of exchange rate depreciation. At the time the projections were made the rupee had not started to fall steeply. (Colombo/Mar26/2022)

ECONOMYNEXT – Sri Lanka’s stock index ended steady on Friday (25) while turnover hit five-week high as investors bought risky assets amid steep depreciation in the currency and high inflationary expectations, brokers said.

The main All Share Price Index (ASPI) gained 0.03 percent or 3.61 points to close at 10,455.32.

The day’s turnover was 4.5 billion rupees, the highest since February 18 and slightly lower than this year’s average daily turnover of 5.2 billion rupees.

“Index witnessed a sharp upswing while hitting an intraday high of 10,592 during the first half of the session as buying spree infused on EXPO, LOLC and HAYL,” First Capital said in its market note.

First Capital said a crossing in Agalawatte Plantations accounted for 50 percent of the turnover.

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 if it also be a dragging tactic.

An All-Party Conference held on Wednesday assessed the ongoing economic crisis with no conclusion after the rupee has fallen around 45 percent since March 8 while the market saw yields in government’s treasury bills rising to around 12 percent.

Analysts said investors are trying to shift their savings to hedge against rupee fall and inflation, which is at record high and over 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 45 percent since it was allowed flexibility on March 08.

All commodity prices in Sri Lanka are on the rise due to the currency fall. Currency dealers expect more depreciation in the coming days as the central bank devalued the rupee.

S&P SL20 of the most liquid stocks edged up 1.06 percent or 38.22 points to 3,649.93 points.

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 8 percent so far in March after falling 11 percent in the previous month. Overall the market has lost 14.2 percent so far this year after being one of the world’s best stock markets with an 80 percent return last year.

Foreign investors moved back to selling after being on buying side. Foreigners sold a net 32.7 million rupees worth of shares. However, the market has witnessed a total foreign outflow of 2.3 billion rupees so far this year.

Expolanka, LOLC Holdings and Hayleys pushed the index up on Friday.

Shares in Expolanka gained 3.7 percent to close at 272.25 rupees a share, LOLC ended 2.4 percent higher at 822.25 rupees a share while Hayleys gained 3.8 percent to 103.75 rupees a share. (Colombo/March25/2022)

ECONOMYNEXT – Power cuts of 5 hours for some areas in Sri Lanka and 4 hours and 20 minutes 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 3 hours of power cuts from 9.00am to 6.00pm and 1 hour and 40 minutes from 6.00pm to 11.00pm

Areas ABCDEFGHIJKL will have 3 hours and 20 minutes of power cuts from 800am to 600pm and 1 hour and 40 minutes from 600pm to 1100pm.

Download the power cut schedule for March 26 from 26-03-2022-power-cut-schedule

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/March25/2022)

ECONOMYNEXT – Sri Lanka has allowed the International Monetary Fund to release a staff report prepared following annual Article IV consultations after protests in parliament by the opposition and by ex-Prime Minister Ranil Wickremesinghe.

“The 2021 Article IV consultation with Sri Lanka concluded with the Executive Board Meeting on February 25,” Sri Lanka mission chief Masahiro Nozaki said.

“The authorities consented yesterday to the publication of the Article IV staff report. In preparing the staff report, we followed the IMF’s Transparency Policy, which aims at safeguarding the independence of staff’s views in IMF country documents.

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Ex-Prime Minister Ranil Wickremesinghe at an All Party Conference, had an exchange with Finance Minister Basil Rajapaksa on blocking the release of the report.

Minister Rajapaksa claimed the final report was not ready and seemed to be unaware that official had blocked the report.

However during Wickremesinghe’s time, IMF staff reports were also blocked when his appointing Arjuna Mahendran was running the central bank.

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Mahendran, like Finance Minister Rajapaksa also claimed that he did not block the report when questioned by reporters.

During Wickremesinghe’s the central bank also created two currency crises. In the first crisis the central bank busted the rupee from 131 to 151 to the US dollar and in the second in 2018 to 182 to the US dollar.

Classical economists have called for reforms to the central bank law to block Keynesians and other interventionists to print money to manipulate interest rates and bust the rupee.
(Colombo/Mar25/2022)

ECONOMYNEXT – Sri Lanka should set up a currency board to stop further currency falls, US economist Steve Hanke has said as the island’s currency collapsed from 203 to 290 to the US dollar in an attempt to float the currency which has not yet succeeded.

“Since January 1st 2022, the Sri Lankan rupee has depreciated ~26% against the USD. #SriLanka’s severe balance of payments crisis and recent fuel price hikes are sinking LKA,” Hanke said in a twitter.com message.

“To ease the crisis, LKA needs to install a currency board, like the one it had from 1884 until 1950.”

Sri Lanka – then Ceylon – set up the currency board after the Ceylon Rupee issued by the Oriental Bank Corporation stopped exchanging silver for rupee notes, technically called a suspension of convertibility.

A modern day central bank attempts a float also in a similar fashion, though the bank is not closed.

Since January 1st 2022, the Sri Lankan rupee has depreciated ~26% against the USD. #SriLanka's severe balance of payments crisis and recent fuel price hikes are sinking LKA. To ease the crisis, LKA needs to install a currency board, like the one it had from 1884 until 1950. pic.twitter.com/rz8fSn0l2J

— Steve Hanke (@steve_hanke) March 24, 2022

At the time the Mercantile Bank which also issued notes provided convertibility at par.

Oriental Bank Corporation ran out of silver reserves following bad loans. A modern day central bank runs out of dollar reserves due to direct government financing of deficits, re-financed credit schemes and sterilized interventions or giving reserves for imports.

The central bank of Sri Lanka today holds over two trillion in Treasury bills a part of which was taken back from banks in the course of private sector finance to maintain a policy rate or price controls of bond auctions.

Sri Lanka’s currency board, which had kept the island safe through two World Wars and a Great Depression was replaced with a Latin America style cenrtral bank under US technical advice in 1950.

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Almost all such central bank by Fed experts have led to social unrest and some central banks have collapsed and led to spontaneous dollarization.

Analysts have warned it may happen in Sri Lanka as well if the float is not established.

Knowledge of currency boards have been lost to most post World War II ‘economists’ who relentlessly favour depreciating currency central banks, through which they try to boost growth with ‘stimulus’ create balance of payments trouble, starve the poor, create social unrest, boat people, and bring down governments.

The rising world food and commodity prices hurting the poor around the world while strengthening the hands of authoritarian leaders of natural-resource rich countries after the US and ECB printed vast amount of money is the latest example analysts say.

Steve Hanke was one of the few economists in the world who correctly warned that Fed’s Jerome Powell would set off an inflationary spiral.

Hanke has helped set up several currency boards including in Eastern Europe.

Currency boards have neutral policy and are still in use in East Asia. However most East Asian pegs including Vietnam are tighter than currency boards and collect forex reserves exceeding the monetary base. (Colombo/Mar25/2022)

COLOMBO (News 1st); A controversy has arisen over the Opposition’s comments in Parliament on Thursday (24) that Food Security in the country is facing a serious crisis. Ven. Athuraliye Rathana Thero stated that the importation of fertilizer from China and India has resulted in a crisis. Ven. Athuraliye Rathana Thero questioned under whose orders and NO issues on Food Security; Mahindananda

ECONOMYNEXT – Sri Lanka’s main opposition has questioned in parliament whether a state bank has delayed payment on a contract as the country struggles with foreign exchange crisis triggered by money printed to maintain low interest rates.

“With great sadness we are saying this,” Samagi Jana Balawegaya legislator Harsha de Silva told parliament.

“We have heard that a state bank has defaulted. Please look into this immediately. ”

Sri Lanka banks have faced counterparty limit cuts since a downgrade of the sovereign credit which have tightened in recent times making it harder to roll-over contracts.

De Silva said a few months ago he warned in parliament about state banks borrowing dollars a high rates through swaps where premiums were negative.

Authorities have also forced dollars coming into the country to be converted to rupees, further hurting dollar deposit building.

State banks have funded dollar loans to the Ceylon Petroleum Corporation in particular.

De Silva said the Monetary Board of the central bank has been asked to come to the committee on state accounts at the parliament this week but they have not turned up. (Colombo/Mar24/2022)

ECONOMYNEXT – Sri Lanka’s poultry sector is in crisis with feed shortages worsening and prices going up, an industry official warned as the rupee collapsed under the pressure of money printed to keep interest rates.

Broiler meat prices have reached 800 to 900 rupees a kilogram and eggs went over 30 rupees threatening the availability of protein from around 450 to 500 rupees last year.

“One of the biggest issues is not having raw materials to make animal food,” Ajith Gunasekara, President of the All Island Poultry Association told EconomyNext.

“In the last two months, we could not import the raw materials for the food, because of the dollar crisis.”

Sri Lanka started printing money to keep interest rates down (monetary stimulus) after cutting taxes (fiscal stimulus) in a bid to create a ‘production economy’ in an extreme Keynesian boom policy ignoring warnings from classical economists.

Sri Lanka has been able to print money since 1950 when a soft-peg central bank replaced a currency board which had kept the country stable through two World Wars and a Great Depression.

Keynesian stimulus hits chicken

“Due to not having good nutritious raw materials the farmers were not able to give nutritious food for the animals, especially layers,” Gunasekara said.

“That including the heat nowadays, egg production fell by 40 percent.”

Sri Lanka’s State Veterinary Surgeons Association has warned that farmers are culling layer chicken due to the lack of feed selling for meat.

It takes more than 6 months to grow a chicken and it would take more than a year for the sector to reach normalcy, officials said.

Over 70 percent of the production cost of poultry farmers is feed cost.

India credit for chicken feed?

The Poultry Association is hopeful that maize and feed ingredients could be imported under the Indian credit line.

“According to them (authorities) the food items that are to be purchased under the Indian credit line also includes animal food,” Gunasekera said.

“From today (Monday) we asked the suppliers to get the raw materials from India under this credit line.”

Poultry farmers get materials from European and Chinese markets too but are still unable to import due to a dollar shortage.

“When we can’t supply to the demand the first people that will be affected is the small-scale farmers,” Gunasekera said.

“It is already happening. Large scale farmers are also facing this issue because they also make their own animal food needed for their farms and the production costs increase for them as well.”

However, Gunasekerasays they don’t want to halt the production as that will create a major price hike and with the green light they have received from the government the industry is hopeful.

The rising price of meat and fish are also driving up the demand for eggs he said. (Colombo/Mar24/2022)

ECONOMYNEXT – Power cuts of 6 hours and 20 minutes for some areas in Sri Lanka and 5 hours for other areas were approved in two blocks for March 24 Thursday, Public Utilities Commission Chairman Janaka Ratnayake said as a forex crisis creates power shortages in the dry season.

Areas ABCDEFGHIJKL will have power cuts of 3 hours and 20 minutes from 0800am to 0600pm and 1 hour and 40 minutes from 600pm to 1100pm.

Areas PQRSTUVW will have power cuts of 4 hours from 30 minutes from 830am to 0530pm and 1 hour and 50 minutes from 0530pm to 1100pm.

Download the power cut schedule for March 24 from 24-03-2022-Power-Interruption-Schedule-full

Sri Lanka’s power regulator is considering a hike in electricity prices.

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/March 23/2022)