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ECONOMYNEXT – Sri Lanka’s central bank has discontinued an 8 rupee top-up given for foreign remittances through official channels from printed money effective March 09, after the rupee was allowed to fall to 230 rupees to the US dollar.

“The 8 rupee payment has been discontinued,” Central Bank Governor Nivard Cabraal said.

A 10 rupee top up for dollars held in hand converted at banks has also been discontinued.

The payments given from printed money, expands reserve money, credit and imports and contributes to forex shortages and the overall economic crisis, analysts had warned.

It is a so-called quasi fiscal activity, or an indirect financing of the budget by the central bank new money.

An order to sell 25 percent of remittances and compulsorily converted export proceeds to the central bank remains.

Meanwhile the cabinet on Tuesday had approved a 38 rupee payment to expat workers creating further confusion.

Cabraal said it was a fiscal decision which will be clarified by authorities later.

Minister Dallas Alahapperuma said on Tuesday that the cabinet paper was submitted before the decision to float the currency was made.

The government has a large budget deficit and it is not clear how it will be funded. (Colombo/Mar09/2022)

ECONOMYNEXT – Sri Lanka devaluation of the rupee to 230 to the US dollar will not help avert the foreign exchange crisis and the one percent rate hike was insufficient with inflation running double digits, opposition legislator Harsha de Silva said.

De Silva said money printing had made it impossible to hold the 200 to the dollar exchange rate and large volumes of reserves have been lost as a result. Central bank conversion regulations had further hurt the exchange rate and inflows.

“Excessive money printing undermined the credibility of the US dollar peg at Rs. 200, as a result vital foreign exchange began to flow through unofficial channels,” de Silva said.

De Silva said the rupee will not stop at 230 to the US dollar, since the rate was not a result of market forces but was a politically determined “devaluation” which was pre-announced.

He said forex dealers were confused and the forex market was not working.

De Silva warned that a 100 basis point rate hike was not enough to stabilize the economy with national inflation at 16.8 percent in the 12 month to January.

De Silva said remittances through official channels had plunged and a 25 percent conversion rule had also encouraged exporters to park money overseas.

“Inward remittances particularly witnessed a drop of 62 percent in January 2021 compared to the year before,” de Silva said.

De Silva claimed that the rupee devaluation was triggered following a phone conversation between India’s Foreign Minister S Jaishankar to secure a meeting with Finance Minister Basil Rajapaksa to get a billion US dollar credit line.

“The current devaluation is solely to please the Indian’s in order for the Finance Minister Basil Rajapaksa to secure a visit, as devaluation was a precondition for the meeting,” he said.

The value of a currency is determined by monetary policy and the monetary anchor that is being used. If a peg (external anchor) is used printed money drives up consumption, resulting in a ‘forex shortage’ and fall in reserves to defend the peg and maintain the exchange rate.

Economists and analysts had called for changes to the monetary law to prevent monetary policy incompatible with the exchange rate from being followed and a move to single-anchor monetary policy (floating rate with inflation target or peg with floating short term interest rates). (Colombo/Mar08/2022)

ECONOMYNEXT – Sri Lanka may have to convince the international community more on its human rights efforts before another resolution at the United Nations Human Rights Council (UNHRC) meeting in September as the island nation has been asked to do more to address past alleged rights abuses.

Before the Sri Lankan delegation left to Geneva to participate in the 49th UNHRC session, the government attempted to activate some of its domestic processes including the Office of Missing Person (OMP) and the Office of National Unity and Reconciliation (ONUR).

The government also tabled an amendment to the country’s anti-terrorism law, the Prevention of Terrorism Act (PTA,) in parliament and released a number of people arrested under the PTA including lawyer Hejaz Hizbullah and poet Ahnaf Jazeem, long demanded by international rights groups.

However, it also faced new allegations that were forwarded at the latest UNHRC session including the government’s alleged failure to find the masterminds of the 2019 Easter Sunday attack and the alleged muzzling of opposition legislators and minorities critical of the government.

Apart from these, individual complaints by Sri Lankans also have been sent in a confidential manner to the UNHRC about how their fundamental rights are being breached under successive governments, sources who were aware of such complaints told EconomyNext.

Sri Lanka’s Catholic Church leader Cardinal Malcom Ranjith’s meeting with the UN human rights chief Michelle Bachelet has sought to change the perception of Catholic nations, especially in the Latin American belt, a source who has the knowledge on the meetings said.

According the resolution passed at the UN body last year, Bachelet has received a mandate to collect evidence of crimes allegedly committed during Sri Lanka’s long civil war, which ended with an upsurge of alleged civilian deaths attributed to both the Sri Lankan army and Tamil Tiger rebels.

Many rights activists and some Western nations still see Sri Lanka’s measures including proposed amendments to the anti-terror law, reactivating the work of the OMP and ONUR as attempts to hoodwink the international community.

However, none of these measures managed to convince the UN and international community.

No credible road map

Bachelet on Friday’s session in Geneva said there have been some recent signs of increased engagement by the government with her office and certain steps to initiate reforms.

“I encourage the Government to take further steps to address the fundamental problems with the PTA, as well as undertake the deeper legal, institutional and security sector reforms that are critically needed, to put an end to impunity and prevent any recurrence of past violations,” Bachelet said.

“Regrettably, the past year has also seen further obstruction and setbacks to accountability. Victims and their families continue to be denied truth and justice.  And the Government’s response to criticism has constricted democratic and civic space, including for essential human rights advocacy.

“Two years after the expression of commitments to pursue an “inclusive, domestically designed and executed reconciliation and accountability process” before this Council, the Government has still not produced a credible road map on transitional justice towards accountability and reconciliation.”

President Gotabaya Rajapaksa’s Sri Lanka Podujana Peremuna (SLPP)-led coalition, which earlier opposed all views on addressing past rights abuses from the West, the UN, and global rights groups, has been on reverse gear since the country started to face an economic and debt crisis.

The European Union has threatened to withdraw Sri Lanka’s access to the GSP plus trade concession worth over 500 million US dollars if Sri Lanka does not fulfil its commitments including repealing the PTA as it agreed to in 2016.

Some western nation including Canada and the United States have already imposed targeted sanctions on military personnel who are accused of war crimes.

“The current Government has not only demonstrated its unwillingness to pursue accountability – it has incorporated military officials implicated in alleged war crimes into the highest levels of Government, reinforcing a narrative of impunity,” the UN rights chief said.

Though Sri Lanka started to address most of the rights concerns, it hardly had the time to reconcile with minorities which have accused the SLPP-led coalition of not taking strong action against racism and targeted violence against minorities since it came to power.

Visible ethno-religious nationalism

“The expression of ethno-religious nationalism in State institutions has become more visible, increasing the marginalisation and fear of minority communities, and undermining reconciliation,” Bachelet said.

“Since the end of 2020, we have noted a significant increase in land disputes, mainly related to Buddhist heritage conservation or forestry protection, that are exacerbating grievances of minority communities and creating new tensions.”

The UN rights boss also questioned the independence of country’s key commissions and institutions after the passage of the 20th amendment to strengthen the powers enjoyed by the president.

“I am also deeply concerned by continued reports of surveillance, harassment and intimidation of civil society organisations, human rights defenders and journalists by police and intelligence services,” Bachelet said.

“Repeated incidents of deaths in custody and in alleged armed encounters with police are alarming. We also continue to receive allegations of ill-treatment and torture by police and military. This highlights the importance of fundamental security-sector reforms.”

She also said the victims of the 2019 Easter Sunday bombings and religious leaders also continue to call for justice, reparation and a full account of the circumstances of those attacks, in particular the role of the security establishment.

Cardinal’s request

Bachelet’s comments on Easter Sunday victims came after Sri Lanka’s Malcom Cardinal Ranjith personally visited Geneva and placed his statement officially to the UNHCR on the plight of the victims in the attack along with a request to ensure justice.

The Cardinal said the Easter Sunday attack – which killed 269 including 47 foreign nationals from 14 countries – first appeared to be the work of Islamic extremists but subsequent investigations indicated that “this massacre was part of a grand political plot.”

He said the SLPP-led government has failed to mete out justice to the victims despite repeated requests and there are attempts to harass and intimidate those who clamour for justice instead of uncovering the truth behind the attack and prosecuting those responsible.

Many rights activists say the Cardinal’s request could become a game changer in the future in forcing Sri Lanka’s government to address alleged past human rights violations, given the likelihood of Catholic-dominated nations will now also call on the government to address UNHRC demands.

Meanwhile, Sri Lanka’s Core Group said its concerns over surveillance and intimidation of civil society persists and detentions, threats and intimidation of journalists and human rights defenders continue while the proposed changes to the PTA are very limited and its longstanding concerns still remain.

“The new ‘One Country One Law’ taskforce risks undermining Sri Lanka’s pluralist society. We urge Sri Lanka to ensure that this taskforce’s work is inclusive and non-discriminatory,” the UK’s Global Ambassador for Human Rights Rita French in her statement on behalf of  the core group said.

Alarm bell rings

Human rights activists and officials who visited Geneva said the sessions on Sri Lanka for the first time saw Christians and Sinhalese speaking against human rights violations by an incumbent government for the first time.

Opposition legislator Harin Fernando and Cardinal Ranjith were given 1.5-minute slot each under the NGO time slot where 10 NGOs were given the opportunity to speak.

“It is an alarm bell for Sri Lanka,” said a rights activist based in Geneva told EconomyNext.

“Now pressure is mounting on Sri Lanka as most countries spoke on Monday asked it to address concerns.”

Sri Lanka for its part said there were serious anomalies and weaknesses in Bachelet’s report presented to the Council.

However, some diplomats based in Sri Lanka say Sri Lanka’s credibility among the international community has eroded due to its past record and another resolution is likely in September depending on the government’s responses to UNHRC’s call to address human rights abuses.

Sri Lanka responds

Sri Lanka’s Foreign Minister G L Peiris criticized the UNHRC’s move to find evidence against the government’s past human rights abuses.

“The fundamental deficiency is its intolerably intrusive character, impinging as it does on core functions and responsibilities of organs of the Sri Lankan State, overwhelmingly mandated by the people of our country at three successive elections” he told the UNHRC,” he told in his statement addressing the Council.

“Despite our rejection of the resolution, we will continue our voluntary international undertakings on human rights and engage with the United Nations, including with this Council,” he said.

“We are dismayed by the High Commissioner’s unwarranted onslaught on seminal institutions of our country which function under the aegis of Sri Lanka’s Constitution and legal system, emanating from a rich and varied cultural heritage, and are subject to stringent review processes which form an integral part of our tried and tested laws.”

On Tuesday, Sri Lanka’s foreign ministry said the country “received overwhelming support from countries of the Global South who expressed support for the Government’s significant efforts towards reconciliation and reiterated the importance of objective and constructive cooperation as the fundamental basis for multilateral engagement”.

“Of the 45 countries that spoke at the Interactive Dialogue, 31 spoke in support of Sri Lanka. Sri Lanka received cross-regional support from a broad spectrum of states of South, South East and Central Asia and the African Group,” the Foreign Ministry said in its statement. (Colombo/Mar08/2022)

ECONOMYNEXT- Sri Lanka government’s decision to switch off lights in Local Government area would be a setback for the attempts to increase the female labour force participation (FLFP), a Colombo-based think tank economist said.

Finance Minister Basil Rajapaksa on Monday instructed heads of local government authorities across the country to turn off street lights in their areas to conserve electricity due to the prevailing energy crisis.

“The move to switch off street lights at night would make women feel less safe and it would be a setback for attempts to increase the FLFP rate in Sri Lanka,” Nisha Arunatilake, an economist at Institute of Policy Studies said in the think tank’s twitter feed.

Though women account more than 50 percent of the Sri Lanka’s 22 million population, only 34.5 percent of the women are in the labour force.

Though FLFP has been on the rise, still there are a number of barriers for women to be in active labour force including concerns over their security as well as social stigma and culture.

Night shifts in super markets and nursing homes have increased employment opportunity for women while increaseingthe FLFP in Sri Lanka.

However, the power cuts in the night time coupled with lack of transport facilities due to fuel shortage have threatened the FLFP and more women doing jobs in night shifts.

Finance Minister’s Monday announcement came as the country has severe dollar shortage to purchase fuel.

Local government authorities Economy Next spoke to said they are still waiting for proper direction from the government on the decision. (Colombo/March8/2022)

ECONOMYNEXT – Sri Lanka’s rupee is bid at 230 to the US dollar in the interbank market with no offers despite a float being allowed by the central bank amid mandatory conversions and surrender requirements.

There were no two way quotes in the interbank market by 1400hours of on March 08, for the exchange rate to float, despite Central Bank Governor Nivard Cabraal saying the rupee had been allowed to float.

There were only bids at 230 and no offers.

Exporters who converted dollar at around 202 on Monday are converting from around 224 to just under 230 on Tuesday, based on mandatory conversion rules, market participants said.

“There is no direct central bank pressure to maintain the 230 rate,” a market participant said. “But banks are too nervous to bid higher, due to certain reasons.”

Central Bank Governor Nivard Cabraal told EconomyNext the 230 to the dollar rate was “guidance” and the rupee was floated.

In past floats after money printing crises, there had been offers at higher levels and some moral suasion had come when bids completed the transaction. During the current crisis however there are bids but no offers.

On Tuesday banking and exporter circles were scrambling to find money for an oil ship anchored off Colombo Port.

Former Deputy Governor W A Wijewardene said the rupee had to be floated for forex market to return to normal and if it is re-pegged at 230 the market will not solve the problem.

“In principle allowing the exchange rate is the right move,” Wijewardena said. “But if this is a devaluation and they try to keep at 230 it will not eliminate the parallel exchange rates. The kerb rate will simply go up.”

Analysts had warned that existing surrender rules may hurt the rupee.

Countries with soft-pegged central banks have forex shortages due to liquidity injected for multiple reasons. The central bank is now printing money to sterilize interventions, which will stop if a float takes hold. (Colombo/Mar08/2022)

ECONOMYNEXT – India’s external affairs minister S Jaishankar has assured Sri Lanka’s finance minister Basil Rajapaksa of continued support, and a mutually convenient date is to be finalised for the latter to visit India in the second half of March, the High Commission of India in Colombo said.

The high commission tweeted Monday (07) night that the two ministers had a productive and cordial telephone conversation, in which Jaishankar had given his assurance that India will “continue to support Sri Lanka in all possible ways”.

EAM @DrSJaishankar and Hon’ble Finance Minister @RealBRajapaksa had a productive and cordial telephone conversation a while ago. EAM assured that #India will continue to support #SriLanka in all possible ways. They agreed to finalize a mutually convenient date in the second(1/2) pic.twitter.com/wTX2jTjtoS

— India in Sri Lanka (@IndiainSL) March 7, 2022

The announcement followed a report in Sri Lanka’s weekend English newspaper The Sunday Times that India had called for an economic road map or action plan aimed at long term economic recovery and to “clear the decks for a long list of its economic cum strategic demands for implementation in the North and the East of Sri Lanka” in order to release a one billion US dollar emergency loan for essential supplies.

Finance Minister Rajapaksa had twice cancelled a planned visit to India after initially securing a 500 million US dollar loan in December 2021, which was to be paid in early March.

According to the Sunday Times report, the Indian demands centre a number of maritime security agreements, particularly around the Trincomalee harbour. “These include Donier surveillance aircraft for the Sri Lanka Air Force, a ship repair dock for the Sri Lanka Navy in Trincomalee and posting of a Sri Lankan Navy officer at the Intelligence Fusion Centre, a Bahrain-based intelligence sharing office which is a US Navy initiative to combat international terrorism, the narcotics trade and ensure safe maritime passage for commercial vessels in the region,” the newspaper reported.

The call between Jaishankar and Rajapaksa came hours after Sri Lanka’s central bank said it is abandoning a 200 to the US dollar peg after printing money though multiple means which were making outflows greater than inflows, creating forex shortages and parallel exchange rates.

Sri Lanka rupee allowed to fall, expects Rs230 to dollar rate: Central Bank

Sri Lanka’s forex markets are braced for a float of the rupee after the central bank said it will no longer hold the rupee at 200 to the US dollar, amid suggestions that further monetary tightening is needed to prevent a steep fall of the rupee.

Sri Lanka braced for a float of the rupee amid call for tighter policy

(Colombo/Mar08/2022)

ECONOMYNEXT – Sri Lanka’s central bank said it is abandoning a 200 to the US dollar peg after printing money though multiple means which were making outflows greater than inflows, creating forex shortages and parallel exchange rates.

The central bank said “greater flexibility in the exchange rate will be allowed to the markets with immediate effect.”

“The Central Bank is also of the view that forex transactions would take place at levels which are not more than Rs. 230 per US dollar.”

The rupee is trading in the kerb market around 249 to the US dollar. Exporters have been selling unofficially around 245 to the US dollar.

It is not clear whether the 230 rate will be controlled or it will be a allowed to free float.

Devaluations are hit or miss affairs, analysts say, unlike a clean float which is followed by a steep rate hike to curb domestic credit which succeeds every time.

The current statement came after a 100bp rate hike, which is still far below inflation of 15.1 percent with the budget deficit also around 10 percent of gross domestic product.

Related

Sri Lanka has to hike rates, tourism recovery will not help end forex crisis: Bellwether

The earlier 200 to the dollar non-credible peg was only partially defended through ‘reserves for imports’ leading to forex shortages.

The central bank has surrender requirements, which can undermined the exchange rate, analysts say.

The central bank has lost reserves after record money printing to keep interest rates artificially low and the ability to defend the currency peg.

The full statement is reproduced below:

Policy package to support greater macroeconomic stability: Allowing flexibility in the exchange rate

Considering the severity of the external shocks and recent developments in the domestic front, the Monetary Board of the Central Bank of Sri Lanka announced a comprehensive policy package on 04 March 2022 with the view to counter such economic headwinds.

The Central Bank also indicated that it will continue to closely monitor the emerging macroeconomic and financial market developments, both globally and domestically, and will stand ready to take further measures as appropriate, with the aim of achieving stability in the fronts of inflation, the external sector, the financial sector, and real economic activity.

In that context, greater flexibility in the exchange rate will be allowed to the markets with immediate effect. The Central Bank is also of the view that forex transactions would take place at levels which are not more than Rs. 230 per US dollar.

The Central Bank will continue to closely monitor the developments in the domestic foreign exchange market and make appropriate policy adjustments accordingly.

ECONOMYNEXT – Sri Lanka’s main All Share Price Index (ASPI) lost 2.5 percent on Monday (07) to a more than one-week low as concerns over extended power cut and economic weighed on the risky assets amid fears over the sustainability f country’s power supply due to forex shortage and rise in Brent crude, brokers said.

The (ASPI), fell 283.00 points to close at 10,960.49, its lowest since February 24.

“What happened was Brent Crude hit close to 130 dollars today and the global equity market reacted. So did the Sri Lankan,” a market analyst said.

High oil price has hit Sri Lanka’s economic growth in the past and manufacturing sector is affected hard and company earnings fall due to high cost of production and lower consumption due to high energy cost.

Finance Minister Basil Rajapaksa on Monday urged local government authorities to switch off street lights to conserve the energy at least until March 31.

“People expected the power crisis to be resolved by March 06. However, when the news of street lamp being cut came up that also acted as a factor on top of the uncertainties in the market already.”

On Friday (04) Sri Lanka’s central bank raised the key monetary policy interest rates by 100 basis points to more than a two-year high in a bid to reduce pressure on the currency that was created by excess money printing while keeping the interest rates at a low level to spur pandemic-hit economic growth.

In February, the market has lost 11 percent and overall the market has lost 10.4 percent so far this year after being one of the world’s best stock markets with an 80 percent return last year. The main index, however, gained 1.2 percent last week.

S&P SL20 of the most liquid stocks is also down 2.75 percent or 105.16 points to 3,714.28 points.

The market turnover was 3.5 billion rupees, around half of this year’s average turnover of 6.0 billion rupees.

Foreign investors, who are highly worried about possible sharp depreciation or devaluation in the currency, bucked the trend to buy 150.2 million rupee worth shares. The foreign sales so far this year has been 2.9 billion rupees. In 2021, the Sri Lanka stock market suffered a net foreign outflow of 50 billion rupees.

Analysts predict, the downward trend to continue until investors see some strong and sustainable steps to address the economic and foreign debt crisis.

LOLC Holdings, Expolanka, and Browns Investment dragged the main index to it’s fall on Monday.

LOLC Holdings slipped 4.31 percent to close at 900.00 rupees a share, while Expolanka Holdings, the market heavyweight lost 3.47 percent to close at 271.00 rupees a share, market data showed.

Browns Investment closed down 5.13 percent at 11.10 rupees a share. (Colombo/March07/2022)

ECONOMYNEXT – Prime Minister Mahinda Rajapaksa has requested all local government leaders that represent the ruling Sri Lanka Podujana Peramuna (SLPP) to turn off street lamps until March 31 to help conserve electricity as the island nation goes deeper into a power crisis.

Writing to all heads of local government bodies, group leaders and opposition leaders on Sunday (06), Prime Minister Rajapaksa called for their assistance in what he called the “national duty” of conserving electricity.

Sri Lanka is in the midst of one of the worst energy crises in the country’s history, with daily power cuts as long as seven and a half hours in some areas as the state-run Ceylon Electricity Board (CEB) struggles to find fuel to generate thermal power in the absence of rain for hydro power generation.

The crisis is the result of an ongoing fuel shortage which in turn has been caused by a severe forex shortage brought about by excess money printing to keep interest rates low in a pegged exchange rate regime.

In his letter, Rajapaksa has attributed the power crisis to lack of rainfall, the rise in global oil prices, and the forex shortages in the country.

“One way to manage this challenge is to use electricity carefully on a basis of priority. To set an example of that, I kindly ask you to switch off all street lamps in your constituency until March 31.

“In addition to that, if there are other means of conserving electricity in your respective area causing minimum inconvenience to the public, I ask that you implement them and report to me,” he said. (Colombo/Mar07/2022)