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ECONOMYNEXT – Sri Lanka’s Colombo Stock Exchange (CSE) will introduce a measure to facilitate local companies to raise funds in foreign currencies, a CSE official said, as the island nation is facing a forex crisis after the central bank’s excess money printing.

Sri Lankan importers are struggling to get adequate US dollars as they cannot open letter of credit with local banks due to forex shortage as the country’s foreign currency reserves plummeted over 50 percent last year alone.

The CSE’s new move, which was approved last week by the regulator Securities and Exchange Commission (SEC) will allow Sri Lankan companies seeking to fund foreign currency projects to raise capital in offshore currencies by listing at the Exchange, a CSE official said.

“Companies which have earned over 50 percent of their revenue in foreign currencies in the last three years with a minimum revenue of 5 million US dollars are eligible to use this option,” the source told EconomyNext.

Though the central bank banned many imports last year, the 2021 import bill hit a three-year high as lower interest rates amid excess money printing made imports cheaper.

The move comes at a time the central bank has been struggling to raise dollar loans to boost its reserves, which fell by more than a quarter in January.

Analysts blame the central bank’s parallel currency exchange for the lack of dollar inflows from remittances and exports.

Though the central bank has fixed the exchange rate at around 200 rupees per dollar, the US currency is sold at around 250 rupees in the grey market.

Sri Lanka is unable to tap international capital market for foreign currency loans as global rating agencies have downgraded its credit rating to its worst in the history due to risks faced in foreign debt repayment.

The central bank, however, has repeatedly said it can manage foreign loans and will not default any.

 

ECONOMYNEXT – Sri Lanka’s current debt repayment strategy which is similar to reloading a pre-paid mobile phone is unlikely to get the country out of a looming economic crisis as money printing and dollar shortages take a toll on the island nation, opposition legislator Patali Champika Ranawaka said.

Sri Lanka has been downgraded to ‘CC’ by Fitch indicating heightened risk of sovereign default while foreign reserves have been depleted while being exchanged for newly minted money which is turning up as imports.

Sri Lanka has been borrowing from foreign governments and central banks has also borrowed through swaps to repay part of the maturing debt, as money printing created forex shortages, instead of running deflationary policy to turn current account inflows to financial account outflows.

Reload

“The government is insensitive to the financial crisis. It is managing debts as like reloading prepaid mobile phones,” Ranawaka told a meeting with Foreign Correspondents’ Association (FCA) in Colombo.

The last administration also printed money, created forex shortages and borrowed under a so-called Actively Liability Management Law, ratcheting up foreign debt, instead of running deflationary policy, analysts have shown.

In January 2021, India came up with a 400 million US dollar swap, a deferment of cross border payments due under regional clearing arrangement, a 500 million dollar petroleum credit line and another billion US dollar food and medicine credit is planned.

“Hadn’t India bailed out Sri Lanka in January, we would have faced bankruptcy by now,” said Ranawaka, one of the key ministers in the last government who oversaw the completion of Chinese Port City under his ministry purview.

Inflationary Policy

Sri Lanka has been printing money to boost growth for several years instead of doing serious reforms to allow private sector activity to take off, engaging output gap targeting until 2019, and full blown fiscal stimulus backed up by money printing from February 2021.

By January 2021 12-month inflation had hit a 14.2 percent.

The new money trying to rush out of the country, has pushed up premium in the kern market and Undiyal/Hawala settlement system, diverting money away from the formal banking system.

Relatives of those who receive remittances via informal methods claim they get 250 rupees for each US dollar, nearly 20 percent higher than the central bank’s rate of 210 rupees, which also includes a 10-rupee incentive of which at least 8 rupees are printed money.

Delays in getting dollars to match the excess rupees being produced had led to shortages of cooking gas, milk powder, sugar, car spare parts as well as inputs for industries.

The central bank has already banned imports to preserve dollars which has led to shortage of imported milk powder, wheat flour, and many other food items.

“The government is repaying the loans at the expense of the people’s needs. It has deprived the people of having milk powder and fuel,” Ranawaka claimed.

However the central bank has given 967 million US dollars for imports since October 2021 when a 200 to the US dollar peg was strict was strictly implemented, data show.

Unless money is printed, the central bank does not give any reserves for imports, but instead collects reserves. Large volumes of reserves were given last in 2018, when money was printed to target an output gap.

Money Printing Tax

Ranawaka questioned the current administration’s spending priorities, when revenues were down after tax cuts.

“They are expanding the express highway network,” Ranawaka said. “But they are doing that when there is a financial crisis. This is not a time to spend money on infrastructure. This is a time to look into the people’s essential needs.”

Despite the country’s looming financial crisis, Finance Minister Basil Rajapaksa announced a relief package for an already bloated public sector employees as well as pensioners and paddy farmers who were hit by a fertilizer ban.

“When the finance minister is increasing expenditure without raising revenue, he is not only digging his own grave, but the graves for all of us,” Ranawaka said.

“We need to increase revenue, but not by taxing the people more. People are already taxed by both commodity scarcity and by the way of money printing.”

“The money printing is also a way of imposing more tax on the public. High expenditures should be curtained. You can’t expand the highways at this juncture. First of all, there should be food for people’s survival.” (Colombo/Feb19/2022)

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Petroleum Corporation has lost 83 billion rupees in 2021, and is running a 551 million rupee a day loss in February 2022 amid rising global oil prices and domestic taxes, Petroleum Minister Udaya Gammanpila said.

The CPC was now making a loss 551 million rupees a day, Minister Gammanpila said on February 18.

CPC had lost 83 billion rupees last year.

The CPC was making loss of 19 rupees on a litre of Petrol Octane 92 after taxes and 17 rupees on Petrol Octane 95.

The firm was losing 52 rupees from a litre of auto diesel and 35 rupees from super diesel.

On Kerosene it was losing 63 rupees.

Government taxes on Petrol 92 were 42 rupees a litre, on Petrol 95 64 rupees, diesel 17 rupees and super diesel 39 rupees.

Each day the CPC was paying 368 million rupees in taxes as the firm lost 551 million rupees.

The CPC had asked for a price hike or a tax cut as it cannot borrow any more.

“CPC can’t borrow any more loans from banks,” Gammanpila said.

“We have already borrowed 3.71 billion dollars so far. We can’t borrow dollars anymore
Finance ministry has to decide how much tax should be reduced. So far they have not informed. Even if the tax is reduced, we will have to increase the prices.”

The CPC, which has no dollar revenues, is forced to borrow by Sri Lanka’s Mercantilist policy-makers every time the central bank prints money and creates forex shortages.

The CPC is then forced to borrow dollars and get hit by a massive forex loss when the currency eventually collapses.

“We have not decided to increase prices yet,” Gammanpila said. “Some fuel retailers have created shortage expecting that we are going to increase the prices. We will only inform the price revision only after 10 pm.”

Sri Lanka is now in the throes of yet another currency crisis and Sri Lanka is now getting a 500 million dollar credit line from India instead of tightening monetary policy. Inflation is also running at 14.2 percent in the year to January 2021.

Sri Lanka has also not gone to the IMF, which generally asks for monetary tightening and a float of the currency to stop sterilized intervention or printing money after giving reserves for imports.

Minister Gammanpila said he supported an IMF program and most of the cabinet was also in favour. (Colombo/Feb18/2022)

Sri Lanka’s stock fell 0.1 percent on Thursday (17) on retail shares as investors continue to take profit amid concerns over economy and debts dented apatite for the island nation’s risky assets, brokers said. The main All Share Price Index (ASPI), closed 12.42 points lower at 12,364.80 points, its lowest close since February 10.

Online gift sales for Valentines day led by roses picked up in Sri Lanka this week as many resorted to the virtual sharing of love amid rapid spreading of new Covid-19 variant Omicron. The health authorities did not impose new restrictions on the Valentines Day that fell on Monday, February 14, but businesses said many people wanted to use online to buy and deliver gifts while some said there were physical gathering as well.

ECONOMYNEXT – Sri Lanka has spent 967 million US dollars to give ‘reserves for imports’ in the past four months and strictly enforce a 200 to the US dollar peg on which credibility has been lost, official data shows.

In a functioning monetary regime, a pegged central bank does not give any ‘reserves for imports’ but collects a small amount of dollars from monthly inflows at a market interest rate by slowing credit and outflows to re-build or maintain reserves after repaying debt.

In the nine months to September the central bank bought about 228 million dollars net from transactions with commercial banks though total reserves continued to go down at the interest rates and domestic credit levels then prevailing due to debt repayments.

A substantial volume of foreign exchange was also ‘floating’ unofficially at the time with exporters giving dollars at round 220 to the US dollar by transferring to accounts of importers with a non-credible peg at 200 to the US dollar being declared.

Such sales do not change reserve money or require new money to be printed.

However with banks given strict instructions not to facilitate such deals, the central bank had to give more ‘reserves for imports’.

From October to January the central bank had given 967 million US dollars on a net basis to commercial banks in ‘reserves for import’.

Selling reserves for imports is a defence of the peg at 200 to the US dollar.

However when a central bank sells dollars to the market, reserve money shrinks. The central bank then has to print money to stop short term interest rates from going up.

The newly printing money then gives more rupee reserves for banks to give loans without deposits to customers and imports continue to go up.

By December monthly imports rose to 2.2 billion US dollars from 1.6 to 1.7 billion US dollars in earlier months.

From October to December the central bank 736 million dollars on a net basis to banks.

In the same period 262 billion rupees were printed. Monetary base also rose about 20 billion rupees.

The central bank is now printing money to offset or sterilize such reserve sales and also to give a subsidy to expat workers who are remitting money.

In an extraordinary development, there were calls made in Sri Lanka pressure the central bank to use ‘reserves for imports’, which analysts say is a call to printing money and worsen a sterilized intervention cycle.

In order to get out of a currency crisis the cycle of giving ‘reserves for imports’ has to be halted, usually through a float at a market interest rate.

Sri Lanka’s pegged exchange rate is currently broken and reserves. The peg is also under pressure from surrender requirement.

In January the central bank sold 407 million US dollars to the market and bought 176.8 million US dollars from banks.

Such reserve sales were last seen in the 2018 currency crisis. All of Sri Lanka’s past currency crises have intensified. (Colombo/Feb15/2022)

ECONOMYNEXT – Foreign visitors from Russia and Ukraine, the two countries now threatening the world of an armed war amid escalated tension, helped Sri Lanka’s post-Covid-19 tourism recovery this year, the official government data showed on Monday (14).

Russians accounted for 18,044 or 15.8 percent of the total 113,670 holiday makers who visited Sri Lanka this year up to February 11, while Ukrainians accounted for 9,883 or 8.7 percent of the total visitors in the same period.

Russia has more than 100,000 troops massed near Ukraine, which is not part of the Atlantic military alliance, and Washington – while keeping open the diplomatic channels that have so far failed to ease the crisis – has repeatedly said an invasion is imminent, Reuters has reported on Monday.

“An analysis of Russian arrivals in the consecutive years reveals that it has almost exceeded the pre
pandemic levels as experienced in January 2019,” the state-run Sri Lanka Tourism Development Authority said in its January monthly report.

“This could be likely due to increased interest by Russian tour operators in alternative destinations to
Thailand and Goa with strict public health measures in place and the launching of direct flights to
Russia.”

The country saw an increase of Ukrainian and Russian travelers after a tourism revival projected
targeting those countries was launched in late 2020 by former Sri Lankan Ambassador to Russia
Udayanga Weeratunga.

Sri Lanka started direct flights between Sri Lanka and Russia from November last year following an agreement between Russia’s Aeroflot airline and Sri Lanka’s Civil Aviation authority.

The island nation, populour for its shallow beaches and diverse nature attracted 12.3 percent of the offshore visitors from both Russia and Ukraine in 2021 when it saw only a total of 194,495 tourists visited the country.

The SLTDA has targeted at least 1.1 million arrivals this year with a targeted average of
90,000 tourists per month.

Sri Lanka’s revenue from tourism hit 110.7 million US dollars in January this year compared to 2.3 million US dollars a year ago mainly due to lockdown in 2021.

The SLTDA has aimed to promote Sri Lanka as a destination for foreign weddings, meeting, nd conferences to boost the number of tourists in the country.  (Colombo/Feb14/2022)

The days of our years are three score years and ten Psalms 90:10 The 'Backwater' named Udahamulla

ECONOMYNEXT – Sri Lanka has printed 1.2 trillion rupees in 2021 most of which has flowed out of the country as a balance of payments deficit official data shows on top of 505 billion rupees printed in 2019 mostly to keep interest rates down.

Central bank credit to government grew to 2,093 billion rupees by December 2021 from 868.9 billion rupees a year earlier.

A part of the central bank credit to government including over 200 billion in July 2021 relates to foreign reserves appropriated to repay bonds, which did not create domestic inflation. However they prevented the monetary system from tightening and rates from rising.

In 2020 Sri Lanka printed 505.9 billion rupees based on official data, but the liquidity injected to the banking system was much higher. Money was injected also by a cut in the statutory reserve ratio. In a bizarre move the money was re-printed in September 2021.

BOP hit

In 2020 some of the money was printed to give Covid-19 re-finance.

In the way data is currently calculated in Sri Lanka, printed money remaining as excess liquidity in the system does not get captured as central bank credit until it disappears from the country as a BOP deficit. At the beginning of December 200 billion rupees of excess liquidity remained in the system.

A large part of the money in both years was printed came from yield controls imposed on Treasuries auctions, which caused them to fail and liquidity to be injected.

After August 2021 price controls were lifted and bond auctions were mostly successful.

However since then money is printed mostly to sterilize reserves given for imports. The central bank is also printing money for remittances.

The money boomerangs as import demand when the families of expat workers spend them and more reserves are lost as they new money is exchange for dollars via imports.

In 2021 Sri Lanka was hit by a balance of payments deficit of 2.3 billion rupees as the printed money was exchanged for monetary reserves.

In 2021, the BOP deficit was 3.9 billion US dollars.

Related

Sri Lanka BOP deficit hits record US$3.9bn in 2021 amid money printing

In September 2021, a statutory reserve ratio was hiked and the entire money was printed in a bizarre move.

Inflation

In the two years reserve money has grown 40 percent. Broad money had also grown 40 percent despite weak economic growth, creating conditions for rapid price rises.

While liquidity injections hit the balance of payments fast (4 to 6 weeks) with imported goods coming in to fill domestic demand.

Persistent money printing to keep rates down leads to growth in credit and broad money, triggering domestic inflation.

When rates are kept down artificially, money also go to long term assets, driving up a speculative bubble. People may also buy assets fearing inflation or currency depreciation. Capital flight may also take place.

In most countries broad money growth turns in to domestic inflation after 12 to 24 months. Similar problems had been seen in countries like the US.

In Sri Lanka the broader consumer price index, which also includes services which rises slowly, has risen 17 percent over the two years.

Food prices have risen 40 percent.

Sri Lanka exported and imported goods also rise when the US prints money, driving up commodity prices. Traded goods respond quicker to loose policy.

Related

US inflation likely to stay high in 2022, 2023 even if Fed tightens now: Steve Hanke

Anchor Conflicts

Sri Lanka’s monetary policy deteriorated rapidly after the end of a 30-year war and accelerated after the retirement of Deputy Governor W A Wijewardena, analysts have said.

Sri Lanka stated following ‘flexible’ inflation targeting, a highly discretionary domestic anchor, despite having a foreign reserve collecting highly unstable peg with the US dollar called a ‘flexible’ exchange rate as an external anchor, which are in conflict with each other.

Though Sri Lanka had a Latin America style central bank from 1950 set up by a US money doctor, the island’s commercial borrowings were limited.

After 2015, monetary instability ratcheted as anchor conflicts worsened leading to a rapid rise in commercial debt.

When money is printed (inflationary policy is followed with a peg) foreign reserves cannot be built with current inflows and also the ability to repay maturing debt and interest with current inflows is lost.

In 2015, 2016 and 2018 the country could not repay maturing debt with current inflows as inflationary policy (money printing) was followed under ‘flexible’ inflation targeting coupled with liquidity injected to target call money rate.

Under ‘flexible’ inflation targeting with-reserve-collecting-peg, liquidity injections start about two years after monetary tightening ends a currency crisis claiming that inflation is low (Sept 2014, March 2018 and Feb 2020) which is roughly the time it takes for inflation from the previous money printing bout to dissipate, triggering another crisis.

In 2020 and 2021, though sovereign bonds were repaid, the central bank’s reserves were run down and it has become a large net debtor as fiscal debt was effectively transferred to the monetary authority. (Colombo/Feb14/2022)