An Echelon Media Company
Monday June 3rd, 2024

Sri Lanka rupee weakens to new recent low amid money printing

ECONOMYNEXT – Sri Lanka’s rupee weakened to new lows with the US dollar quoted around 190.50 to 191.00 levels in the spot next market and one weeks offered around 193 levels, dealers said, amid record money printing and low interest rates.

Market activity was patchy with sporadic quotes in the spot next markets, though there were offers at around 193 in one week forwards, market participants said.

Commercial bank average selling rate for US dollars reported by the central bank which was 190.37 at on Monday December 21, had weakened to 193.05 by Wednesday.

The rupee is hitting lows not seen since the March-April credit spike and money printing.

Sri Lanka has been printing record volumes of money in 2020 under Modern Monetary Theory, leading to downgrades and steep rises in the yields of sovereign bonds.

The printing has pushed rupee interest rates down and pushed up dollar yields as banks bought sovereign bonds and also found difficulties in rolling over credit lines.

In the absence of money printing and an interest rate that matches the financial account, bank purchases of bond would automatically lead to a contraction in imports as domestic credit is turned from consumption and domestic investment to the purchase of bonds or debt repayment.

Exporters have also been lending money to banks and borrowing rupees due to out of line rupee interest rates, instead of selling in the spot of forward market. Money printing has inverted forward rates making it no longer attractive to sell forward.

Related Sri Lanka forex forwards upside down amid money printing, downgrades

The purchase of sovereign bonds maturing in 2021 by banks would be equal to domestic financing of the debt as maturing proceeds would remain in the country which the government could borrow if necessary.

“The process is somewhat equivalent to the government borrowing dollars, such as through a Sri Lanka Development Bond) domestically and paying off a sovereign bond in 2021,” says EN’s economics columnist Bellwether.

“In the absence of money printing, bank purchases of sovereign bonds would perfectly offset domestic credit and imports and effectively finance the bond repayment.

“In Sri Lanka due to Keynesian Mercantilism the link between domestic credit and the balance of payments is not understood. That domestic rupee borrowings offsets imports is not understood.

“In order to be able to repay foreign loans and avoid sovereign default the government should have successful domestic rupee bill and bond auctions.

“If bond auctions fail and bills are purchased by new rupees expanding reserve money and excess liquidity there will be forex shortages. Failed bill and bond auctions are a root cause of forex shortages, foreign reserve losss, which makes sovereign default more likely.

“In a country steeped in Mercantilism, this is a difficult concept to grasp.

“Keynes also never understood the link, which led to the misunderstanding about a non-existent ‘transfer problem’. As a result there is a lost generation of economists or Mercantilists, forex shortages and sovereign default.”

A record series of bill auctions had failed recently, adding to excess liquidity as debt paper was turned into reserve money. In December alone the Treasury bill stock went up from 616 billion rupees to 644 billion.

Though there is also an increase in real money demand in the month, it could be easily met from the existing excess liquidity.

“The truth is that the maintenance of monetary stability and of a sound currency system has nothing whatever to do with the balance of payments or of trade,” explained classical economist Ludwig von Mises over half a century ago, about Germany.

“If a country neither issues additional quantities of paper money nor expands credit, it will not have any monetary troubles.”

“An excess of exports is not a prerequisite for the payment of reparations (debt repayments in the case of Sri Lanka). The causation, rather, is the other way round. The fact that a nation makes such payments has the tendency to create such an excess of exports.”

“There is no such thing as a ‘transfer’ problem.”

Further Reading : The Reparation Problem: A Discussion

Some Notes on the Stockholm Theory of Savings and Investment I, Bertil Ohlin 1920

Analysts had warned in early 2020 and late 2019 that the obsession would low interest rates and continued monetary indiscipline by authorities would lead to downgrades and external instability.

Related

Sri Lanka heading for uncertainty with low rate obsession: Bellwether

Sri Lanka needs monetary discipline to avoid further downgrades: Bellwether

In the secondary securities market, bond yields remained unchanged in dull market trade, dealers said.

The secondary bond market continued the dull sentiment during the day amidst the upcoming festive season while the yield curve remained broadly unchanged, dealers said.

A 2-year bond maturing on 15.12.2022 closed at 5.70/75 per cent on Wednesday, up from 5.67/75 per cent from Tuesday’s closing.

A bond maturing on 15.01.2023 closed at 5.73/80 per cent on Wednesday, steady from 73/78 per cent from Tuesday’s closing.

A bond maturing on 15.09.2024 closed flat at 6.42/47 per cent on Wednesday from yesterday’s end.

A bond maturing on 01.05.2025 closed flat at 6.50/60 per cent from yesterday’s end.

A bond maturing on 01.02.2026 closed flat at 6.75/85 per cent from the previous day’s end.

A bond maturing on 15.08.2027 closed flat at 7.15/20 per cent.

A bond maturing on 01.07.2028 closed flat at 7.23/30 per cent, unchanged from the previous day’s end.

A 10-year bond maturing on 15.05.2030 closed unchanged at 7.75/90 per cent from Tuesday’s closing. (Colombo/Dec23/2020)

Leave a Comment

Your email address will not be published. Required fields are marked *

Leave a Comment

Leave a Comment

Cancel reply

Your email address will not be published. Required fields are marked *

Water levels rising in Sri Lanka Kalu, Nilwala river basins: Irrigation Department

Sri Lanka Navy assisting in rescue operations (Pic courtesy SL Navy)

ECONOMYNEXT – Sri Lanka’s Irrigation Department has issued warnings that water levels in the Kalu and Nilwala river basins are rising and major flooding is possible due to the continuous rain. People living in close proximity are advised to take precautions.

“There is a high possibility of slowly increasing prevailing flood lowline areas of Kiriella, Millaniya, Ingiriya, Horana, Dodangoda, Bulathsinhala, Palinda Nuwara and Madurawala D/S divisions of Ratnapura and Kalutara Districts, up to next 48 hours,” it said issuing a warning.

“In addition, flood situation prevailing at upstream lowline areas of Ratnapura district will further be prevailing with a slight decrease.

“The residents and vehicle drivers running through those area are requested to pay high attention in this regard.

“Disaster Management Authorities are requested to take adequate precautions in this regard.”

The island is in the midst of south western monsoon.

DMC reported that 11,864 people belonging to 3,727 families have been affected due to the weather in Rathnapura, Kegalle, Kilinochchi, Jaffna, Mullaitivu, Kalutara, Gampaha, Colombo, Galle, Matara, Hambantota, Puttalam, Kurunegala, Kandy, Nuwara Eliya, Anuradhapura, Polonnaruwa, Badulla, Moneragala, and Trincomalee districts.

Meanwhile, the Meteorology Department stated that showers are expected on most parts of the island today.(Colombo/June3/2024)

Continue Reading

UNP gen secy defends call for postponing Sri Lanka poll, claims opposition silent

The UNP party headquarters in Pitakotte/EconomyNext

ECONOMYNEXT — United National Party (UNP) General Secretary Palitha Range Bandara has defended his call for postponing Sri Lanka’s presidential election by two years, claiming that his proposal was not undemocratic nor unconstitutional.

Speaking to reporters at the UNP headquarters Monday June 03 morning, Bandara also claimed that neither opposition leader Sajith Premadasa nor National People’s Power (NPP) leader Anura Kumara Dissanayake have spoken against his proposal.

“I have made no statement that’s undemocratic. My statement was in line with provisions of the constitution,” the former UNP parliamentarian said.

He quoted Section 86 of Chapter XIII of the constitution which says: “The President may, subject to the provisions of Article 85, submit to the People by Referendum any matter which in the opinion of the President is of national importance.”

Sections 87.1, 87.2 also elaborates on the matter and describes the parliament’s role, said Bandara.

“I spoke of a referendum and parliament’s duty. Neither of this is antidemocratic or unconstitutional. As per the constitution, priority should be given to ensuring people’s right to life,” he said.

“Some parties may be against what I proposed. They may criticse me. But what I ask them is to come to one position as political parties and make a statement on whether they’re ready to continue the ongoing economic programme,” he added.

Bandara claimed that, though thee has been much criticism of his proposal for a postponement of the presidential election, President Wickremesinghe’s rivals Premadasa and Dissanayake have yet to remark on the matter.

“I suggested that [Premadasa] make this proposal in parliament and for [Dissanayake] to second it. But I don’t see that either Premadasa nor Dissanayake is opposed to it. To date, I have not seen nor heard either of them utter a word against this. I believe they have no objection to my proposal which was made for the betterment of the country,” he said. (Colombo/Jun03/2024)

Continue Reading

300 of 100,000 trees in Colombo considered high risk: state minister

ECONOMYNEXT – Trees in Sri Lanka’s capital Colombo are being monitored by the municipal council, Army and Civil Defense Force as the severe weather conditions continue, State Minister for Defense Premitha Bandara Tennakoon said.

“Within the Colombo Municipal Council city limits, there are 100,000 trees. Of these, around 300 are considered high risk,” Tennakoon told reporters at a media conference to raise awareness about the current disaster management situation.

Not all trees required to be cut down he said. “We can trim some of the branches and retain them.”

The problem was that buildings in the vicinity of the tree had cut branches on one side, causing it to become unbalanced, the minister said.

New laws would be brought in so provincial/municipal institutions could strengthen enforcement of building codes.

“We don’t have a single institution that can issue a warning about a tree. Not one to tell us what trees can or cannot be planted near a road.

“Trees should be suitable for the area. Some trees have roots that spread and damage roads, buildings. When the roots can’t go deep, they tend to topple over.

“Now Environment Day is coming up, and anyone can go plant a tree by the road. We have to take a decision about this. We have to enforce laws strongly in future.” (Colombo/June3/2024)

Continue Reading