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Monday June 3rd, 2024

Sri Lanka foreign reserves fall to US$5,549mn in November 2020

ECONOMYNEXT – Sri Lanka’s forex reserves fell by 306.4 million US dollars to 5,549.3 million US dollars November 2020 from 5,855.7 million dollars a month earlier, official data show.

Sri Lanka has been printing unprecedented volumes of money, driving excess liquidity to record levels, with Central Bank Governor W D Lakshman saying ‘modern monetary theory’ allows printing money.

Sri Lanka however has a (soft) pegged exchange rate regime with forex reserves which change according to the balance of payments though dollar purchases and sales.

The central bank’s forex reserves rise when rates are slightly higher than required by domestic credit and the balance of payments (allowing the central bank to buy dollars and mop up inflows) and forex reserves are lost when rates are below the market as required by domestic credit and the financial account payments.

Sri Lanka’s private credit has picked in September and October, though November data is not out yet.

However implied forward premiums have turned negative, indicating that the overall interest rates are out of line with economic developments in the current and financial accounts, analysts say.

Central Bank credit to government (printed money) hit 735 billion rupees in October from 511 billion rupees in February 2020, when money printing began starting with a central bank profit transfer as liquidity.

Though profit transfers as liquidity is not central bank credit by definition, when the liquidity hits the balance of payments, reserves are lost through peg defence or the currency fall if the peg is not defended.

Sri Lanka’s forex reserves are now the lowest since April 2017 when forex reserves fell to 5,048 billion rupees. During the 2015/2016 crisis Sri Lanka had a policy rate corridor to protect the peg to some extent.

However under the Sirisena-Wickremesinghe administration, where full central bank independence was given, a call money rate in the middle of the corridor began to be targeted, a ‘bills only’ policy was jettisoned summarily.

The lack of a policy corridor protection makes currency crises inevitable from a small pick up in the economy and the credit system, analysts have said.

Analysts had warned in late 2019 that Sri Lanka was running out of rating space to continue monetary indiscipline (Sri Lanka needs monetary discipline to avoid further downgrades: Bellwether) and if the credit was downgraded to CCC Sri Lanka would not be able to access capital markets.

“Sri Lanka is a country that had mostly kept monetary stability in the worst years of the war with the help of the ideology then prevailing,” EN’s economic columnist Bellwether warned in late 2019 before the value added tax cut shock came.

“But now each new episode of monetary indiscipline is costing the country one notch in the rating scale.

“Sri Lanka will soon run out of rating space to tap capital markets if the flexible exchange rate/call money rate targeting continues in the next recovery space.”

At the time Sri Lanka’s sovereign rating was ‘B’, there was no Coronavirus crisis and a cyclical recovery of the credit system was expected in 2020.

“The next downgrade will take Sri Lanka to B-. Sri Lanka will probably be able to access credit markets even at that rating,” Bellwether said.

“From two levels below investment grade in 2005, Sri Lanka is now a little above CCC, which is a distressed debt level. It is not a place to take monetary risks in particular.

“If rates are cut further and money is printed, the recovery in 2020 will be short-lived or not at all, and another currency crisis will be generated and downgrades will follow.”

Analysts say Sri Lanka is still at a place where monetary and fiscal corrections can be made, though confidence is sharply down from 2019. (Colombo/Dec12/2020)

Comments (3)

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  1. J K Wijedasa says:

    Daily FT headline reads “Sri Lanka forex reserves fall to US$5,549mn in Nov 2020.”
    And insensitive, unscrupulous, unpatriotic MOTOR VEHICLE Importers are lobbying for lifting of import ban. In 2019 $6.5 billion were received from srilankan expatriate workers. Out of that $1 billion WASTED on vehicles for private use. Isn’t that CRIMINAL WASTE???

  2. Chatura says:

    @Wijedasa not neccessarily. You have a T.V., fridge, computer, mobile ect, right? Why? Because those are neccessities for you. Likewise, given some people’s liveliholds, cars are neccessities for them. Buying cars won’t be a problem if CB floats exchange rate. Then the problem you talk about also disappears. Currently those foreign workers and me (I’m earning my salary in USD working online from SL) don’t get a fair value for our dollars. We know rupee is much weaker than 185, but CB is not allowing it to weaken to its correct value.

  3. Lakshman Wanniatchi says:

    Excess liquidity is perhaps mainly due to money printing. But getting wealthy people to put their money in to main stream circulation will result in better tax revenue to the state. I believe every dollar spent on import of a vehicle will lead to government earning a tax revenue of at least 3 dollars. Its not fair we seem to spend 84% of tax revenue on state sector salaries.
    Lakshman Wanniatchi

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Comments (3)

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

  1. J K Wijedasa says:

    Daily FT headline reads “Sri Lanka forex reserves fall to US$5,549mn in Nov 2020.”
    And insensitive, unscrupulous, unpatriotic MOTOR VEHICLE Importers are lobbying for lifting of import ban. In 2019 $6.5 billion were received from srilankan expatriate workers. Out of that $1 billion WASTED on vehicles for private use. Isn’t that CRIMINAL WASTE???

  2. Chatura says:

    @Wijedasa not neccessarily. You have a T.V., fridge, computer, mobile ect, right? Why? Because those are neccessities for you. Likewise, given some people’s liveliholds, cars are neccessities for them. Buying cars won’t be a problem if CB floats exchange rate. Then the problem you talk about also disappears. Currently those foreign workers and me (I’m earning my salary in USD working online from SL) don’t get a fair value for our dollars. We know rupee is much weaker than 185, but CB is not allowing it to weaken to its correct value.

  3. Lakshman Wanniatchi says:

    Excess liquidity is perhaps mainly due to money printing. But getting wealthy people to put their money in to main stream circulation will result in better tax revenue to the state. I believe every dollar spent on import of a vehicle will lead to government earning a tax revenue of at least 3 dollars. Its not fair we seem to spend 84% of tax revenue on state sector salaries.
    Lakshman Wanniatchi

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)

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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)

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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)

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