“The session will evaluate Sri Lanka’s economic policies and reform progress,” State Minister for Finance Shehan Semasinghe said.

“We look forward for continued support of all countries for a successful review to unlock the third tranche, which will further enhance economic stability, growth, and reform efforts.”

The Article IV consultation and second review under the Extended Fund Facility (EFF) for Sri Lanka are on the IMF Board meeting agenda for June 12. The session will evaluate Sri Lanka's economic policies and reform progress. We look forward for continued support of all countries… pic.twitter.com/EGE4UfWgcO

— Shehan Semasinghe (@ShehanSema) June 3, 2024

Sri Lanka is currently finalizing MOUs with official creditors and are also in talks with the IMF.

The Executive Board will consider both the program review and Article IV consultation. (Colombo/June04/2024)

Sri Lanka’s hard goods exports were 877.6 million US dollars in April, up from 848.6 million US dollars a year ago, in a holiday month which usually has a 20 percent downturn.

Remittances were 543.8 million US dollars, up from 454 million last year.

Tourism income was estimated at 225.7 million US dollars for April, which is from a survey and may not be as reliable as import export data from customs or remittances data from banks.

Gross services which include tourism was 558 million US dollars.

Foreign exchange earned by Sri Lankans from exports, remittances and gross services were 1,977 million US dollars in April 2024.

Merchandise imports were only 1,435 million US dollars, leaving a surplus of 542 million dollars.

Sri Lanka’s central bank has started to release more service data in 2024 giving a broader picture beyond the Merchandise trade account.

Turning in their graves?

In Sri Lanka there is a strong belief in the trade deficit.

Macro economists also dangle the ‘current account deficit’ as an excuse for monetary instability after printing money to enforce rate cuts, dredging up doctrine from the days of classical mercantilism in the 17th century, and dressing it up with a new label (the current account deficit vs the commercial balance).

Economic textbooks may be directly to blame for the revival of Mercantilism as well as the bureaucratic policy rate, analysts say.

The Mercantilist doctrine of the commercial balance was comprehensively refuted by classical economists including Smith, Hume, Mill, Thornton, and Torrens in particular who had micro-knowledge of note-issue operations.

In the last century German-Austrian and Swedish economists directly challenged Keynes but the doctrine has persisted among Anglophone academics in particular as inflationism worsened from the 1960s with Fed activism.

In countries with inflationary central bank operations, large numbers of perfectly sane people believe that goods can be imported indefinitely without dollars being earned (the seller not getting any dollars), triggering a chronic merchandise ‘trade deficit.

They also believe that it is a ‘problem’ or that the trade deficit contributes to external instability or currency depreciation.

The obsession with the trade deficit seems to be driven by a belief that hard goods were ‘superior’ to services.

Students of history say similar attitudes were seen in the writings of nationalists who criticized the shift to coconut which was a commercial crop in areas like Kurunegala during British rule.

Sri Lanka’s central bank however has not discriminated against any hard work done by the people, or suggested that services workers were inferior.

Sri Lanka has a private savings rate of around 30 percent of GDP, which also broadly applies to those earning foreign income.

Savers may directly invest in assets, or put money banks as deposits either after conversion to rupees or as dollars in forex accounts.

Banks in turn will give them as investment credit to borrowers, which will turn into imports or build up dollar balances by investing them abroad.

Sri Lanka’ central bank in April collected about 420 million US dollars from the banking system, creating rupee liquidity.

Domestic Operations

When private credit is weak – or when money is not printed to enforce a policy rate claiming that inflation is low with statistics defeating economic principles – the central bank can sell sterilization securities into banks (in the current case Treasury securities in its portfolio) mop up the liquidity and build fx reserves, East Asia style, through deflationary domestic operations.

The government can also borrow rupees through Treasury bills, buy dollars and settle foreign loans and end up with a rupee debt instead of a dollar debt, as happened before potential output targeting and flexible inflation targeting, preventing the build-up of dollar debt and an eventual default.

At the moment large volumes of excess liquidity remain in the banking system, which can be used up as private credit recovers, pressuring the exchange rate unless the dollars that created the liquidity is sold (unsterilized intervention).

The central bank can also prevent imports from being generated through investment credit by steadily selling its securities portfolio if it wants to keep the reserves.

Imports can also increase when foreign aid resumes and the government re-starts infrastructure projects. Sri Lanka government’s net foreign borrowings, except in stabilization years, is usually positive.

After re-structuring loans, Sri Lanka’s debt repayments will reduce, and only interest will have to be paid for several years. (Colombo/June01/2024 – Recast with revised data to show gross services which include tourism. Gross services data only available for two months)

Sri Lanka’s hard goods exports were 877.6 million US dollars in April, up from 848.6 million US dollars a year ago, in a holiday month which usually has a 20 percent downturn.

Remittances were 543.8 million US dollars, up from 454 million last year.

Tourism income was estimated at 225.7 million US dollars for April, which is from a survey and may not be as reliable as import export data from customs or remittances data from banks.

Gross services which include tourism was 558 million US dollars.

Foreign exchange earned by Sri Lankans from exports, remittances and gross services services were 1,977 million US dollars in April 2024.

Merchandise imports were only 1,435 million US dollars, leaving a surplus of 542 million dollars.

Sri Lanka’s central bank has started to release more service data in 2024 giving broader picture beyond the Merchandise trade account.

Turning in their graves?

In Sri Lanka there is a strong belief in the trade deficit.

Macro economists also dangle the ‘current account deficit’ as an excuse for monetary instability after printing money to enforce rate cuts, dredging up doctrine from the days of classical mercantilism in the 17th century, and dressing it up with a new label (the current account deficit vs the commercial balance).

Economic textbooks may be directly to blame for the revival of Mercantilism as well as the bureaucratic policy rate, analysts say.

The Mercantilist doctrine of the commercial balance was comprehensively refuted by classical economists including Smith, Hume, Mill, Thornton, and Torrens in particular who had micro-knowledge of note-issue operations.

In the last century German-Austrian and Swedish economists directly challenged Keynes but the doctrine has persisted among Anglophone academics in particular as inflationism worsened from the 1960s with Fed activism.

In countries with inflationary central bank operations, large numbers of perfectly sane people believe that goods can be imported indefinitely without dollars being earned (the seller not getting any dollars), triggering a chronic merchandise ‘trade deficit.

They also believe that it is a ‘problem’ or that the trade deficit contributes to external instability or currency depreciation.

The obsession with the trade deficit seems to be driven by a belief that hard goods were ‘superior’ to services.

Students of history say similar attitudes were seen in the writings of nationalists who criticized the shift to coconut which was a commercial crop in areas like Kurunegala during British rule.

Sri Lanka’s central bank however has not discriminated against any hard work done by the people, or suggested that services workers were inferior.

Sri Lanka has a private savings rate of around 30 percent of GDP, which also broadly applies to those earning foreign income.

Savers may directly invest in assets, or put money banks as deposits either after conversion to rupees or as dollars in forex accounts.

Banks in turn will give them as investment credit to borrowers, which will turn into imports or build up dollar balances by investing them abroad.

Sri Lanka’ central bank in April collected about 420 million US dollars from the banking system, creating rupee liquidity.

Domestic Operations

When private credit is weak – or when money is not printed to enforce a policy rate claiming that inflation is low with statistics defeating economic principles – the central bank can sell sterilization securities into banks (in the current case Treasury securities in its portfolio) mop up the liquidity and build fx reserves, East Asia style, through deflationary domestic operations.

The government can also borrow rupees through Treasury bills buy dollars and settle foreign loans and end up with a rupee debt instead of a dollar debt, as happened before potential output targeting and flexible inflation targeting, preventing the build-up of dollar debt and an eventual default.

At the moment large volumes of excess liquidity remain in the banking system, which can be used up as private credit recovers, pressuring the exchange rate unless the dollars that created the liquidity is sold (unsterilized intervention).

The central bank can also prevent imports from being generated through investment credit by steadily selling its securities portfolio if it wants to keep the reserves.

Imports can also increase when foreign aid resumes and the government re-starts infrastructure projects. Sri Lanka government’s net foreign borrowings, except in stabilization years, is usually positive.

After re-structuring loans, Sri Lanka’s debt repayments will reduce, and only interest will have to be paid for several years. (Colombo/June01/2024 – Recast with revised data to show gross services which include tourism. Gross services data only available for two months)

Prices measured by the widely-watched Colombo Consumer Price Index fell 0.6 percent in the month of May. The index fell from 195.2 points to 194.1.

The food and non-alcoholic price index fell 1.2 percent to 232.6 points from 235.4 a month earlier.

Since September 2022 food prices are down 5.79 percent.

Sri Lanka’s central bank has been operating deflationary policy and also allowing the rupee to appreciate over the past year bringing down traded price in particular which some non-traded items continued to go up as the price structure adjusted to a collapse of the currency in 2022.

Educations, recreation and culture, while food, clothing and also transport seems to have finished inflating in response to the currency collapse.

Analysts have said that the monetary stability is coming from external anchoring (currency appreciation or stability amid deflationary policy) and the domestic anchor (triggering 5 to 7 percent inflation) is temporarily in abeyance.

Meanwhile growth recovered to 4.5 percent in the last quarter despite a foreign reserve build up in non-inflationary growth.

Singapore’s economic architect told then President J R Jayewardene to not to depreciated the currency and the country will be able to achieve non-inflationary growth.

Singapore does not have a policy rate to engage in money printing to suppress rates and trigger external instability. (Colombo/May31/2024)

“The daily consumption of chicken eggs in this country was 7 million eggs and in the last few months that amount has exceeded to about 8 million eggs,” Department officials said in a discussion with Minister of Agriculture and Plantation Industry Mahinda Amaraweera.

Amaraweera said the increase in local demand should not compromise Sri Lanka’s egg exports, and asked for a survey to be conducted on egg consumption.

Sri Lanka exports chicken eggs mainly to the Maldives, Amaraweera told EconomyNext. “Because of the presence of bird flu in other countries, there is a high demand for eggs from Sri Lanka.”

Switz Lanka, a hen egg producer which markets its product under the Happy Hen brand, exports eggs to the high-end Maldivian hospitality sector.

Maxies and Co Pvt Ltd is also listed as an egg exporter by Sri Lanka’s Export Development Board.

The increase in egg consumption in the island was attributed to the rise in foreign tourists, prices of meat and fish going up, as well as local demand for it as the cheapest protein food available.

Sri Lanka has received 813,176 tourists as of May 7.

A currency crisis also pushed many people into poverty, making eggs a cheaper source of nutrition compared to meat and fish which are more expensive.

Last year, Sri Lanka’s egg production was heavily affected by price controls imposed by the Consumer Affairs Authority, as chicken feed prices went up amid local forex shortage and a global commodity bubble. The government had also imposed restrictions on maize imports which poultry farmers use for chicken feed.

But in April this year Amaraweera said egg production had exceeded the daily requirement, and local consumers could expect a fall in egg prices.

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Sri Lanka producers meeting demand, egg at Rs35 for new year: Minister

Sri Lanka’s eggs were around 20 to 25 rupees before the rupee collapsed in April 2022 from 200 to 360 to the US dollar. Sri Lanka’s chicken meat and egg prices are generally higher than the world due to import licensing on maize which has pushed up production costs. (Colombo/May31/2024)

“We have a strong conviction that within our timelines we can do it,” Miniter Semasinghe told reporters Thursday.

Discussions on converting in-principle deals with official creditors into MOUs are progressing.

“We have to open the second round of negotiations with bondholder,” he said.

Meanwhile advisors of bondholders and government are also engaging he said. (Colombo/May30/2024)

“IORA consists of countries with different sizes and shapes, different economies, and different cultural thresholds,” Hulangamuwa said at the IORA Business Conclave organized by the Chamber.

“All together they present an enormous opportunity of investment amongst member countries.”

The conclave was jointly organized with the Ministry of Foreign Affairs.

“The world economy is 86 trillion. Our economy is 78 billion. If you translate that in to percentage it is 0.08. So, there is much more for Sri Lanka to gain by being part of larger markets rather than being alone,” Foreign Minister Ali Sabry said.

“Sri Lanka has started trade negotiations with Malaysia and Indonesia so that we can create bigger markets for us,” Minister Sabry said.

“Our market is 22 billion but with partnerships we are trying to create a bigger market. It’s a win-win. We have already built partnerships with India, Pakistan, Thailand.”

Secretary General of the Global Alliance for a Sustainable Planet, Satya Tripathi said in his keynote speech at the conclave “We can look after ourselves as developing countries. We can actually come together and create the kind of collective, kind of virtuous partnership that makes all risks melt away.”

The IORA business conclave – which attracted over 200 delegates including 70 international businesspersons from 11 Indian Ocean Rim Association Member States and 6 Dialogue Partners – facilitated robust B2B engagement and discussed collaborations in tourism, agriculture, logistics and ICT, Chairman of the IORA business forum, Buwanekabahu Perera said. (Colombo/May30/2024)

“The purpose of this visit is to provide cooperation to improve Sri Lanka’s immigration system by achieving the same standards as Singapore and integrating advanced technology,” the Ministry of Public Security said in a statement.

“This will greatly contribute to Sri Lanka’s efforts to modernize and improve all processes related to immigration, visa issuance and citizenship.”

The team, who are here after Minister Tiran Alas requested Singapore Minister for Law K Shanmugam’s help, will provide a detailed report on recommendations to bring the existing system on par with that of Singapore.

Sri Lanka recently controversially outsourced its visa handling function to VFS Global, which requires the payment of “processing” and “convenience” charges of 26 dollars, even though the government does not collect any fees.

Maldivian authorities have reminded Sri Lanka of the long-standing bilateral agreement under which their citizens could travel freely between the two neighbours without any charges or bureaucratic barriers.

Singapore is another country which could take action against Sri Lanka if the bilateral deal is found to be violated, according a source said.

There are only a handful of countries to which Sri Lankan passport holders can travel without any visa restrictions. (Colombo/May30/2024)

Stability

“The objective of monetary policy is not to promote growth, but to stabilize and facilitate for the country to achieve potential growth, whatever the levels,” Governor Weerasinghe told reporters in Colombo, after keeping rates unchanged.

“A lot of other policies will have to take place to enhance growth in the medium to long term.”

Critics have complained that Sri Lanka’s central bank has in the past tried to push growth by cutting rates by printing money through liquidity tools and denied monetary stability to the people and businesses by trying to close a potential ‘output gap’.

Sri Lanka has exchange controls due to successive deeply flawed monetary operational frameworks which intensify and also leads to trade controls, whenever attempts are made to boost growth by inflationary rate cuts involving reverse repo injections or standing facilities.

In the last century there has been a growing belief under Keynesian or post-Keynesian doctrines that rate cuts could boost growth or unemployment, (the non-neutrality of money) leading to the eventual collapse of the Bretton Woods, the emergence of floating rates, high levels of inflation, asset price bubbles like the housing bubble in floating regimes and steep depreciation and default in reserve collecting ones.

Some critics say money is indeed ‘non-neutral’ in that monetary instability, negative confidence shocks and the inability to conduct normal economic activities that come from forex shortages or defaults in the wake of inflationary rate cuts, leads to below average growth or economic contractions. Others – including monetarists – believe money may not be neutral in the short-term.

Before open market operations proper, were devised in the 1990s, leading to deliberate inflationary rate cuts, forex shortages seem to have come from rural credit re-finance, deficit financing as well as sudden sterilization of forex market interventions in Sri Lanka.

Sri Lanka’s economy grew 4.5 percent in the last quarter, after negative growth from the most aggressive ‘macro-economic policies’ deployed since the setting up of the central bank in 1950 and joining the International Monetary Fund.

For 2024, the central bank is making a cautious projection of around 3.0 percent, amid domestic elections, a debt restructure that is yet to be completed and an uncertain external environment.

Output Gap

At the moment there is a potential output gap based on the central bank’s model, Governor Weerasinghe said.

The potential output is a statistical estimation which is based in part on historical trends.

“Potential output is not a fixed one,” Governor Weerasinghe explained. “It is a dynamic variable, depending on historical data. As everyone knows potential output is what has happened in the
past and that will generate the potential output.”

“On that basis what we are seeing is the potential output is higher than what we think now.

He declined to publicly share the output gap estimated by the central bank. The potential output has been as high as 5.25 percent when it begun to be estimated.

“I don’t think we can share that kind of information in the model,” Governor Weerasinghe said. “That’s a complicated one. What we see is there is still a gap, a negative output gap is there.

“The central bank’s objectives in monetary policy decisions; the first one is to look at the inflation outlook, and then at whether there is a slack in the economy or whether there is a space for the economy to catch up and reach the potential.”

Rates

The central bank has been cautious in cutting rates, and held the policy corridor at 8.5 percent and 9.50 percent this, maintaining a balance of payments surplus, a strong exchange rate, allowing the agency to maintain monetary stability.

The central bank has maintained low inflation of around 2.5 percent for around 18 months, providing stability for economic activities to normalize.

At the moment so-called statistical ‘real’ short term rates based on historical inflation are positive.

Inflation would continue to be below 5 percent for 2024 based on their statistical model, Director of Economic Research S Jegajeevan said, though there may be a pick up from current levels.

Inflation may edge higher in the latter part of 2025.

“I can see there is a space (to cut rates),” Governor Weerasinghe said. “Inflation we think we can maintain at 5.0 percent. Policy rates are at 8.5 percent. I think real natural rates can be much lower going forward.”

At the moment with excess liquidity from dollar purchases interbank rates have hit the bottom of the policy corridor of 8.5 percent preventing short term rates from falling.

Recent lowering of the policy corridor, have also not been enforced by any printing of money.

The willingness to invest savings longer term, may depend not only on the availability of real savings but how confident savers are about future stability of the country including the exchange rate, analysts say. (Colombo/May31/2024)

“The Head of the embassy encourages Sri Lankan investors to establish business links in Bagdad and Kurdistan,” the trade ministry said in a statement.

Trade Minister Nalin Fernando met Al-Masoudi to discuss conducting the 9th session of Iraq-Sri Lanka for Economic and Technical Cooperation in Sri Lanka in November. The forum offers a platform to develop bilateral relations between both countries.

Establishing direct shipping facilities which would bolster Sri Lanka’s trade to Europe and the Middle East, improving air connectivity, and bilateral tourism ventures between the two countries were discussed at the meeting.

The re-establishment of a Sri Lankan Embassy in Iraq was also discussed to solve visa and tax issues between the two countries.

Iraq is one of the main buyers of Sri Lanka’s tea. Nearly 150,000 migrant Sri Lankans work in Iraq. (Colombo/May29/2024)

Sri Lanka produced 152,000 metric tonnes of rubber in 2012, but by 2023, it had fallen to only 64,400 metric tonnes, Manoj Udugampola, a former Chairman of the Colombo Rubber Traders Association told reporters in Colombo.

A census by Sri Lanka’s Rubber Development Department had found that the area cultivated had fallen from 138,000 hectares to 98,250 hectares.

“Apart from that, if you take the rubber extent we had ten years back, which was 138,000 Ha, last year the Rubber Development Department got a fresh survey, as per that census we have only 98,250 Ha,” Udagampola said, estimating a drop in 40 percent of the land extent.

“Out of that 98,000 hectares 10,000 hectares, around 10 percent of the total extent in the country is mostly kept abandoned, mostly by the smallholders,” he said.

“Why? Because with every kilo they tap, they incur a loss.”

“Last year’s 1x crepe rubber price was Rs. 671, this year it goes for 775, our net sales averages comes to around 660 rupees.”

On May Day, President Ranil Wickremesinghe announced a wage hike to 1,700 rupees a day from the 1,150 they were paying. Tea farms were also ordered a similar hike.

“As plantation companies, even at a loss, we maintain our rubber plants and rubber plantations. With this 70 percent increase of wages, from 1150 rupees, to 1902 rupees with EPF it’s a 74 percent increase,” he said.

“If wages rise by at least 180 rupees, then we may face a 120 percent rise in cost of production,” he said.

“And just because our cost of production may rise, we cannot raise our sale prices, because we are not price makers, we are price takers,” he explained. “Most rubber sold in the world is at a much larger scale, and at cheaper prices.”

RPCs manage a total of 30 percent of the rubber production as well as lands, while 70 percent is managed by small-holders, who are moving away from the rubber industry.

Tea smallholders had worked out a scheme to help pluckers get more money and increase the yield, which the large tea farms were trying to do as ‘revenue share’, which was also hit by the new gazette notice. (Colombo/May29/2024)

“Ages it can be decide by the employer,” Nanayakkara said when asked about job advertisements that specify age.

Sri Lanka is working on a revised employment act, which would address discrimination based on gender and sexual orientation.

“Right now, it’s [with] the legal draftsman,” Nanayakkara said. “We are planning on sending it this month before election.”

Nanayakkara said the new act would regulate workers in the informal sector.

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Sri Lanka new Employment Act in progress

““From this new employment act there is no such a burden for ladies, gents, LGBTIQ, anyone can go for any job and there will be no restriction for any,” Nanayakkara said.

However, the ministry of public administration has advertised that employees wishing to join the ministry ‘should be not more than 45 years of age.’ (Colombo/May29/2024)

Though private credit is positive it is still ‘sluggish’ , the central bank said.

At the moment working capital is being borrowed.

Credit Demand

Businesses are trying to de-leverage after a currency crisis, and also re-negotiate old loans with lower interest rates as complaints from the SME sector shows.

De-leveraging is part of a credit cycle that improves the balance sheets of business across the board and leaves them in a stronger position to expand in the future.

To expand however retail sales have to pick up. Capital investments then start as existing capacity or slack runs out and there is more confidence in the future.

“We have seen retail sales picking up in the recent past,” Governor Weerasinghe said. “I think that will push up some of the SME borrowings in the coming months.”

Early indications show that credit has not moved fast in April, which was a holiday month, he said.

“Hopefully in the months of May and June credit will pick up.”

The Prime Lending Rate has started to fall, indicating the risk appetite.

“Volumes are also rising,” Governor Weerasinghe told reporters after the latest monetary policy decision to hold rates.

“But businesses are still not willing to borrow for a longer term.”

Sri Lanka’s central bank has kept inflation low and allowed the exchange rate to appreciate in the first quarter which had brought down the price of many imported goods which could also help drive up retail sales.

A stronger exchange rate would also reduce building material prices, which may reduce the overall need for capital investments or allow bigger projects in the future, compared to a 370 to the dollar exchange rate that was seen in 2022.

Sri Lanka periodically hikes rates steeply to avert currency crises, which are usually triggered by cutting rates with inflationary open market operations and standing facilities on the basis of 12-month historical inflation data without regard to current credit conditions at the time, critics say.

This year rates have fallen due to weaker private credit, strong finances of the state enterprises, which allows debt repayments, a flattening state deficit by tax hikes as well as confidence and stability created by the central bank which halted capital flight.

But there is also reserve collection (financing the budget deficits of foreign countries) under an IMF program and repaying central bank swaps.

A slower fall in rates has been observed compared to an initial response to hikes in earlier cycles as well, Governor Weerasinge said.

Abnormal Cycle

“If you look at the charts it has been coming down significantly, but still not aligned with policy rates, under normal monetary policy cycles,” Governor Weerasinghe told reporters.

“In a cycle of policy easing transmission happens with a time lag.”

This time is not a normal cycle with debt restructuring added to the mix.

In Ghana which also has a flexible inflation target at 8.0 percent, an inflation target so deadly and could amount to un-anchored money, a default, depreciation and debt restructuring has seen instability continue with a gilt market shock from wide domestic debt restructuring.

In Ghana the policy rate is 29 percent, inflation 25 percent and the 3-month bill 23 percent in May.

Sri Lanka has also hiked income taxes.

Unlike value added tax, where money is collected after transactions, including retail sales, income tax kills the disposal income required to make transactions happen.

Legislators led by the Justice Minister Wijedasa Rajapaksa lifted the parate execution, or foreclosure by board decision, in a sudden state intervention, which banks had already warned would make them more cautious in lending to good customers and keep rates up.

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Sri Lanka parate suspension increases risk premium, endangers deposits, banks say

It is not clear to what extent the parate execution suspension is contributing to sticky new lending rates and delaying an economic recovery, but the central bank has earlier urged banks to cut rates for SMEs despite the problem with parate execution.

Sri Lanka CB urging banks to lower rates for SMEs despite parate suspension

Classical economists refer to such shocks as ‘regime uncertainty’. In the US during the extension of the Great Depression and delay in investment spending was directly attributed to state interventions especially under the New Deal, which spooked investors.

READ MORE: Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War

Confidence created by the central bank through recent exchange stability and virtually no inflation amid falling import prices, which could trigger a similar fall in domestic substitutes, may also increase disposable income, initially allowing more reserves to be collected and deposit rates to fall.

The latest dollar purchases however have been left mostly unsterilized, allowing excess liquidity build up, which analysts say may push rates down, particularly deposit rates, but may pressure the exchange rate unless mopped up to some extent or the exchange rate defended to lose the liquidity and reserves as credit demand resumes.

Governor Weerasinghe said there was a claim that banks had raised deposit rates (most fixed deposits are up to one year in Sri Lanka) but that re-pricing had now largely happened.

New lending

Though negotiations for old loans may be going on, which also depends on bargaining between banks and customers, Governor Weerasinghe said he would like to see new lending rates falling faster.

“We are monitoring the new lending rates, which are around 12.5 percent. It is still the highest,” Governor Weerasinghe said.

“We are emphasizing that new lending should happen at closer to the other market rates.”

There are some new apartment projects and land sales are also being advertised.

Credit growth depends on actual credit demand which has factors other than interest rates.

Governor Weerasinghe pointed out that the ban on car imports could also contribute to a slower credit.

Vehicles are financed by both banks and leasing companies. Leasing companies themselves have credit lines with banks.

Banks are also trying to raise equity to gear up for new lending after capital ratios were hit by bad loans and defaults in dollar bonds.

Commercial Bank on May 28 announced a 22 billion rupee rights issue. (Colombo/May29/2024)

Maldivian authorities have reminded Sri Lanka of the long-standing bilateral agreement under which their citizens could travel freely between the two neighbours without any charges or bureaucratic barriers.

A one month stay is available without a fee.

Maldivians, who consider Sri Lanka their second home, often spend more than a month in the larger country, but are now required to pay 26 dollars to VFS Global, which has controversially been contracted to handle Sri Lankan visas.

“The Sri Lankan government will not charge a fee, but Maldivians still have to pay VFS after applying online for a visa,” a Maldivian government official said in the capital, Male. “This violates the spirit of our agreement.”

He said the new administration of President Mohamed Muizzu was taking up the issue with Sri Lankan authorities in both Male and Colombo.

In a worst-case scenario, the Maldives will be compelled to reciprocate the new cost of a Sri Lankan visa and charge Sri Lankans traveling to the archipelago. There are also expat Sri Lankans in the Maldives.

There are only a handful of countries to which Sri Lankan passport holders can travel without any visa restrictions.

Singapore is another country which could take action against Sri Lanka if the bilateral deal is found to be violated, according a source said.

Opposition parties have said in parliament that outsourcing the visa handling to VFS Global and their partners was a bigger corruption scandal than the bond scam of 2015 and 2016, when billions of rupees were stolen through insider deals.

VFS has sent this response in relation to visas to Maldivians

We want to clarify that no visa or service fee is levied to Maldivian nationals who wish to visit Sri Lanka for a period of six months. Fees are applicable for all other categories.

For additional information on visa exemptions please check https://www.srilankaevisa.lk/information

We have also attached a screenshot of the page which states that Maldivians do not have to obtain an e-Visa for six months stay.

All applicable visa fees and charges are as per the directions of the Department of Immigration and Emigration (DI&E), Sri Lanka. (COLOMBO/May 28, 2024)

“267 employees have given consent to be retired under the VRS to be implemented for employees in relation to the amalgamation of Ceylon Fertilizer Company Limited and Colombo Commercial Fertilizer Company Limited,” Gunawardena told reporters Tuesday.

The Cabinet of Ministers approved the proposal to implement the VRS at a cost of 844 million rupees from the funds of the two fertilizer companies for execution of the proposed retirement scheme.

This is subject to the recommendations of a committee appointed to study retiring excess employees in state enterprises, Gunawardena said. (Colombo/May29/2024)

“The reforms have started to yield positive outcomes, reflecting significant progress in multiple areas. Sri Lanka’s gross official reserves have seen a significant increase, reaching USD 5.5 billion by the end of April 2024,” Semasinghe said on social media platform X (twitter).

“Additionally, the Sri Lankan rupee has appreciated by approximately 8 % against the US dollar so far in 2024. This will boosts investor confidence and enhances the country’s ability to manage external shocks and meet international obligations and enhance confidence on the economy.

“The appreciation of the rupee can help lower inflation and reduce the overall cost of living and make it easier for the government and businesses to service foreign debt, thereby improving our financial reputation globally. Further, will improve the trade balance by potentially reducing the trade deficit.”

Sri Lanka’s inflation was 1.5 percent in the 12-months to April 2024, measured by the widely watched Colombo Consumer Price Index, data from the state debt office showed.

The CCPI Index fell 0.8 percent, to 195.2 points in the month of April after falling 1.9 percent in March.

Sri Lanka’s central bank has been operating largely deflationary policy, since September 2022, except perhaps in December 2023, and also allowed the rupee to appreciate in the balance of payments surplus it created.(Colombo/May28/2024)

“While the medium term inflation outlook remains compatible with the current level of policy interest rates and inflation expectations are well anchored, the Board observed the need for a further reduction in market lending interest rates in line with policy interest rates and other benchmark interest rates, which is imperative for the easing of domestic monetary conditions and domestic economic recovery,” the central bank said in its monetary policy statement.

The central bank said the effect of value added tax hike in the inflation index had been offset in the inflation index by falling fuel, electricity and LP gas prices.

The electricity and gas sectors have said the appreciation of the currency (after deflationary monetary policy) was the reason they were able to cut prices, indicating that it was the central bank that was fully responsible for the energy price falls.

The full statement is reproduced below:

The Central Bank of Sri Lanka maintains policy interest rates at their current levels

The Monetary Policy Board of the Central Bank of Sri Lanka, at its meeting held on 27 May 2024, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 8.50 per cent and 9.50 per cent, respectively. The Board arrived at this decision after carefully assessing the current and expected macroeconomic developments and possible risks on the domestic and global fronts with a view to maintaining inflation at the targeted level of 5 per cent over the medium term while supporting the economy to reach its potential. While the medium term inflation outlook remains compatible with the current level of policy interest rates and inflation expectations are well anchored, the Board observed the need for a further reduction in market lending interest rates in line with policy interest rates and other benchmark interest rates, which is imperative for the easing of domestic monetary conditions and domestic economic recovery.

Headline inflation is expected to converge to the targeted level over the medium term, despite transitory volatilities

Headline inflation, as measured by the year-on-year change in the Colombo Consumer Price Index (CCPI, 2021=100), showed some uptick to record 1.5 per cent in April 2024 compared to 0.9 per cent in March 2024, mainly due to an acceleration in non-food inflation. However, on a month-on-month basis, both food and non-food prices declined. Recent movements in inflation indicate that the uptick in inflation driven by the Value Added Tax (VAT) amendments in January 2024 has been partly offset by the latest price developments underpinned by the downward revisions to the electricity tariff, and fuel and LP gas prices.

In addition, the moderation in food prices and the muted demand conditions also contributed to the low level of inflation. Meanwhile, core inflation, which reflects underlying demand pressures in the economy, also remained at subdued levels reflecting low demand pressures in the economy. Incoming data suggests that headline inflation is likely to be below the targeted level of 5 per cent in the upcoming months due to the combined impact of the administered price adjustments and eased food prices,
although some upside risks remain.

However, inflation is expected to eventually align with and remain around the target level over the medium term, supported by appropriate policy measures.

A further decline in market lending interest rates is warranted
The overall market interest rate structure has adjusted downwards in response to the monetary policy easing measures implemented thus far. The yields on government securities continued to decline, further aligning with the current level of policy interest rates. With the decline in average deposit interest rates in the banking sector in recent months along with the moderation of benchmark interest rates, further space has been created for overall lending interest rates to adjust downwards in the period ahead. Moreover, elevated interest rates on selected loan products are yet to be adjusted downwards in line with the overall interest rate structure. Flows of credit to the private sector have only recorded a marginal expansion thus far during the year, in spite of the notable monetary policy easing and the improvement in overall liquidity conditions. A further reduction in retail lending interest rates could facilitate the pickup in private sector credit, thereby supporting the ongoing recovery of economic activity.

The external sector strengthened further

As domestic economic activity gathered momentum in recent months, the cumulative merchandise trade deficit is expected to have widened during the four months ending April 2024 compared to the same period in 2023. Buttressed by tourism related inflows, the services sector recorded a notable net inflow in recent months, while workers’ remittances remained elevated. Gross official reserves increased notably to US dollars 5.5 billion (including the PBOC1 swap) by end April 2024, supported by considerable net purchases by the Central Bank from the domestic foreign exchange market amidst increased foreign currency inflows. Meanwhile, the Sri Lanka rupee recorded an overall appreciation of around 8.0 per cent against the US dollar thus far in 2024.

Policy interest rates are maintained at their current levels

In consideration of the current and expected macroeconomic developments highlighted above, the Monetary Policy Board of the Central Bank of Sri Lanka, at its meeting held on 27 May 2024, was of the view that it is appropriate to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 8.50 per cent and 9.50 per cent, respectively. The Board noted that there remains space for market lending interest rates to decline further given the prevailing accommodative monetary policy stance and the continued decline in the cost of funds of financial institutions. The Board re-emphasised the need to pass the benefits of eased monetary conditions to the borrowers without further delay.

The Monetary Policy Board will continue to observe incoming data and assess risks to the inflation outlook, among others, and stand ready to take appropriate measures to maintain domestic price stability in the period ahead while supporting the economy to reach its potential.

Small tea estate owners are already paying more than the prescribed minimum wage and there is a problem related to increasing these wages in the regional estate companies which have been transferred to the private sector from the government, a statement from the ministry quoted Nanayakkara as saying.

Small estate owners however are paying pluckers based on the volume of kilo plucked around 50 rupees a kilogram.

The privatized firms say they are offering more on a the basis as smallholders and workers who have not been prevented by the unions are earning between 40,000 to 75,000 rupees a month on the same basis.

President Ranil Wickremesinghe has told the cabinet of ministers that a bill must be drafted to take over the estate companies that do not implement the minimum wage and “give them to those who can implement them properly”, the statement said.

Separate discussions have been held with estate owners and labour unions, and because the parties could not reach an agreement, the ministry had convened the Wage Boards, said Nanayakkara.

“In the first instance, the estate owners did not attend, and they officially informed us that they would not participate in the second session. Therefore, as a last resort, we proposed a wage of 1,700 rupees, inclusive of a basic wage of 1,350 and a 350 rupee allowances, based on the legal provisions we have. We gazetted this on April 30 and May 1, giving the relevant parties 15 days to file objections,” he said.

“Since no substantial objections were received, the Department of Labour, the government, and I, as the Minister of Labour, finalised the notification last Thursday,” he added.

The Planters’ Association representing said they met President Ranil Wickremesinghe and govt officials and explained that they cannot pay as much as 1700, which works out to 74 percent increase with EPF.

President Ranil Wickremesinghe had requested owners on numerous occasions to raise the wage, said Nanayakkara.

“When this country fell during the time of COVID-19, the estate workers made a great sacrifice because they could not have a meal of rice, a roti, or drink plain tea,” he said. 

“The President repeatedly urged the estate owners to provide a reasonable wage to the workers. However, since we did not receive a satisfactory response, we took this decision. All estate owners will now have to pay this minimum basic wage.”

Tea farm managers say that successive governments have dealt heavy blows to the sector, in the form of the glyphosate ban which lost the country the Japanese market, the fertilizer ban which hit the sector badly and finally the currency crisis, which led cost rises.

Despite all what has done by successive governments to hit the plantations, managers says they have paid salaries and EPF. Meanwhile the residual government managed estates are in arrears of provident fund contributions deducted from the workers own salaries.

The private firms which bought the estates in the mid 1990s had paid 8,000 billion rupees to get the leasehold and last year each estate paid around 80 to 100 million in leases, which was adjusted upwards by the GDP deflator, after the currency crisis. (Colombo/May27/2024)

As part of this initiative, 10 pioneering Sri Lankan brands will be selected to showcase the nation’s dedication to sustainability, ethical practices, and cultural heritage on a global scale, with support from CELE and Good Life X.

“Chosen for their commitment to ethical standards, sustainability, and social responsibility, these ten brands will undergo a comprehensive capacity-building program,” the EDB said.

The program seeks to promote Sri Lankan crafts internationally and make a significant impact on the local economy by fostering a sustainable business model that benefits artisans and their communities.

The global creative industry is one of the fastest-growing economic sectors globally, with high engagement of SME entrepreneurs, and recognized for its substantial role as a contributor to the gross domestic product (GDP) in many nations.

“The Sri Lankan Creative Industry also has significant potential to contribute to the economy, given Sri Lanka’s inherent craftsmanship, cultural diversity, and rich natural resources. These provide the base for a wide range of creative industries such as art, crafts, design, fashion, filming, performing arts, heritage, architecture, Sri Lanka’s cuisines, and more.”

“To realize this potential, Sri Lanka must continuously seek new and sustainable sources of growth. This is essential to revitalize our economy and create new job opportunities that align with the aspirations of our young people.

“TIFC and UAL have conducted research on “Sri Lanka’s Crafting Potential: Sustainable Trade and Development for Sri Lanka’s artisanal sector” to gain an in-depth understanding of the Sri Lankan craft sector for future interventions, with the three key pillars innovation, collaboration, and education in mind, and a research report has been prepared. (Colombo/May27/2024)

The information will not be used to collect tax retrospectively, State Minister for Finance Ranjith Siyambalapitiay said.

The gazette requiring the information to submitted online to the Department of Inland Revenue was issued on March 2024 and its implementation notice was issued on May 21, Minister Siyambalapitiya said.

According to the gazette, ownership and transfer of shares, current account balances and loans have to be provided quarterly by the stock exchange and banks and non-bank financial institutions.

Car registrations, land ownership and transfers should be provided real time.

Information on leases and consultancy and contracts will also have to be provided.

Sri Lanka has to collect more direct tax after the country’s revenue fell to very low levels, Minister Siyambalapitiya said.

Sri Lanka’s macro-economists persuaded politicians to cut taxes in 2020 and also printed money to boost growth (stimulus or targeting potential output) after triggering a series of currency crises through rate cuts after the end of a civil war, ending in sovereign default.

Sri Lanka is now requiring all persons earning over 100,000 rupees a month (about 300 dollars) to open a tax file and pay income tax to support the state.

Sri Lanka’s macro-economists have resisted any transition to a better monetary standard that reduces the discretion to cut rates to target potential output by printing money.

Download Sri Lanka gazette on asset reporting

Link to Inland Revenue Notice

Countries in East Asia and the Middle East that have more consistent monetary regimes which avoid forex crises, have allowed better budgeting, and lower income tax rates (around 20 percent) and value added tax (15 percent or lower) which helps in capital generation and investment and future growth. (Colombo/May26/2024)