- State Finance Minister Shehan Semasinghe says the first disbursement of USD 250 mn out of the USD 500 Mn for “budget support” from the World Bank has been received: analysts express alarm that the Govt is yet borrowing in Forex for “budget support” even after increasing taxes, utility prices and all govt charges by massive percentages.
- Former Foreign Minister & MP Professor G L Peiris says the Govt’s claims that domestic debt restructuring efforts will have no impact on the EPF are false: also says the entire process of DDR is a “deception”: in the meantime, Govt issues the Gazette Notification on DDR.
- Former CB Governor Ajith Nivard Cabraal says there’s no way that the debt crisis could be successfully overcome without growing the economy: laments there’s no govt strategy at present to stimulate the economy, and therefore the DDR plan would fail: reminds the GDP had a growth from USD 24 bn to 79 bn from 2006 to 2014, and consequently the Debt to GDP reduced from 91% to 69% during that period.
- TNA MP M A Sumanthiran alleges that by the Govt & Central Bank excluding primary dealers, domestic private Bond holders & high net-worth money market players from the Domestic Debt Optimisation, those investors have benefited immensely: terms such investors as “vultures”: alleges that they are the ones who do bond scams and who fund the election campaigns of the Govt.
- Colombo Stock Exchange’s ASPI increases significantly by 633 points or 6.71% to pass the 10,000 point mark to 10,076 points; Turnover records Rs 7.4 bn: T-Bill and Bond yields down substantially, leading to massive profits being booked by primary dealers, bond holders and money market players.
- Fitch Ratings says complications may arise from a number of factors in the govt’s proposal for treatment of Domestic Debt, although the new effort marks a step towards resolving uncertainties around the impact of the sovereign’s debt restructuring on the local banking sector.
- Govt’s budget deficit for the 4 months upto April 2023 expands by a staggering 57% from a year ago to Rs.824 bn (from 2.2% of GDP to 2.7%) driven by interest costs: exchange rate appreciates amidst non-payment of Forex debt, tight import restriction policies, massive contraction of consumer demand and negative economic growth.
- Chinese Ambassador to SL Qi Zhenhong says many nations in the world, including China and Sri Lanka, are still suffering under the yoke of neo-colonialism and hegemonism: also says China firmly upholds international fair play & justice, advocates the practice of true multilateralism, takes a clear stand against all hegemonism & power politics, and unswervingly opposes any unilateralism, protectionism & bullying.
- Former PUC Chairman Janaka Ratnayake stresses need for accurate data and fair practices in determining electricity tariffs, with a focus on minimising the burden on consumers and ensuring their rights: asserts the increase of the electricity tariff in February was based on inaccurate data.
- Sri Lanka Women’s Cricket Captain Chamari Athapaththu becomes the first player from Sri Lanka to top the ICC Women’s ODI Player Rankings: climbs to the top spot in the batting charts.
Sri Lanka Original Narrative Summary: 05/07
President Wickremesinghe Addresses Sri Lanka’s First International Digital Marketing Summit
In a momentous occasion, President Ranil Wickremesinghe delivered a powerful message at Sri Lanka’s First International Digital Marketing Summit, highlighting the country’s potential to cultivate a community of exceptional marketers. He emphasized that these skilled professionals, armed with vision, determination, and expertise in the digital realm, hold the key to leading the nation’s revival and contributing to its economic stability during this critical juncture.
President’s Full Speech
It is indeed a pleasure to address the participants of Sri Lanka’s First International Digital Marketing Summit, an event that holds immense significance for our nation’s future in the field of digital marketing. At the outset I wish to convey my appreciation to the Digital Marketing Association of Sri Lanka (DMASL) and Dialog Axiata PLC, for their collaboration in bringing together this momentous summit. Their dedication to advancing the digital marketing landscape in Sri Lanka is extremely commendable.
The theme of this year’s summit, “The Lankan Revival: Unleashing the Power of Digital for Sri Lanka’s Resurgence,” resonates deeply with the aspirations of our nation. In the face of unprecedented economic challenges, we have demonstrated our resilience and determination. Now, it is time to unleash and leverage the potential of digital technologies to drive our nation forward, transforming Sri Lanka to be a leading global player in the digital marketing industry.
The lineup of speakers assembled for this event is nothing short of being exceptional. Representatives from Meta, Google, LinkedIn and other such renowned companies will share their invaluable insights and experiences, providing you with an unique opportunity to learn from the very best in the field. Each speaker brings a wealth of knowledge, expertise and a global perspective, that will undoubtedly inspire and empower you to achieve remarkable success in your digital marketing endeavours.
One aspect of this summit that is truly distinct is the emphasis on interaction and engagement. The interactive sessions and Q&A allows for a deeper understanding of the concepts discussed, and also showcases the commitment and contribution of these industry leaders, to the growth and development of digital marketing professionals in Sri Lanka.
I am confident that the insights shared, the knowledge gained and the networking at this summit, will have an indelible influence on all of you participants. Together, we will build a community of exceptional marketers who possess the skills, vision and determination, to lead our nation’s revival in the digital era, and also contribute to the country’s economic stability at this critical juncture.
As the President of Sri Lanka, I extend my wholehearted support to all the participants of this summit. I urge you to seize every opportunity presented to you here today. Let us resolve to champion the power of digital marketing, to position Sri Lanka as a beacon of innovation and excellence on the global stage. Together, we can sustain the power of digital marketing and lead Sri Lanka into a future filled with boundless opportunities.
Thank you, and I wish you a truly transformative and memorable experience, at the Sri Lanka Digital Marketing Summit.
Ranil Wickremesinghe
President
Democratic Socialist Republic of Sri Lanka
Prevailing showery and windy conditions expected to continue
Prevailing showery and windy condition over the south western parts of the island is expected to continue.
Showers will occur at times in Western, Sabaragamuwa and Central provinces and in Galle and Matara districts. Fairly heavy showers about 75 mm are likely at some places in the Sabaragamuwa province and in Kandy and Nuwara-Eliya districts.
Several spells of showers will occur in the North-Western province.
Showers or thundershowers may occur at a few places in the Uva province and in Ampara and Batticaloa districts during the evening or night.
Strong winds about (45-50) kmph can be expected at times in western slopes of the central hills, Northern and North-Central provinces, and in Puttalam, Hambantota and Trincomalee districts.
General public is kindly requested to take adequate precautions to minimize damages caused by temporary localized strong winds and lightning during thundershowers.
Sri Lanka hopes China will come on board with external debt restructuring
By: Staff Writer
Colombo (LNW): Sri Lanka hopes that China will assist the country in its bid to restructure the external debt in the ongoing negotiations, Foreign Minister Ali Sabry said on Monday.
Sabry said negotiations have been progressing well with the Chinese as they are believed to hold over 50 per cent of Sri Lanka’s external debt.
“We have had several rounds of discussions with them,” Sabry, who was in China last week, said.
He said the Chinese were taking part as observers in the platform created by the Paris Club of Creditors along with India and Japan. “We are very confident that China will assist us in debt restructuring,” Sabry said.
Sri Lanka hopes to restructure its external debt of USD 41 billion along with its slightly higher domestic debt of USD 42 billion.
On Saturday, the government got its local debt restructuring plan approved in Parliament.
Both the restructuring processes should be complete by September in time for the International Monetary Fund’s first review of its USD 2.9 billion bailout programme extended in mid-March.
Sri Lanka approached the IMF for a bailout in April 2022 after declaring its first-ever debt default since independence in 1948.
Domestic debt restructuring (DDR) is a key condition in the IMF programme, through which a bailout package was approved for Sri Lanka.
The IMF programme unlocks more help from international funding agencies. Accordingly, the World Bank, earlier this week, approved USD 700 million in financing as budgetary and welfare support for Sri Lanka, which is facing its worst economic crisis.
The island nation is facing its worst economic crisis in history due to a shortage of foreign exchange reserves.
Sri Lanka’s economy has been hit hard by the pandemic, rising energy prices, populist tax cuts and double-digit inflation.
A shortage of medicines, fuel and other essentials also helped to push the cost of living to record highs, triggering nationwide protests which overthrew the government of President Gotabaya Rajapaksa in 2022.
Sri Lanka launches the finalization of domestic debt rework
By: Staff Writer
Colombo (LNW): While external debt restructuring remains a top priority for the Sri Lankan government, domestic debt rework finalization gets underway but the Government securities and Sri Lanka Development Bonds will not be restructured, Central Bank and Finance Ministry officials confirmed dispelling fears of local banks and creditors.
Only T-Bills held by the Central Bank amounting to US$11.4 billion will be considered for treatment to create some fiscal space, two high officials of the monetary and fiscal authorities said.
A voluntary domestic debt optimization operation without compulsion is envisaged by Sri Lankan government and its advisors will initiate consultations with major T-Bonds holders of $ 24 billion, they reiterated.
The International sovereign bonds amounting $12.1 billion would be treated as and when necessary they stated adding that the country would not restructure Treasury bills outside of central bank holdings and would engage with major T-bond holders for voluntary ‘optimization.
According to CB high official, holders of Sri Lanka’s Treasury bonds who agree to participate in the voluntary Domestic Debt Optimization (DDO) will undergo a debt exchange process, where their old bonds will be replaced by new bonds.
Sri Lankan authorities will offer the option of debt exchange to T-bond holders who are willing to participate in the voluntary debt optimization. New bonds will be issued in exchange for old bonds, but this will be performed while ensuring the stability of the banking system.
The Central Bank has already reduced the stock of Sri Lanka Development Bonds (SLDBs) which are held largely by the banks by converting them to rupee bonds.
The Central Bank has announced the domestic debt optimization strategy pledging to protect the banking sector and without affecting the superannuation funds.
The banking sector has to bear tax burden as high as 50 percent making a significant contribution to government revenue and financial consolidation.
The Banks obtained a profit of 33 percent from the investment in government securities, while in the current situation, it has earned a profit of 17 percent.
Therefore the government has decided to absorb any additional impact on banks and ready to make financial infusion if necessary if there is any impact from the DDO, finance ministry sources disclosed.
Treasury bonds of superannuation pension funds are to be exchanged for longer maturity treasury bonds from 2027 to 2038, with a step-down coupon structure of 12percent until 2025 and 9 percent until maturity.
In order to encourage participation of superannuation funds, those that do not take part would be subject to an income tax rate of 30 percent versus the current 14 percent, according to the DDO strategy.
EPF and ETF are subject to a 14 percent tax rate, lower than the tax rate imposed on banks.it has been decided to optimize all existing Treasury Bonds from these funds and issue new bonds in return.
These bonds will get 12 percent interest until 2025 and 9 percent interest. The government assures that if there is any deficit, the treasury will cover it.
The stock of SLDBs was brought down to Rs. 282.5 billion by the end of March 2023 from Rs. 603.1 billion in April last year, he added.
Sri Lanka has launched the foreign commercial borrowing by the issuance of International Sovereign Bonds raising funds amounting $ 17.2 billion in 2001 an again $17.6 billion from 2007, central bank data shows.
However Sri Lanka’s bond holders have been demanding for domestic debt restructuring in the recent past. They claim that the government’s domestic debt – defined as debt governed by local law – will be reorganized in a manner that both ensures debt sustainability and safeguards financial stability.
Sri Lanka Undertakes Nationwide Building gauge resistance survey against earth tremors
By: Staff Writer
Colombo (LNW): Sri Lanka’s recent tremors have compelled the government to launch a program to gauge the resistance of buildings and new constructions against earth tremors is being conducted across Sri Lanka, the country’s Geological Survey and Mines Bureau (GSMB) said.
In response to an increase in seismic activity, Sri Lanka’s Geological Survey and Mines Bureau (GSMB) has embarked on a nationwide campaign to evaluate the resistance of both existing and newly constructed buildings against earthquakes. This effort aims to ensure the safety of infrastructure in the face of mounting geological instabilities and to provide reassurance to the country’s residents.
Over the past year, Sri Lanka has experienced a number of minor tremors. The country’s senior geophysicist at the GSMB, Mahinda Seneviratne, made these facts known during a television appearance. According to Seneviratne, these tremors have brought to light the critical need for a comprehensive assessment of building resilience against such geological events.
The focus is not only on assessing the current state of infrastructure but also on ensuring that new constructions meet safety standards to withstand potential earth tremors.
Seneviratne highlighted the city of Colombo as an area of particular concern. Colombo, the nation’s capital and most populous city, boasts a high density of structures. The robustness of these structures against seismic activities has thus become a top priority for GSMB.
Recent geological events have accelerated the urgency of this resilience assessment program. Notably, a significant 5.8-magnitude earthquake was reported off the southeast coast of Sri Lanka this past Saturday.
This tremor, although originating from the depths of the ocean and located approximately 1,260 kilometers from Colombo, was reportedly felt by residents in both Colombo and Galle districts.
The occurrence of this earthquake led to an influx of inquiries to GSMB regarding the safety of buildings, especially in the wake of Saturday’s tremor. This public concern further underscores the relevance and necessity of the GSMB’s ongoing campaign to gauge building resistance to earth tremors.
This initiative is a critical step in ensuring Sri Lanka’s infrastructure can withstand such geological events. The results will not only help to potentially save lives and reduce property damage in the event of future earthquakes but will also provide peace of mind to Sri Lankan residents.
As the GSMB continues this essential work, it is clear that the safety of Sri Lanka’s people and the resilience of its infrastructure remain top priorities
Several small tremors have been felt in the country in the past year, said senior geophysicist of the GSMB Mahinda Seneviratne on TV.
Seneviratne said they are paying special attention to buildings in Colombo due to the high density of structures in the city.
He added that a 5.8-magnitude earthquake was reported in the seas off the southeast coast of Sri Lanka on Saturday, and the GSMB has received many inquiries about the safety of buildings, especially following Saturday’s tremor.
The tremor was located around 1,260 km from Colombo and took place in the deep seas, the GSMB official said, adding that residents of Colombo and Galle districts reported feeling the tremor.
10 essential dishes to try in Sri Lanka
From string hoppers to watalappam, get to know the delicacies this island nation offers that are found nowhere else
The teardrop-shaped island of Sri Lanka off the southern tip of India is a tropical paradise with picture-perfect beaches, ancient Buddhist temples, and exotic wildlife. But for food lovers, Sri Lanka’s vibrant mix of cultural influences makes it a culinary wonderland. Over centuries of trade and colonial rule, Arab, Malay, and South Indian influences have blended with indigenous cooking styles to create unique dishes found nowhere else, while a troubled history has made much of the country’s cuisine reliant on homegrown produce.
“One thing about Sri Lankan cuisine is that we are still tied to our land. We do everything with what’s available here,” Ministry of Crab co-founder Dharshan Munidasa tells Tatler Dining. “We are in a crossroads of all these waters mixing and hence the freshwater prawns are huge, the crabs are huge, the tuna is great.”
Now a traveller’s paradise, Sri Lanka offers a bounty of delicious, and in some cases novel, flavours for the intrepid foodie. Here are 10 essential dishes to sample on your next trip to Sri Lanka, for first-time visitors and seasoned travellers like.
1. Rice and curry
No meal in Sri Lanka is complete without a hearty plate of rice and curry. Red, yellow, and green curries, usually made with meat or seafood, coconut milk and spices like chilli, cinnamon, and curry leaves, are presented in a spread—much like Korean banchan—along with an array of vegetable sides like okra, jackfruit, and eggplant. The curries are then ladled over mounds of fluffy rice, with the diner able to mix and match to their heart’s desire.
2. Egg hoppers
These bowl-shaped pancakes (also known as appam) made from rice flour and coconut milk are a staple of Sri Lankan breakfasts and dinners. Cooked in a special pan with a rounded bottom, hoppers can be plain but are best when cooked with an egg in the middle—and are always eaten with curry. The lace-like edges soak up sauce, while the eggy centres remain fluffy.
3. Kottu roti
This popular street food consists of chopped roti flatbread stir-fried on a griddle with spices, meat, eggs and vegetables. The ingredients are vigorously chopped and tossed together, creating a riot of textures, flavours and aromas. Kottu roti is usually eaten as a late-night snack, but it is too delicious to miss at any hour.
4. Pol sambol
This Sri Lankan version of shredded coconut salad is spicy, tangy, and deeply nutty. Grated coconut is mixed with chilli, lime, and often tomato, onion and Maldivian fish. Pol sambol is usually served as a condiment, but it’s also delicious on its own with rice.
5. Crab curry
Sri Lanka is an island, so seafood like the famous lagoon crab is abundant and a highlight of the cuisine. Crab curry, where chunks of crab meat are simmered in a spicy coconut-based curry sauce, is a signature dish. The sweet crab meat, which falls off the shell, pairs perfectly with the rich and fiery curry.
6. Ambul thiyal
Ambul thiyal, also known as sour fish curry, is a popular Sri Lankan dish made with tuna, spices, and dried goraka fruit. The dish is typically prepared by marinating chunks of tuna in a mixture of spices and then cooking it in a tangy sauce made with dried goraka fruit, which gives it its distinctive sour flavour. A staple in Sri Lankan cuisine, ambul thiyal and is often served with rice and other traditional sides.
7. String hoppers
A popular dish across Sri Lanka and South India, string hoppers (also known as idiyappam) are made from a steamed mixture of rice flour pressed into thin noodles or “strings”. The noodles are typically served with a variety of curries, chutneys, and sambols, and are a staple in Sri Lankan cuisine. Whether eaten for breakfast, lunch, or dinner, string hoppers are loved for their soft, delicate texture and versatility, as it can be paired with a wide range of flavourful curries and condiments.
8. Ceylon tea
While not exactly a dish, Ceylon tea is absolutely essential to try while in Sri Lanka. A type of black tea that is grown and produced in Sri Lanka, Ceylon tea is known for its distinct flavor and aroma, which is influenced by the island’s unique climate and soil conditions. The tea is typically brewed strong and served with milk and sugar, although it can also be enjoyed plain or with a slice of lemon. Ceylon tea is a staple in Sri Lankan culture and is often served to guests as a symbol of hospitality. It is also exported around the world and is a popular choice among tea lovers for its bold and robust flavour.
9. Milk rice
For a sweet ending to a Sri Lankan meal, milk rice is ideal. Essentially a milky rice pudding infused with coconut milk, sugar and spices like cardamom, nutmeg and saffron, it’s often garnished with more coconut milk, fruit like mangoes or bananas and pistachios for a comforting dessert that packs a punch.
10. Watalappan
A sweet and creamy pudding made with coconut milk, jaggery (a type of unrefined cane sugar), cashews, and spices, watalappan is typically steamed in small bowls or cups and has a smooth and silky texture. It’s often flavoured with a combination of cardamom, cinnamon, and nutmeg, which gives it a warm and aromatic taste. The dessert is often served during special occasions and festivals, such as weddings and New Year celebrations, and is a beloved ending to any Sri Lankan meal.
Source: Tatler Asia
Sri Lanka’s trade deficit widens with relaxation of import bans
By: Staff Writer
Colombo (LNW): Sri Lanka’s Central Bank claims the island nation’s trade deficit widening for four years including 2023, despite the recent lifting import ban on certain items., a top official said, as the crisis-hit nation is compelled to relax its import barriers.
Since the country declared an unprecedented sovereign debt default last year after the $77.1 billion economy fell short of foreign currency, the Central Bank has imposed strong restrictions on imports.
The deficit in the merchandise trade account amounted to US dollars 447 million in May 2023, compared to US dollars 403 million recorded in May 2022, recording a year-on-year expansion for the first time since February 2022, central bank announced.
The cumulative deficit in the trade account during January to May 2023 was US dollars 1,926 million, a sizeable decline from US dollars 3,528 million recorded over the same period in 2022
Reflecting the ongoing recovery in economic activities, Sri Lanka’s imports expanded moderately in May, marking the first year-on-year increase since February 2022.
Earnings from merchandise exports declined by 2.7 per cent in May 2023, year-on year, to US dollars 1,019 million, while increasing notably compared to April 2023.
The decline in earnings from industrial exports mainly contributed to the decline in export earnings amidst improved agricultural exports. Meanwhile, cumulative export earnings during January to May 2023 recorded at US dollars 4,866 million, a decline of 7.7 per cent over the same period in the last year.
Earnings from the exports of industrial goods declined in May 2023, compared to May 2022, mainly due to the lower exports of garments to most of the major markets (the USA, the EU, and the UK).
Similarly, a sizeable decline was recorded in the exports of petroleum products (led by lower export volumes and prices of bunker fuel exports), textiles (primarily, cotton fabric), printing industry products and transport equipment.
However, earnings from animal fodder (mainly, wheat residues); machinery and mechanical appliances (mainly, mechanical appliances parts); food : Expenditure on merchandise imports increased marginally to US dollars 1,466 million in May 2023, compared to US dollars 1,451 million in May 2022, recording the first year-on year increase since February 2022.
As per the latest data from the Central Bank, imports in May increased to $ 1.46 billion, indicating the first increase in 15 months.
Noting that the ongoing recovery in economic activities played a crucial role in driving the increase in import expenditure, the Central Bank said the rise in import expenditure was primarily driven by higher spending on consumer goods, offsetting the decline in expenditure on intermediate and investment goods imports.
However, cumulative import expenditure from January to May plunged by 22.8% YoY to $ 6.79 billion from the corresponding period in 2022.
Governor of Eastern Province Senthil Thondaman meets with Andhra Chief Minister!
Colombo (LNW): Andhra Pradesh, Chief Minister Jaganmohan Reddy had a meeting with Eastern Province Governor Senthil Thondaman and discussed on strengthening the bilateral relationship between the two countries, and further discussions were carried out to setting up sugarcane and chili farming and pharmaceutical manufacturing company.
Senthil Thondaman requested Andhra state government regarding BOI Garment Park and encouraging investors to set up Industrial park at Trincomalee port. Due to their elderly age, Sri Lanka devotees of Tirumalai Temple Tirupati are mostly unable to travel to Tirupati.
A request was also made to construct a Temple for Tirupati Tirumala in Sri Lanka for their convenience. The Chief Minister had shown his positive response to this request. In this meeting, the Chief Minister of Andhra Pradesh presented a statue of Tirupati Perumal Swamy to Senthil Thondaman.
Deputy Ambassador of India to Sri Lanka Dr. Venkatesh and Sri Lankan officials were participated in this meeting.
Another T bill issuance irregularity on the table?
In my article released to this blog on 7 June revealed a significant loss to the public caused by the issuance of Treasury bills at the auction held on 31 May 2023. The loss occurred as the Central Bank (CB) did not reduce the auction yield rates in line with the 2.5% reduction in policy interest rates determined by the CB in the same day afternoon although the Governor and Tender Board members had the prior knowledge.
This article reveals an early warning on a similar policy irregularity that can happen at the next T bill auction due on 5 July (tomorrow), the day before the next monetary policy meeting.
Background Inputs
- On 27 June, the CB announced the advancement of the next monetary policy review to 6 July at 7.30 am from the normal scheduled date of 23 July. At this advanced, breakfast meeting, the Monetary Board will decide on the overnight policy interest rates of the CB, i.e., standing deposit facility rate and standing lending facility rate on overnight money printing transactions with banks and primary dealers.
- On same day, the CB conducted a Treasury bill auction for Rs. 130 bn. Accordingly, bids worth Rs. 55.434 bn were accepted and the private placement window was open for raising the balance funding. However, only Rs. 22.768 bn was raised through placements despite the long settlement date.
- The normal 2-working day settlement time given for auctions falls on 30 June. However, the settlement date was announced as 4 July as relevant senior officials had the prior knowledge on the banking holiday of 5 days announced by the Governor in the late evening of same day (27 June) from 29 June to 3 July. Accordingly, the next working day after the banking holiday, i.e., 4 July, became the settlement date.
- Next day, on 28 July, the CB announced the next Treasury bill auction for Rs. 140 bn to be held on 5 July, i.e., one day before the advanced monetary policy meeting, with a settlement date as 7 July.
Concerns over last T bill auction held on 27 June
- Bids for all three maturities were accepted at the weighted average yields of the previous week’s auction, i.e., 23% for 91 days, 19.46% for 182 days and 16.99% for 182 days.
- A long settlement time of 7 days was given despite the severe funding difficulties confronted by the government. As Primary Dealers and Primary Dealer Units of banks were working on 30 June, the unjustified special bank holiday for the public, the normal two working days’ settlement could have been followed, given the government funding difficulties. When concerns were raised over why the T bill auction held on 31 May was not delayed by one day till next day (1st June) to know the policy rate decision (2.5% cut) announced by the CB on 1st June, the CB’s media responded that it could not hold even one day because of the government funding urgency.
- As the auction was subscribed only 42.6%, a huge opportunity in terms of bidding and long settlement date has been open for private placements.
Expectations over policy interest rates decision on the advanced meeting on 6 July
The purpose of the abrupt advancement of the Monetary Board meeting to 7.30 am of 6 July, i.e., the day after the next T bill auction, is very clear that the CB intends to announce another policy interest rate cut of a significant amount. The reasons are very clear.
- The monetary policy decision on 31 May was based on the actual inflation of 35.5% in April and significantly faster disinflation path projected, among other macroeconomic factors. As the month of May was over and the release of inflation figures by the Census and Statistics Department was due on same day, the Governor and relevant senior officials had the prior knowledge on further reduction of inflation to 25.2% in May.
- Further, when Monetary Board meeting was advanced on 27 June, the Governor had the prior knowledge of further reduction of inflation to 12% in June as price data collection had been over by 27 June.
- According to the CB’s inflation press release on 30 June, inflation fell to 12% in June and the projected disinflation path has become steeper.
- Accordingly, if the current market conditions and consumer price trends prevail, inflation will fall to around 5% in August and around 2% in next 4 months purely due to the base effect.
- In fact, there is a high probability that the country will face a significant deflation risk in next year.
- If the inflation-based monetary theory and monetary policy approach are believed, the cumulative lagged effects of significant monetary tightening by way of 10.5% hike in policy interest rates will be a major force causing the deflation risk. A policy rate hike of 9% was implemented by the present CB Governor during the period of April 2022 to April 2023. However, as a 2.5% policy rate cut was effected at the last monetary policy meeting held on 31 May, a 8% cumulative policy rate hike remains to be reversed if the deflation risk is to be controlled early. This is to induce a significant stimulation of the aggregate demand in the economy without delay in order to keep the inflation in the CB’s target zone of 4%-6%.
- Further, according to the CB Governor’s PowerPoint presentation made to the Cabinet of Ministers on 28 June on domestic debt optimization concept, the proposed exchange of Sri Lanka Development Bonds and FCBU debt for local currency debt is to take place at a floating interest rate of the CB’s standing lending facility rate plus 1%. This also requires an urgent policy rate cut to reduce the cost of the government on the proposed domestic debt optimization.
- In terms of IMF programme conditions, the monetary policy is required to maintain a real policy interest rate 2.5% as its natural level.
In view of the above reasoning, a policy rates cut at least 5% could be justified and expected at the next Monetary Board meeting on 6 June. Accordingly, policy interest rate should fall below 8%-9% from the present level of 13%-14%.
Justifiable decision at the next T bill auction on 5 July
- Four members of the T bill Tender Board will know by the time of the Tender Board meeting in the afternoon of 5 July the proposed new policy rates as they would have attended the monetary policy meeting at least two days prior to the Monetary Board meeting.
- Two members, i.e., Director of Economic Research and Assistant Governor supervising the monetary policy subject, should have singed the Monetary Board paper on the monetary policy review submitted to the Monetary Board at least two days prior to the Monetary Board meeting as per the procedure. This is the paper that forwards the recommendation of the Monetary Policy Committee on the policy interest rates and other policy instruments to the Monetary Board. The recommendation is submitted with the concurrence of the Governor because it is the Governor who officially recommends policies to the Monetary Board for approval in terms of the Monetary Law Act.
- Given the current trend of inflation, steeper disinflation path projected by the CB and foreign exchange and balance of payment front, Tender Board members should not have any ambiguity over the next policy interest rates decision of the Monetary Board.
- Therefore, a reduction of T bill yield rates comparable to the proposed policy interest rates cut should be effected at the forthcoming T bill auction if Tender Board members are professional economists and financial professionals who behave in the public interest as required. This is especially required since T bill yield rates are used by the CB as de factor policy interest rates to transmit the monetary policy stance to term credit markets.
- As the private placement window is amply available now, there is no difficulty to determine a significant reduction in yields rates to be consistent with new policy interest rates, given the ample liquidity injected by the CB last week (around Rs. 800 bn) in response to banking holiday panic and high yield rates kept at the last T bill auction.
- If the Tender Board is not capable of cutting the yield rates as proposed, the auction can be postponed to the next day afternoon pending the Monetary Board’s policy interest rates decision in the early morning. This could be easily done as 7 days were given for settlement of the last T bill auction. If the government needs funds urgently, the CB can make a special T bill issuance to itself and advance funds as this method has been normal after the present CB Governor assumed duties.
Overall Public Concerns
- Even though Tender Board members knew present macroeconomic trends favourable for lower interest rates as highlighted above, yield rates at the last T bill auction were kept unchanged at the levels of the previous auction and a 7-day settlement period was offered. Therefore, once yield rates fall in response to significant disinflation and policy interest rates cut expected at the next Monetary Board meeting due on 6 July, dealers will realize an immediate capital gain just after two days from the settlement on T bills they purchased from the last auction and private placements.
- If the Tender Board effects a reduction in yield rates at the next T bill auction due on 5 July pending a significant policy interest rates cut next day, dealers who purchased T bills at the last auction will receive another capital gain just after one day from the settlement.
- If the Tender Board at the next T bill auction due on 5 July does not cut the yield rates by considering prevailing trends and circumstances highlighted above, dealers will immediately realize a significant capital gain in response to the policy rates cut pending next day, 6 July, at a loss to public funds.
- The loss to the public funds by way of increased interest payments on debt raised through T bills and bonds in 2022 and 2023 so far due to exorbitant yield rates decided by the Tender Board is unbearable. The yield rates were more than twice or thrice the prevailing policy interest rates. Total issuance in 2022 and 2023 so far has been around Rs. 2,745 bn on T bonds and Rs. 13,420 bn on T bills. Therefore, the interest cost at yield rates generally ranging from 25%-32% has effectively made the domestic debt unsustainable at present. Therefore, the Tender Board is directly responsible for the loss to public funds and unsustainability of domestic debt due to its failure to adopt effective strategies for raising funds at justifiable yield rates, given their professional qualifications, public authority and confidential information set. The mandate of the public debt management as set out by the CB is to manage the debt at lowest cost and risk.
In view of facts, concerns and views presented as above, it is the public duty of the audit and fiscal authorities to conduct an independent, in-depth inquiry on the loss to the public caused by the CB including the Tender Board on issuance of T bills and bonds from January 2022 if the government is to look for a fairer domestic debt optimization process. The general public is unable to provide any observations on this subject as the dealer-wise information on bids and secondary market transactions is not transparent.
(This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures.)
P Samarasiri
Former Deputy Governor, Central Bank of Sri Lanka
(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 10 Economics and Banking Books and a large number of articles published.
The author holds BA Hons in Economics from University of Colombo, MA in Economics from University of Kansas, USA, and international training exposures in economic management and financial system regulation)
Source: Economy Forward