Author: TELO Admin

The People’s Bank of China (PBoC) released a receipt of the ¥ 10 billion (equivalent to $ 1.5 billion) currency swap to the Central Bank of Sri Lanka (CBSL) yesterday (29), increasing the official foreign reserves of Sri Lanka to $ 3.1 billion, according to the CBSL.

CBSL Governor Ajith Nivard Cabraal announced yesterday on his official Twitter handle that due to the receipt of recent foreign exchange inflows, the official foreign reserves position of the country had reached approximately the aforementioned level and will remain at that level until the end of 2021. Neither Cabraal nor the CBSL in its press release issued yesterday, specified the exact source of the recent foreign exchange inflows.

However, speaking to The Morning Business yesterday, a high-ranking source in the CBSL confirmed that this increment in the official reserves position of the country was due to the receipt of the ¥ 10 billion swap from China. It was further stated that the discussion relating to the $ 1.9 billion financial assistance from India has reached its final stages.

This expected financial assistance from India will be in the form of a $ 400 million currency swap to help Sri Lanka address the existing balance of payment (BOP) issues; a $ 1 billion line of credit to cover the import of food, medicines, and other essential items from India to Sri Lanka; and a $ 500 million line of credit to cover the import of fuel from India.

The Sapugaskanda Oil Refinery will be closed from January 03 due to the shortage of US dollars for the purchase of crude oil, the Ministry of Energy said.

The Petroleum Corporation management is preparing to restart the country’s only oil refinery before January 30 after procuring the required crude oil.

The supply of crude oil by the Singaporean company which was awarded the long term contract for the supply of crude oil to Sri Lanka will commence from January 25.

In the process of purchasing crude oil, the relevant company should be informed 90 days in advance of the purchase of the crude oil type used in the Sapugaskanda refinery, the Ministry said in a statement. Also, the purchase of alternative crude oil as emergency purchases failed due to the lack of foreign exchange, it added.

It has also become difficult to buy crude oil on a credit basis as Sri Lanka has fallen in the credit rating, the Ministry further explained.

However, Sapugaskanda oil refinery supplies only 14% of the country’s petrol and 29% of its diesel requirements.

Therefore, the Ministry of Energy assures that the temporary closure of the refinery will not create an oil shortage in the country.

Sri Lanka for the first time shut down the refinery on November 15 due to a shortage in crude oil supply. The refinery resumed operations on 07 December.

The total outstanding public debt has increased slightly under Rs.2.0 trillion during the first nine months, as the cash-strapped government had to borrow more since the country was hit with multiple waves of coronavirus since April this year, hobbling the economy.

According to the latest data released by the Finance Ministry and published by the Central Bank, the country’s total debt stock had ballooned to Rs.17.05 trillion by the end of October 2021, from Rs.15.12 trillion at the end of 2020, rising by Rs.1,934.5 billion during the nine months.

This is the most in any nine-month period but the good news is nearly 80 percent of the new debt was raised in rupees, as the country has been settling its foreign currency debt fell due during both 2020 and 2021, largely utilising its foreign currency reserves, which brought the country closer to a debt default.

While the rupee debt took the lion’s share, it also caused the current troubles in the external sector, as they hit the balance of payment by way of outflows through imports, since the Central Bank had to provide dollars for such rupees until they stopped providing any more convertibility when reserves fell to rock bottom.

Sri Lanka’s foreign currency reserves fell to US $ 1.6 billion by end-November, barley enough for a month’s imports before they were suddenly propelled to US $ 3.1 billion on December 29, with some inflows, which the Central Bank is yet to officially reveal.

Meanwhile, the prospects of the US $ 1.9 billion worth of currency swaps and bilateral term loans with India reached a step closer this week, after the country’s Petroleum Minister said that an agreement would be signed in January with India to lease out 99 oil tanks in Trincomalee.

Further, a joint venture company was also set up this week by Ceylon Petroleum Corporation, with the name of Trinco Petroleum Terminal Limited, to undertake operations by both parties.

Meanwhile, the rupee debt, which predominately came by way of treasury bills and bonds and the majority of which came through printed money, also caused other excesses in the economy by way of sending the prices though the roof.

The Colombo inflation hit 9.9 percent in November, with food prices also surging by 17.5 percent over the same month last year.

According to the Treasury data, the total domestic debt has risen by Rs.1,533.4 billion in the nine months to Rs.10,598.5 billion.

Meanwhile, the total outstanding foreign debt rose by a modest Rs.401 billion in the nine months, all of which came from the depreciation of the rupee and by the end of September 2021, the total foreign debt stock was at rupee equivalent of 6,453.2 billion.

The Sri Lankan rupee has depreciated by about 7.2 percent against the dollar so far during the year.

This could be one reason why the authorities are hesitant to float the currency, as its fallout on the outstanding foreign currency debt will be enormous. Economists opine that the Central Bank should let either the currency or the interest rates to absorb the shock, as both cannot be controlled at once.

Sri Lanka failed to sell 50 percent of the volume of a 100 billion rupee bond auction, the final for 2021, data from the state debt office showed, as rates rose and the country faced severe foreign exchange shortages from mostly liquidity injected to sterilize interventions.

The office offered 50 billion rupees of 15.01.2033 bond and sold all at 12.06 percent.

On December 12, 15.03.2021 bonds were sold at 11.61 percent. The security was quoted around 11.85/12.05 percent before the auction.

The debt office rejected all bids for 15 billion rupees of 01.08.2025 bonds despite getting 36 billion rupees.

It also rejected all 38.3 billion rupees of bid for 25 billion rupees of 15 June 2027 bonds.

Sri Lanka is facing external default and rating of ‘CC’ after the central bank placed price controls on bonds and printed unprecedented volumes of money.

It then had to spend reserves to exchange the money for dollars as the newly printed money triggered a balance of payments deficit.

Some of the bonds that were repaid with printed money does not correspond to the current year deficit but to prior years.

On January 03, about 97.5 billion rupees of bonds and another estimated 50 billion rupee coupon is due.

When the holders of bond get the printed money, they will spend or save in banks, which in turn will give them out as credit, instead of raising new deposits, creating a forex shortage.

Remaining foreign reserves will be lost when the central bank gives convertibility to the new rupees.

A budget deficit will create inflation and balance of payments trouble only if the central bank prints money to accommodate it and keep rates down to boost credit artificially with ‘legally counterfeited’ fiat paper money.

“[We are making] it possible for the public to convert Government securities into money to expand the money supply.. . ,” Federal Reserve Governor Mariner Eccles said in 1951 as the agency was forced to buy World War I bonds to keep rates down.

“We are almost solely responsible for this inflation. …[T]he whole question of having rationing and price controls is due to the fact that we have this monetary inflation, and this committee is the only agency in existence that can curb and stop the growth of money.. . . ”

Sri Lanka has lifted most price controls on goods, but forex shortages are continuing.

The Central Bank recently instructed all licensed banks to sell 25% of the foreign exchange inflows they receive through workers’ remittances and exports proceed residuals to the Central Bank.

This directive came as a step of the Central Bank to consolidate its dollar reserves.

Deutsche Bank however says the toughened dollar surrender rule could aggravate forex crunch in the country.

In a letter directed to the Chief Executive Officers of all Licensed Banks, the CBSL said the 10 percent mandatory sale of foreign currencies to the Central Bank by licensed banks has been increased to 25 percent with effect from today.

The tighter dollar surrender rule, which came into effect from the start of this week, could have perverse outcomes as it could leave fewer dollars with the banking system for imports, potentially exacerbating the foreign currency troubles faced by importers and thereby worsening the shortages in some commodities.

According to a note sent out to its clients by Deutsche Bank, an exporter who sells US$ 100 to his commercial bank earlier resulted in the bank selling US$ 10 or 10 percent back to the Central Bank leaving US$ 90 with the commercial bank.

But from Monday onwards, the commercial bank is required to surrender US$ 25 or 25 percent from the US$ 100 that was sold by the exporter, leaving it with only US$ 75.

This, according to the Deutsche Bank will leave a fewer amount of dollars with the banking system available to be sold when an importer comes up with rupees for opening letters of credit (LCs).

As a result, the dollar shortage confronted by the importers even to this day from around July this year, could become more pronounced and thereby worsen the shortages of imported commodities in the local market.

Murtaza Jafferjee, the Chairman of Advocata Institute said that there will be a more acute shortage.

“I’m assuming the central bank is doing this because their reserves are depleting. And the reason for the depletion is mainly because they are continuing to permit the Government to service its foreign debt. It seems that they are prioritizing the needs of creditors over the needs of the citizens of the country. Due to the shortage of Dollars, the scarcity of goods and services in the market is going to increase. And probably the prices also,” he warned.

Sri Lanka Muslim Congress (SLMC) Deputy Leader and Ampara District MP, H. M. M. Harees said they were ready to collaborate with other political parties when it comes to the development of the Eastern Province.

Harees was addressing an event held at the Sainthamaruthu Divisional Secretariat under the patronage of Divisional Secretary M. M. Ashique.

“Our country is facing a foreign currency crisis right now. However, a large sum of money has been allocated in the Budget 2022 for rural development activities. Bangladesh is achieving its development goals as they focused on rural development. Therefore, it is the duty of responsible parties to implement rural development projects,” he said.

Speaking further, he said that the Government has allocated Rs 100 million for each MP and they must make use of this money to alleviate poverty in their electorates.

More than 40 percent of people in the Ampara District are engaged in Agriculture. They have many issues to be addressed and the fertiliser issue is one of them. The Government has taken all possible steps to address the issues of farmers and the public, Harees added.