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Sri Lanka’s macroeconomic policy setting: Cohesion or confusion?

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By Dushni Weerakoon

The hike in policy interest rates by the Central Bank of Sri Lanka (CBSL) in August 2021 marks a shift from stimulus to exit strategies in the pandemic era. Such recalibrations globally are focused on how to tackle the historically large debt-to-GDP ratios that the COVID-19 pandemic leaves in its wake. At end 2020, advanced economies (AEs) on average had amassed debt to the tune of 120% of their GDP with emerging markets economies (EMEs) trailing some distance at 65% of GDP. As the spotlight moves, the full impacts of the macroeconomic policy measures, hitherto obscured by the urgency to deal with the health crisis, are now coming under greater scrutiny.

Sri Lanka’s debt metrics make an orderly exit more difficult

Many countries, especially AEs, exercised their ‘monetary sovereignty’ to create and print their own money to support stimulus efforts. They have done so through coordinated monetary/fiscal policies – i.e. using monetary policy to keeping borrowing costs low while fiscal authorities provide back-stop assurance. Some are better positioned to manage the inherent risks and conflicts of interest that are involved in this exercise. AEs have an advantage as issuers of reserve currencies with global demand and historically low interest rates; EMEs with limited exposure to foreign currency-denominated debt and holding comfortable stockpiles of reserves are less exposed to disruptive tail events.

Such countries can bring down their debt ratios if they are able to maintain nominal GDP growth persistently above the average interest rates that they pay on their debt – i.e. the growth-corrected interest rate (r-g) whereby countries can run modest primary deficits and still have a stable or falling debt-to-GDP ratio.

Sri Lanka is not similarly positioned. Its debt metrics point to high vulnerabilities – a high debt-to-GDP ratio of 101% of GDP, large exposure to foreign currency-denominated debt, and a hefty foreign debt repayment schedule. Under these conditions, the threat from exercising monetary sovereignty was always self-evident. A depreciating currency, notwithstanding distortionary controls on imports and capital flows, worsens the debt vulnerabilities.

Domestic and foreign debts are hardly similar. Given Sri Lanka’s debt metrics and the fundamental economic imbalances that have generated them, simple accounting identities do not always offer very plausible solutions. If the exchange rate depreciates, it adds to the real value of outstanding debt, relative to the size of the economy, even if interest rates remain modest. Further, shocks like COVID-19 raise risk premia, and marginal borrowing costs can rise suddenly and sharply, cutting countries abruptly out of financial markets.

Crucial to instill and retain macroeconomic policy credibility

Short of distortionary measures such as inflating debt away or maintaining an overvalued currency, a primary surplus is needed to stop the public debt-to-GDP ratio from rising and an even larger surplus is needed to reduce it. Improving the primary budget balance calls for tax increases or public spending cuts that are unpopular and have upfront costs. Given the government’s unwillingness to go down this path, households and firms will be required instead to bear the cost through higher interest rates that will affect their consumption and investments.

Higher interest rates in this instance will also not ‘pull in’ foreign capital to firm up the exchange rate given the risk premia on the currency front as depreciating pressure deepens. With reserves in hand to cover barely two months of imports, the forex market will continue to face volatility and instability until a steady stream of capital inflows, beyond short-term swaps, emerge. Until such time, a depreciating domestic currency will increase the interest burden as calculated in that currency. If debt servicing interest rate costs are pushed persistently above the economic growth rate, Sri Lanka’s debt burden will grow steadily even in the absence of new borrowing – a context sometimes called a ‘debt spiral’.

Without a clearly spelt-out debt sustainability path, Sri Lanka seems to be placing all its bets on foreign direct investment (FDI) to ease external pressures and revive economic growth. For a successful outcome – i.e. productivity gains to drive long-term growth – the type of FDI matters. The more desirable is efficiency-seeking FDI, but this is also harder to attract. For now, a policy environment of import curbs and capital controls is more likely to see strategic-seeking infrastructure-led FDI. The latter runs the risk of switching resources to non-tradable sectors – reducing the availability of external financing over the longer term – and the prospect of a short-lived growth burst as before in the post-war years. Crucially too, the sole reliance on FDI leaves Sri Lanka at the mercy of developments beyond its control.

Rather, efforts to attract FDI should be coupled with building effective policy strategies that instill and maintain credibility. Indeed, this is all the more important as Sri Lanka appears to be firmly against an International Monetary Fund (IMF) bailout. IMF loan amounts are small and it no longer has much sway on debt relief with much of EME foreign debt held by private institutional investors and China. An IMF programme is mostly useful in firming up sovereign credit ratings and reviving the sentiments of investors. But investor sentiments can also improve if governments put forward and implement credible policy strategies. By contrast, the CBSL’s policy rate adjustment to anchor expectations, for instance, will not stick if direct financing of fiscal spending is to continue under yield control measures. Instead, market convictions on the credibility of the policy mix will drive economic fundamentals. As Sri Lanka readies to transition out of pandemic-related emergency support, some notion of fiscal and debt sustainability to anchor confidence should be the priority in Budget 2022 preparations.

* This blog is based on the comprehensive chapter on “Economic Performance and Outlook: Managing the Crisis and Promoting Recovery” in IPS’ forthcoming annual flagship publication ‘Sri Lanka: The State of Economy 2021’

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Link to blog: https://www.ips.lk/talkingeconomics/2021/08/30/sri-lankas-macroeconomic-policy-setting-cohesion-or-confusion/

Dushni Weerakoon is the Executive Director of the Institute of Policy Studies of Sri Lanka (IPS) and Head of its Macroeconomic Policy research. She joined IPS in 1994 after obtaining her PhD, and has written and published widely on macroeconomic policy, regional trade integration and international economics. She has extensive experience working in policy development committees and official delegations of the Government of Sri Lanka. Dushni Weerakoon holds a BSc in Economics with First Class Honours from the Queen’s University of Belfast, U.K., and an MA and PhD in Economics from the University of Manchester, U.K.



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Lanka inflation hit 70.2% in August

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Food prices climbed 84.6 percent, while prices of non-food items rose 57.1 percent in the crisis-hit island nation.

(Al Jazeera) Consumer inflation in Sri Lanka accelerated to 70.2 percent in August, the statistics department has said, as the island nation reels under its worst economic crisis in decades.The National Consumer Price Index (NCPI) rose 70.2 percent last month from a year earlier, after a 66.7 percent increase in July, the Department of Census and Statistics said in a statement on Wednesday.

Food prices climbed 84.6 percent, while prices of non-food items rose 57.1 percent in the tourism-dependent South Asian country of 22 million people.The Central Bank of Sri Lanka (CBSL) in August said the inflation rate would moderate after peaking at about 70 percent as the country’s economy slowed.

The NCPI captures broader retail price inflation and is released with a lag of 21 days every month.The more closely monitored Colombo Consumer Price Index (CCPI), released at the end of each month, rose 64.3 percent in August. It acts as a leading indicator for national prices and shows how inflation is evolving in Sri Lanka’s biggest city.

Sri Lanka’s economy shrank 8.4 percent in the quarter through June from a year ago in one of the steepest declines seen in a three-month period, amid fertiliser and fuel shortages.

“Inflation is expected to taper from September,” said Dimantha Mathew, head of research for Colombo-based investment firm First Capital. “However, inflation is only likely to moderate and reach single digits in the second half of 2023.”

An acute dollar shortage, caused by economic mismanagement and the effects of the COVID-19 pandemic, has left Sri Lanka struggling to pay for essential imports including food, fuel, fertiliser and medicine.

The country earlier this month reached a preliminary deal with the International Monetary Fund for a loan of about $2.9bn, contingent on it receiving financing assurances from official creditors and negotiations with private creditors.

India on Tuesday said it had begun talks with Sri Lanka on restructuring its debt and promised to support the crisis-hit neighbour mainly through long-term investments after providing nearly $4bn of financial aid.

The High Commission of India in Colombo said it held the first round of debt talks with Sri Lankan officials on September 16.

“The discussions held in a cordial atmosphere symbolise India’s support to early conclusion and approval of a suitable IMF programme for Sri Lanka,” the High Commission said.

Sri Lanka will make a presentation to its international creditors on Friday, laying out the full extent of its economic troubles and plans for a debt restructuring.

The Indian High Commission also said New Delhi would continue to support Colombo “in all possible ways, in particular by promoting long-term investments from India in key economic sectors”.

India’s support to Sri Lanka this year has included a $400m currency swap, a $1bn credit line for essential goods and a $500m line for fuel. In addition, India has also deferred payment on Sri Lankan imports of about $1.2bn and given a credit line of $55m for fertiliser imports.

The High Commission said India had continuing development projects worth about $3.5bn in Sri Lanka, whose president earlier this month asked his officials to resolve obstacles to projects backed by India. He did not specify the obstacles or the projects.

President Ranil Wickremesinghe has said Sri Lanka will turn a free trade agreement with India into a comprehensive economic and technological partnership.

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Raigam Wayamba Salterns Group turnover tops 1 bn

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Raigam Wayamba Salterns PLC saw its group turnover increase from Rs. 959.6 million to Rs. 1,147 million recording a growth rate of 19.5% year on year.Despite the fact that the financial year 2021/2022 was filled with many challenges, as a result of prudent management practices implemented and followed, the Raigam Wayamba Group was capable of reporting its ever-highest growth in 2021/2022,” said Chairman, Raigam Group, Dr. Ravi Liyanage.

Raigam Wayamba Salterns PLC, which was listed in the Colombo Stock Exchange (CSE) in 2010 is the front line player in the value added salt market in Sri Lanka and it supplies a range of consumer salt products under the popular brands “Isi”, “Ruchi”, “Welcome” and “Triple Washed” as well as various salt products used as an input for different industries in bulk form.All the consumer products of Raigam Wayamba Salters are SLS certified for its quality and consistency and the processes are ISO certified.’8

The Raigam Wayamba Salterns Group is equipped with salterns, salt refineries and processing plants located in Puttalam and Hambantota districts. In addition to that the raw material supply for these operations has been ensured by the 1,800 Acre saltern established in Kuchchaweli in Trincomalee District by the parent company of the Raigam Group. Further the Puttalam Salt Limited (one of the successor to the National Salt Corporation) is also an associate company of the Raigam Group.

The well-known Raigam brand and state of the art island wide distribution network are distinct strengths of the Raigam Group. The Raigam distribution network operates on a latest IT platform and also includes distribution channels for modern trade, industry and bakery sectors.

Sri Lanka’s economy which was under-performed for two years due to COVID pandemic situation was experiencing the impacts of the foreign exchange crisis in the latter part of the financial year 2021/2022. Despite the fact that the financial year 2021/2022 was filled with many challenges, as a result of prudent management practices implemented and followed, the Raigam Waymba Group was capable of reporting its ever-highest growth in 2021/2022.

The group turnover increased from Rs. 959.6 million to Rs. 1,147 million recording a growth rate of 19.5% Y to Y. At the same time the Profit after Tax grew from Rs. 149.7 million to Rs. 215.6 million at an annual growth rate of 44%. As a result of these successful financial performances the Earning Per share for the year stood at Rs. 0.76 compared to Rs. 0.53 in the corresponding year. This has made a significant impact on the value of the shareholders’ investment increasing the Net Asset Value Per Share form Rs. 5.06 to Rs. 5.74.

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Singer’s legendry sewing industry and Academies developing skills and entrepreneurship in Sri Lanka

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A name synonymous with Singer (Sri Lanka), Singer sewing machine has over the years become an indispensable product at local households, helping thousands of women and men to make a living through a sewing business. For over six decades, Singer has been manufacturing its trademark sewing machines in Sri Lanka. Singer brand has claimed many firsts in sewing machine innovations including the world’s first zig-zag machine and the first electronic sewing machine.

Singer Industries, a subsidiary of Singer (Sri Lanka) manufactures traditional, portable and digital sewing machines at a fully-fledged facility, where it provides direct employment for over 100 factory workers and accommodates around 150 service agents. The traditional sewing machines are of two variants such as the straight stich and the zig-zag sewing machine, while the portable and digital sewing machines cater to the modern customers. Singer Industries is mandated with assembly of sewing machines and manufacturing of cabinets and stands for sewing machines.

The sewing machine stands and cabinets are 100% locally manufactured with the help of local suppliers who also depend from sewing machine manufacturing. Singer Industries also consists of a strong R&D section for sewing machine innovations. All the sewing machines produced by Singer Industries are distributed by its parent company, Singer (Sri Lanka) through their 431 distribution touch points. Currently, Singer sustains its dominance as the market leader for domestic sewing machine industry with a market share of 85%. Among the facilities, Singer Industries provides to its customers, it has deployed special service technicians at island wide service centres for technical assistance and support related to sewing machines. Its YouTube channel has access to over 130 technical assistance videos to further support its valued customers.

The name ‘’Singer’’ is closely associated with sewing. One of its major contributions to the local sewing industry is the Singer Fashion Academy. For more than 60 years, the Academy has helped thousands of individuals to develop sewing skills and become entrepreneurs. The Fashion Academy conducts sewing courses and diplomas while a degree pathway is to be implemented soon to further support students. The Academy is also the first and only institute in the country to receive course validation status from the Chartered Society of Designers (CSD) in the UK.

As of today, the academy consists of 54 branches Island wide and offers 22 sewing courses, 2 diplomas and another 10 courses as part of its Diwi Saviya program for low-income families. Annually, over 5000 – 6000 students get enrolled in Singer Fashion Academy’s courses. In addition to the physical classes, the academy conducts online courses and also provides a recorded version of lessons to further facilitate students. During the last decade, over 60,000 students have successfully completed the Fashion Academy’s courses and some of these students have already started their own sewing businesses. The Fashion Academy has helped in developing the passion of sewing among Sri Lankans and as a result, sewing has become a hobby among many.

Sewing can be considered one of the most feasible self-employment opportunities with its potential to generate a good income. A business of one’s own is a luxury at present due to current economic crisis. Many individuals who started their sewing businesses from scratch have developed their businesses to highly profitable ones. Singer Fashion Academy has all the resources ready to help develop sewing skills and is committed to develop a skilled workforce for the betterment of the country.

(Company news release)

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