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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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Ransomware menace plagues Sri Lankan businesses: Kaspersky

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A total of 2,650 ransomware incidents were detected and blocked by Kaspersky cybersecurity solutions for businesses in Sri Lanka from January to December 2023.

Experts from the global cybersecurity company insist on organisations, regardless of shape and size, to beef up their IT security posture as ransomware, especially the targeted type, continues to be a damaging menace for organisations in the region.

“The era of widespread mass attacks by encryptors on both individuals and businesses is gradually fading away. Instead, we are witnessing a shift towards organised groups that execute hacks involving data theft and encryption, commonly referred to as double extortion. The rationale behind this evolution lies in the perpetrators’ ability to operate with greater efficiency, thereby enabling them to demand significantly higher ransom sums,” says Fedor Sinitsyn, Lead Malware Analyst at Kaspersky.

Last year, ransomware incidents in Sri Lanka include the compromise of 5,000 government-related emails as well as attacks on telecom servers.

“It’s evident that the threat actors behind ransomware attacks target all sectors in Sri Lanka. The total number of attempts may be low, but organisations need to realise the real impact of each successful ransomware infection, both on the financial and reputation fronts. It’s imperative for businesses here to look into cybersecurity technologies that provide absolute anti-ransomware effectiveness in third-party exams. Because not all cybersecurity solutions are created equal,” Yeo Siang Tiong, General Manager for Southeast Asia at Kaspersky.

Kaspersky Endpoint Security for Business, Kaspersky Small Office Security and Kaspersky Standard demonstrated complete protection against ransomware in 10 different real-life attack scenarios during regular Advanced Threat Protection assessments held by AV-TEST.

To combat ransomware and assist those affected, Kaspersky, alongside Europol, the Dutch National Police, and others has the No More Ransom initiative, launched in 2016. On the official website, participants provide decryption tools, guidelines, and instructions to report cybercrimes, irrespective of the location of the incident.

By the end of 2023, Kaspersky marked the seventh anniversary as a key contributor to the No More Ransom initiative. This period witnessed expanded access to Kaspersky’s free decryption tools, in line with its commitment to combating ransomware. These tools, targeting 39 ransomware families, have been integral in assisting nearly 2 million victims globally, as reported by Europol, underscoring the profound impact of the No More Ransom initiative supported by Kaspersky.

To protect yourself and your business from ransomware attacks, consider following the rules proposed by Kaspersky experts:

Do not expose remote desktop/management services (such as RDP, MSSQL, etc.) to public networks unless absolutely necessary and always use strong passwords, two-factor authentication and firewall rules for them.

Promptly install available patches for commercial VPN solutions providing access for remote employees and acting as gateways in your network.

Always keep software updated on all the devices you use to prevent ransomware from exploiting vulnerabilities.

Focus your defense strategy on detecting lateral movements and data exfiltration to the Internet. Pay special attention to the outgoing traffic to detect cybercriminals’ connections.

Back up data regularly with special attention to offline backup strategies. Make sure you can quickly access it in an emergency when needed.

Avoid downloading and installing pirated software or software from unknown sources.

Assess and audit your supply chain and managed services’ access to your environment.

Prepare an action plan for reputational risk of your data exposure in the unfortunate event of data theft.

Use solutions like Kaspersky Endpoint Detection and Response Expert and Kaspersky Managed Detection and Response service which help to identify and stop the attack on early stages, before attackers reach their final goals.

To protect the corporate environment, educate your employees. Dedicated training courses can help, such as the ones provided in the Kaspersky Automated Security Awareness Platform.

Use the latest Threat Intelligence information to stay aware of actual TTPs used by threat actors. The Kaspersky Threat Intelligence Portal is a single point of access for Kaspersky’s TI, providing cyberattack data and insights gathered by our team for over 26 years.

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IDB and MOI organize National Vehicle Parade with all domestically value-added vehicles

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A vehicle parade of locally manufactured and assembled vehicles organized by the Industrial Development Board (IDB) along with the Ministry of Industries (MOI), Sri Lanka Automobile Component Manufacturers Association (SLACMA) and Automobile Assemblers Association will be held for the third time, through Galle Face, Lotus Roundabout , Fort, Technical Junction, Punchikawatta, Maradana, Borella, Borella cemetery junction and to BMICH on June 18, 2024 from 4pm onwards. The IDB under the Ministry of Industries is a key stakeholder in the Standard Operating Procedure which facilitates automobile assembly and component manufacturing in the country. The roadshow will see a fleet of over 200 locally assembled vehicles parade the streets.

Chairman of Industrial Development Board Dr. Saranga Alahapperuma stated, “The IDB which is the statutory body responsible for the development of all industries in Sri Lanka, has a mission to provide the strategic, technological and commercial foundation needed to encourage, promote and develop all industries in the country. Hyundai, Proton, Chery, BAIC, DFSK, Wuling, Mahindra, TATA, JMC, Lanka Ashok Leyland, TVS and Bajaj are few of the brands that are assembled in Sri Lanka with the approval and certification of the Industrial Development Board.”

The services of the IDB are of great benefit to the automobile and auto component manufacturing and automobile assembly industry in the country.

It is the authority responsible for overseeing the auto component development, design, testing and certification for industries, automotive component costing and process/product optimization services, raw material testing and selection for automotive components, plant, machinery, equipment, tool appraisal and valuation and incubator facilities for automotive component developers. It is also the national tooling center for automotive component development and provides services such as foundry and metallurgy services for automotive component developers, technical inspection services, rubber compound development for automotive components and electro-plating services for automotive components through a network of district offices covering the entire island.

The IDB also provides industrialists with industry information services, incubator facilities, and even an electricity subsidy.

“The facilities provided by the IDB will help create a very favorable environment for the automobile manufacturing and assembly industry and the automotive component manufacturing industry to match world standards. The Sri Lanka Automobile Component Manufacturers Association (SLACMA) and Automobile Assemblers Association both are committed to help organize the Vehicle Parade annually, to whom which I thank for their efforts.” Alahapperuma said.

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Q+ Payment App goes trilingual to further facilitate payments for the masses

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Highlights of the launch events in Nittambuwa and Jaffna,

‘Q+ Payment App’ – the first LankaQR certified mobile payment app in Sri Lanka – has gone trilingual with the launch of its groundbreaking Sinhala and Tamil versions at twin events held in Nittambuwa and Jaffna respectively.

Powered by the Commercial Bank of Ceylon, the Q+ Payment App is now available in the preferred language of the user, making the App and its payment options available to a much wider customer base covering the entire island.

The launch of the Sinhala version of Q+ Payment App took place at the Nihal Fashions complex in Nittambuwa, and was supported with a Cashback offer for QR payments for purchases from the merchant, the Bank said. The event was attended by the Head of the ComBank Card Centre Mr Nishantha De Silva, the Bank’s Regional Manager – Colombo Metro Mr Hemantha Sooriyabandara, branch managers from the area, and the management and staff of Nihal’s Group.

The Tamil version of Q+ Payment App was launched at TCT Multi Trade Centre in Jaffna, also with the participation of the Bank’s Head of Card Centre Mr Nishantha De Silva, Regional Manager – Northern Mr A. Jeyabalan, several branch managers and senior Bank staff from the region and the management and staff of TCT Multi Trade Centre.

Positioned as the next dimension of payment options, the Q+ Payment App enables cardholders to pay through multiple payment options via their mobile phones including ‘Scan & Pay’ by scanning the merchant’s QR code. Since the launch, the app has undergone numerous functionality-enhancing upgrades. Besides all the multiple payment options it offers, Q+ Payment App has also been enabled for different methods of fund transfers and scheduled payment options supported by year-round attractive Cashback offers, promotions and lifestyle events.

Q+ Payment App is the only QR payment app in Sri Lanka that supports six types of QR codes – LankaQR, VisaQR, MastercardQR, UnionPayQR, Indian UPIQR & Alipay QR. It was adjudged the Best Mobile App for Retail Payments in Sri Lanka for the last two years by LankaPay.

Sri Lanka’s first 100% carbon neutral bank, Commercial Bank is the largest private sector bank in Sri Lanka and the first Sri Lankan bank to be listed among the Top 1000 Banks of the World.

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