Sri Lankans may be brimming with hopes of hosting 2022 by looking past all the hardships caused by the pandemic and the mismanagement of its economy, but it may take some restraint to have any optimism as the country continues a hangover from some of the political blunders it has committed over the past two years.
According to former Central Bank Deputy Governor and well-known economic commentator Dr WA Wijewardena, Sri Lanka is entering the new year with a double whammy of severe liquidity shortages in both domestic foreign exchange markets and rupee, worsened by soaring consumer prices as well as the continued accommodative stance of central bank monetary policy.
“SL is to enter 2022 with a double whammy: no cash in foreign currencies and rupees in the banks,” Dr Wijewardena said in a Twitter message sent over the weekend, giving a harbinger of this. what to expect next year.
Sri Lanka’s currency problems have worsened since June this year, when soaring global commodity prices, driven by oil prices, began to put pressure on the country’s import bill amid boom. Record cash injections and lost flows from tourism, worker remittances and direct investment which together amounted to around US $ 13.5 billion to US $ 15 billion in 2020 and 2021.
As a result, the government has had to use its foreign exchange reserves to meet its external debt obligations, and over the past two months, the Central Bank has been forced to intervene directly by issuing foreign exchange from the reserves for clear shipments stranded at port containing essential items due to a shortage of foreign exchange.
This brought the country’s foreign exchange reserves to just below $ 1.6 billion, barely enough for a month of equivalent imports, triggering a decline in the country’s sovereign rating to “CC”, signaling a potential default in the country. the next months.
However, according to Dr Wijewardena, the shortage in the domestic money markets, which reached 355.55 billion rupees at the close of the market last week, has also exacerbated the challenges, as the Central Bank is now forced to respond daily to this requirement under its 6.0 percent Standing Loan Facility (SLF).
“The BC must now finance both the government and the commercial banks to keep the system running,” he added.
But, when the central bank raised its policy rates by 50 basis points in August, it said it would be ready to provide the liquidity required by licensed banks at the SLF counter.
In total, banks borrowed 445.03 billion rupees overnight from the SLF window on December 24.
It’s a harbinger of rising deposit and credit rates in the coming times, and rising inflation, which peaked nearly a decade in November at 9.9. %, could complicate the continuation of the central bank’s current accommodative monetary policy.
However, with the economy in recovery mode following the lifting of restrictions and the contraction observed in the September quarter, the Central Bank is in a difficult position to keep interest rates at current levels.
When, “the money supply increased by 3 trillion net rupees (between) January 2020 and October 2021 (39%), (and) when the economy only grew by 2%; with limited imports, the excess money will drive out the weak supply of local foods devastated by a mad fertilizer policy, ”said Dr Wijewardena, explaining the rationale for the exponentially higher prices currently in the economy.
It was revealed last week that the paddy crop would be weaker during this current harvest season due to the overnight organic fertilizer pivot, but officials assured that this would not threaten the country’s food security.
Commenting further, Dr Wijewardena attributed the current performance of the economy to “artificial control of interest rates and the exchange rate”, reiterating a position supported by economists.
“According to reports, banks are acquiring SWAP dollars in cash for 1 month with a promise to receive 192.25 for 200 in 1 month, which implies a rate of 208 $ / Rs,” he added.