ECONOMYNEXT – Sri Lanka has exceeded key quantitative targets set in an International Monetary Fund program for March 2024, based on preliminary data the Washington based agency said in a report.
The March data are not performance criteria on which reviews are conducted but are indicative targets which shows the progress of the program and are a stepping stone for a September review based on June data.
An indicative target for the primary balance (roughly overall deficit minus interest costs), was assessed at 316 billion rupees more than four times the 70 billion rupee target set in the program.
Primary balance can be a big surplus if the interest bill is high and capital expenditure is cut. It is a type of crisis management measure used by the IMF, after a central bank triggers a currency crisis by cutting rates with inflationary liquidity tools and goes it for help.
However, Sri Lanka’s Treasury has also kept a lid on most current spending, other than the interest bill which tends to shoot up after rates are cut with liquidity tools for flexible inflation targeting, to sterilize dollar sales or to target potential output.
In the last currency crises, which also triggered a default, interest rates went up higher than in previous crises due to fears of a Debt Sustainability driven induced default on rupee bonds with broadbased re-structuring. However it was averted by Sri Lanka officials which led to a 1,000 basis point fall in g-sec yields.
Meanwhile more taxes have been collected from the people to finance the island’s bloated state.
A 750 billion rupees central government tax revenue floor has been exceeded to reach 837 billion rupees.
Central bank credit to government (outstanding stock) has been reduced to 2,691 billion rupees in March compared to a target of 2,800 billion rupees. In December the CB credit was calculated 2,742 billion rupees.
Net international reserves of the central bank were brought up to a negative 1,268 million US dollars exceeding the target of a negative 2,035 by almost 700 million dollars.
In order to collect foreign reserves, which is a type of appropriation of domestic savings of the people by the central bank (taking in deposits) and exporting it to the US and other countries to finance their deficits or by other agency debt in reserve currencies.
In order to collect such ‘deposits’ the central bank has to prevent the money from being invested domestically which will generate imports.
Reserves are captured with deflationary policy involving sell-downs of down central bank held securities to domestic banks or others, at a market rate, subject to any nominal changes in reserve money at a given exchange rate.
Government paying interest to the central bank, banks repaying earlier re-finance credit has the same effect.
In 2024 the central bank allowed the exchange rate to appreciate, which can also reduce prices of traded goods boost real and nominal savings and make it easier to collect foreign reserves.
When domestic credit is weak it is easier to collect reserves. Reduced domestic credit and collection of reserves, including by private banks which then cannot be invested domestically, can push the external current account into surplus.
The central bank also met a 5 percent 12-month inflation target, with an achievement of 4.3 percent.
Sri Lanka’s economy grew 5.3 percent despite reserve collections, amid the stability provided by the central bank.
There were no central bank purchases of Treasuries from the primary market.
However the central bank injected overnight and term money to banks (not on a net basis) showing how easy it is for a rate-obsessed monetary authority to get around the requirement and create external instability again as soon as private credit recovered.
The central bank also allowed excess liquidity from dollar purchase to remain unsterilized for an extended period under its ad hoc pegging arrangement, getting a short term falls in rates, but triggering pressure on the rupee as a result in May and June.
It is not possible to collect reserves with a free floating exchange rate. (Colombo/June15/2024)