ECONOMYNEXT – Sri Lanka’s banking system has collected reserves or repaid debt totaling 6.2 billion US dollars in the two years to April 2024 since rates were to help end money being printed (inflationary policy) to keep interest rates artificially low.
In April 2022 Sri Lanka also defaulted, halting the repayment of bilateral and private debt.
The savings of principle repayments from April 2022 to March 2024 from the default is 5.8 billion US dollars.
The central bank however continued to borrow from the Reserve Bank of India after the rate hike, and printed money to sterilize interventions delaying a quick correction of the balance of payments.
Since then, the central bank has built reserves with deflationary policy as private credit also fell.
By April 2022 the central bank had borrowed and busted forex to end up with negative reserves of 4.2 billion US dollars, which worsened to 4.8 billion US dollar by June 2022. It then started to improve.
The central bank reported an overall balance of payments surplus by September 2022.
Sri Lanka’s private banks also continued to repay credit lines, which they could not renew due to downgrades and currency pressure coming from the confidence shock delivered by earlier rate cuts of the central bank enforced by liquidity tools.
Private banks had repaid debt from April 2021, data show.
Private banks which had bought domestic Sri Lanka Development Bonds were repaid with rupees which were converted to dollars after monetary stability was restored.
Banks also had to make provisions for possible haircuts on its sovereign bond portfolio.
The central bank’s negative reserve position had improved from a negative 4.8 billion US dollars in June 2022 to just negative 178 million US dollars.
The central bank had repaid swaps to Bangladesh, repaid the International Monetary Fund borrowings made during earlier ‘flexible inflation targeting’ currency crises and also Indian swaps and ACU borrowings.
Monetary troubles come from liquidity injections made to cut rates though under a revival of mercantilism in Cambridge-Saltwater universities after the Fed invented open market operations and triggered the Great Depression, ‘terms of trade shocks’, import and ‘current account deficits’ are blamed.
When rate cuts trigger confidence shocks and capital flights, excessively high interest rates are required to kill domestic private credit to restore confidence in the currency (the central bank’s note issue) and regain the lost attribute of being a medium of exchange for cross-border transactions.
Countries started to default especially after 1978, when the Second Amendment to IMF’s Articles deprived pegged countries of a credible anchor, leading to mass sovereign defaults. (Colombo/June27/2024)