Thread by @ChayuDamsinghe

Why is there no fuel in Sri Lanka?

Main reason - no USD to pay for it.

Then why is there no USD?

Let me try and explain, and thereby give some hope on how we can get out of this sooner than later.

(1/19)

#EconomicCrisisLK #FuelCrisisLK #GoHomeGota2022

Sri Lanka has had 2 main sources of USD.

1 - export/remittance/tourism earnings (ie trade)
2 - investment/grant/debt inflows (ie fund flows)

Our main source of outflows have been 3 - imports and 4 - debt repayments.

So increase 1 and 2, reduce 3 and 4. Simple, right?

(2/19)

On trade, we don't get all of our due trade earnings into the country. This is due to a combination of losing confidence in the system (both the formal remitting system and Sri Lanka overall) which keeps money out of the system overall.

Fixing this needs trust.

(3/19)

But we do get something still, at least 600-700mn USD I think, likely a bit more. So why aren't we using this for our essentials like fuel?

Likely because not all of it is actually available for use.

(4/19)

Part of this is used to get raw materials for export requirements, and that clearly shouldn't be stopped as long as it's net positive.

But the real issue is that we're still likely paying back credit from previous months.

(5/19)

Remember, Sri Lanka has usually had a negative forex balance in a given month. So we can't actually meet all our dollar needs for the month with dollars we get that month - there were never enough dollars.

(6/19)

So what we do, is get it on credit. Let's say we get 60% of what we import using actual USD, the other 40% using essentially a short term loan (LC).

However, that LC has to be met in the future. This means we actually need to pay for old imports today.

(7/19)

As long as you can keep getting new credit, this is fine. You can use the dollars you get to pay off old credit, and then you can import for this month using new credit.

But what happens when you can't get new credit because say, your reserves run down to zero?

(8/19)

You can use your current USD earnings to pay off previous credit. But now you can't import anything new - because you can no longer access new import credit!

Of course, in reality, what happens is that you access LESS rather than zero - though you can always REACH zero.

(9/19)

If we assume that most imports come in on credit (and looking at it on 3-month credit), then what we pay for in May/June is actually imports we made 3 months ago - ie Feb/March.

Feb imports - 1.87 bn USD
Mar imports - 1.82 bn USD

(10/19)

So that's the issue. We're still paying for payments made in February and March - and to add insult to injury, these were imports made mostly when the exchange rate was 200, but now they're being cleared at 80% higher values.

Quite a tangle...

(11/19)

Banks can't NOT pay for these imports, if they do, they're in default (like BOC ended up being in - seems it hadn't been able to meet some of these imports at least according to Fitch)

Of course, there also maybe a forex allocation issue as well - but this seems bigger

(12/19)

Of course, what makes it slightly optimistic is that our exports haven't fallen too much in value since then (and remittances haven't fallen either).

On the flip side, imports in April were only 1.7 bn and likely fell more in May and June.

(13/19)

This means, as we go along, there should be more and more forex available for fuel. Assuming that imports were 1.6 bn in May, and 1.5 bn in June, and all imports were on 3 month LCs, that means by July - there should be 100mn more available, 200m in Aug, 300m in Sep.

(14/19)

Of course, reality might be shorter/longer LCs. If remittances recover faster, then this happens earlier. If we get some additional inflows, this happens earlier

But on the basis of inflow/outflow matching, by September/October, things could likely clear out regardless

(15/19)

Waiting without fuel until then is terrible. A key reason why we don't get a lot of money now is trust and confidence in the system.

A complete change in the leadership combined with some policies (that the people are less suspicious of with a change) might work enough.

(16/19)

So even in a negative scenario, there's an end point for the fuel shortages. Trust improving can help achieve this much earlier

In my view, the best way to do this is for #GoHomeGota2022 to work out and a government coming in with a scheduled election in a few months.

(17/19)

As citizens, that might be a key thing to push for. If not for an election, at least for a government that brings enough change to inspire confidence.

With that, we can get out of this sooner than later.

Lets hope we do, and lets act towards it.

(18/19)

Disclaimer - personal opinion and also an oversimplification. Other inflows/outflows exist, not all imports are LCs, LC periods vary, not all export earnings ever come in. But overall story should be broadly accurate.

(19/19)