By Paneetha Ameresekere
Government of Sri Lanka’s (GoSL) face value money printing (FVMP) debt increased by 2.03 per cent (Rs 52,909.30 million) to Rs 2,657,280.64 million (Rs 2.6573 trillion) on Monday (11), due to a persistent lack of revenue. This increase was, however non-demand pull inflationary as it was used to meet GoSL’s external commitments and not to meet domestic needs.
Consequently, liquidity decreased by Rs 104,064.30 million (US$ 347.10 million) during Monday’s trading, led by GoSL’s foreign debt servicing commitments and to make ‘essential’ imports, paid for from the country’s foreign reserves. Conversions are based on the administered benchmark ‘spot’ value of Rs 299.81 to the US dollar as at Thursday (7 April).
Meanwhile, GoSL’s at least theoretical MP borrowing costs (BCs) increased at a decelerated pace of 0.05 per cent (Rs 44.17 million) to Rs 88,719.65 million on Monday, due to investor preference to invest in riskless, but low returns Treasury (T) Bills and T Bonds in secondary market trading, rather than invest in the lucrative private sector for better returns because of sustained uncertainty.
Money market was short for a record consecutive 146 market days to Monday, with this shortfall increasing by 7.75 per cent (Rs 51,155 million) to Rs 711,622 million, causing almost perennial rate pressure. CBSL lacks transparency in its open market operations.
The ‘spot’ sharply weakened by Rs five (1.56-1.52 per cent) to be trading at
Rs 325/335 to the dollar in two way quotes in interbank foreign exchange (FX) trading due to sustained uncertainty, market sources told Finance Today on Monday..
Year-on-Year (YoY) to yesterday, the market exchange rate (MER) has weakened by between Rs 123-132 (60.89-65.02 per cent) thereby causing cost-push inflationary pressure as Sri Lanka is an import-dependent economy.
A year ago, the MER, which was one week’s forwards, closed the day stronger at Rs 202.00/203.00 to the dollar in two way quotes compared to its Monday’s close. Investors then were dealing in one week’s forwards to find the true value of the dollar because of strictures imposed by the Central Bank of Sri Lanka (CBSL) on the shorter tenures to minimise the value of GoSL’s foreign debt in rupee terms for accounting purposes.
Consequently the administered ‘spot’ was fixed at Rs 199.87 to the dollar in two way quotes by CBSL, a year ago, compared to a weaker administered rate of Rs 311.68 yesterday, down 55.94 per cent (Rs 111.81) YoY.
“Spot’ trades are settled after two market days from the date of transaction. CBSL, the steward of GoSL debt and of its foreign reserves, deals in ‘spot’. The banking regulator is also CBSL.
GoSL’s FVMP debt has been over two trillion rupees for a record consecutive 56 market days to Monday. GoSL’s highest to the 150th highest FVMP debt has been registered in the 150 consecutive market days to Monday, though not necessarily in a particular order. Transactions between CBSL and GoSL are foreign reserves neutral.
CBSL holds exclusive MP rights. GoSL’s foreign debt servicing commitments and ‘essential’ imports are met from the country’s foreign reserves because if met from the market, that would cause further depreciative pressure on the rupee as Sri Lanka is an import dependent economy.
GoSL’s FVMP debt is equivalent to the FV holdings of CBSL’s T-Bills and T-Bonds. Investments in T-Bills and T-Bonds are risk free, because, if GoSL’s is unable to honour such debt repayments, CBSL is mandated to print demand pull inflationary money and repay such creditors. GoSL sells
T-Bills and T-Bonds to raise money domestically to meet its monetary needs. MPBCs are prorated to yields fetched in secondary market trading of T-Bonds and T-Bills.