Government of Sri Lanka’s (GoSL) face value money printing (FVMP) debt decreased by 0.07 per cent (Rs 1,827.88 million) to Rs 2,782,131.18 million (Rs 2.7821 trillion) on 9 May, thereby marginally defraying demand-pull inflationary pressure as well.
GoSL’s at least theoretical MP borrowing costs (BCs) decreased by 4.03 per cent (Rs 5,360.42 million) to Rs 127,635.76 million on 9 May due to buying pressure on riskless, low returns Treasury (T) Bills and T Bonds in secondary market trading, rather than lend to the lucrative private sector, the engine of growth, due to sustained political uncertainty.
Liquidity was drained by Rs 16,039.12 million (US$ 45.84 million) during the course of trading on 9 May led by the settlements of swaps between GoSL and Central Bank of Sri Lanka (CBSL) and due to essential imports made from the country’s foreign reserves, GoSL’s foreign debt servicing commitments and/or swaps between CBSL and the market. CBSL is not transparent in its daily, open market operations. Transactions between GoSL and CBSL are foreign reserves neutral. Conversions are based on the administered benchmark ‘spot’ rate of Rs 349.90 to the US dollar as at last Thursday (5 May).
Money market was short for a record consecutive 161 market days to 9 May, with this shortfall increasing by 2.52 per cent (Rs 17,867 million) to Rs 726,634 million on 9 May, thereby causing almost perennial rate pressure, CBSL data showed.
GoSL’s FVMP debt has been over Rs 2 trillion for a record consecutive 71 market days to 9 May. GoSL’s highest to the 165th highest FVMP debt has been registered in the 165 consecutive market days to 9 May, though not necessarily in a particular order.
CBSL holds exclusive MP rights. 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 is unable to honour these 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. ‘Spot’ trades are settled after two market days from the date of transaction. CBSL, the steward of the country’s foreign reserves and GoSL debt, deals in ‘spot.’
The ‘spot’ is administered by CBSL to show GoSL’s foreign debt in rupee terms to be of a lower value for accounting purposes, while the import of ‘essential’ goods is met from the country’s foreign reserves and not from the market, because if met by the latter that would cause further depreciative pressure on the rupee, as Sri Lanka is an import-dependent economy. GoSL’s foreign debt servicing commitments are also met from the country’s foreign reserves and not from the market, because if met by the latter, that will cause further pressure on the rupee, as Sri Lanka is an import-dependent economy.
By Paneetha Ameresekere