Panic selling of treasuries due to inflation phobia

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Government of Sri Lanka’s (GoSL’s) face value money printing (FVMP) debt decreased by 8.10 per cent (Rs 256,271.91 million) to Rs 2,907,037.31 (Rs 2.91 trillion) led by the settlement of foreign reserves-neutral transactions between GoSL and Central Bank of Sri Lanka (CBSL) on Wednesday (29 June). Nonetheless, GoSL’s highest to the 200th highest FVMP debt has been registered for a record 200 market days to yesterday.

However, the decrease in GoSL’s at least theoretical MP borrowing costs (BCs) relative to the fall of its FVMP debt, decelerated by 3.10 per cent (Rs 3,155.53 million) to Rs 98,778.50 million on Wednesday, due to panic selling in secondary market trading of Treasury T Bills and T Bonds by investors on expectations that inflation will accelerate in Colombo this month, when such data was to be released by the Census and Statistics Department yesterday (Thursday, 30 June). Market’s net shortfall decreased by 3.85 per cent (Rs 23,951 million) to 597,394 million on Wednesday, data further showed.

Wednesday’s decline in GoSL FVMP debt helped depress demand-pull inflationary pressure to an extent. Market liquidity was uplifted by Rs 280,222.19 million (US$ 777.75 million) during trading on Wednesday, led by transactions between CBSL and GoSL. Conversions are based on the benchmark, but officially administered ‘spot,’ which was fixed at Rs 360.30 to the US dollar as at Monday (27 June).

GoSL’s FVMP debt has been over Rs 2 trillion for a record 106 consecutive market days to Wednesday due to an almost perennial lack of revenue. The market has been short for a record 196 market days to Wednesday.

GoSL’s FVMP debt is equivalent to the totality of CBSL’s T Bill and T Bond holdings. MP is the exclusive right of CBSL. GoSL’s MPBCs are prorated to the outcome in secondary market trading of T Bills and T Bonds on the reference day.

‘Spot’ trades are settled after two market days from the date of transaction. CBSL, the steward of GoSL debt and its foreign reserves deals in ‘spot.’ The ‘spot’ is administered to minimise GoSL’s foreign debt in rupee terms and lower the cost of ‘essential’ imports, while ‘essential’ imports are met from the country’s foreign reserves and not from the market to prevent further depreciative pressure on the rupee, as Sri Lanka is an import-dependent economy. CBSL lacks transparency in its open market operations. Transactions between CBSL and GoSL are foreign reserves-neutral.

By Paneetha Ameresekere