Inflationary money printing up Rs 3.9B

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Government of Sri Lanka’s (GoSL) demand pull inflationary face value money printing (FVMP)debt increased by Rs 3,947 million on Friday. Further, the country’s foreign reserves were drained by US$ 96.80 million (Rs 34,821.51 million) led by the settlement to pay for ‘essential’ imports on Friday. In the two market days to Friday, foreign reserves have been poorer by a total of $386.10 million due to the payment of such imports.

Consequently GoSL’s FVMP debt increased by 1.30 per cent (38,768 million) to Rs 2,995,084.82 million (Rs 2.9951 trillion) to reach its second highest FVMP debt on Friday. Vis-a-vis the increase in GoSL’s FVMP debt on Friday, the value of GoSL’s at least theoretical MP borrowing costs (BCs) accelerated by 13.98 per cent (Rs 13,777 million) to Rs 112,304.39 million due to selling pressure in secondary market trading of Treasury (T) Bills and T Bonds by investors, to reinvest in Wednesday’s (6 July) Rs 70 billion T-Bill auction on expectations of higher yields led by a near 100 per cent Colombo inflation. Higher inflation spurs higher rates to contain inflation. Market’s net short fall decreased by 0.61 per cent (Rs 3,947 million) to 648,335 million on Friday, data further showed

 GoSL’s highest to the 202nd highest FVMP debt has been registered for a record 202 market days to Friday. GoSL’s FVMP debt has been over two trillion rupees for a record 108 consecutive market days to Friday due to an almost perennial lack of revenue. The market has been short for a record 198 market days to Friday.

 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 minimize 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