Inflationary Money Printing up Rs 3.2B

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Government of Sri Lanka’s (GoSL’s) demand pull inflationary face value money printing (FVMP) debt increased by Rs 3,216 million on Tuesday (2) due to a persistent lack of revenue. Consequently, GoSL’s overall FVMP debt increased by 0.26 per cent
(Rs 8,024 million) to Rs 3,153,338. 64 million (Rs 3.1533 trillion) on Tuesday. GoSL’s FVMP debt has been over Rs three trillion for a record consecutive 19 market days to Tuesday.

The country’s foreign reserves bled for the fifth consecutive market day to Tuesday, with Tuesday’s value alone being USD 13.32 million (Rs 4,808 million), thereby increasing such haemorrhaging  to USD 220.89 million in the review period led by the settlement of payments in relation to making “essential” imports. Central Bank of Sri Lanka (CBSL) lacks transparency in its open market operations.

GoSL’s at least theoretical MP borrowing costs (BCs), fell for the second consecutive market day to Tuesday, with Tuesday’s fall being by 1.44 per cent (Rs 1,888.16 million) to Rs 128,842.39 million, led by buying pressure of riskless, “but low value”   Treasury (T) Bills and T-Bonds in secondary market trading by investors, rather than invest in the high returns private sector, the engine of growth, due to perennial uncertainty.

Market was short for a record 221 market days to Tuesday, though this shortfall decreased by 0.54 per cent (Rs 3,216 million) to 595,823 million, thereby virtually causing perpetual rate pressure. GoSL’s highest to the 224th highest FVMP debt has been registered for a record 224 market days to Tuesday.

Transactions between CBSL and the GoSL are foreign reserves neutral. 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.

By Paneetha Ameresekere