MPBCs Rise on Inflationary Expectations
By Paneetha Ameresekere
Inflationary expectations saw Government of Sri Lanka’s (GoSL’s ) at least theoretical money printing borrowing costs (MPBCs) rise by 0.96 per cent (Rs 534.94 million) to Rs 56,461.02 million yesterday due to selling pressure of Treasury (T) Bills and T Bonds in secondary market trading. Complementing these developments, GoSL’s demand pull inflationary face value (FVMP) debt increased by Rs 3,085 million, thereby increasing GoSL’s FVMP debt as a whole by 0.18 per cent to Rs 1,673,309.32 million (Rs 1.6733 trillion) yesterday.
GoSL’s FVMP debt has been over one trillion rupees for a record consecutive 60 market days to yesterday due to a lack of revenue. Money market was short for the twenty-eighth consecutive market day to yesterday thereby causing persistent rate pressure, though market shortfall decreased by 3.31 per cent (Rs 4,003 million) to Rs 117,080 million. Liquidity increased by a pyrrhic Rs 918 million (US$ 4.54 million) during yesterday’s trading, due to the possible settlement of exporter conversions. Conversions are based on Tuesday’s administered value of the benchmark ‘spot’ which was Rs 202.40 to the US dollar. Central Bank of Sri Lanka (CBSL) lacks transparency in its open market operations data.
Dead 115 Days
The interbank foreign exchange (FX) market was ‘dead’ for the 115th consecutive market day to yesterday (Thursday) with all trades in the FX market, ipso facto, made worse by bank-client trades too, since midnight on 6 September, having to be executed under a controlled exchange rate (ER) regime of between Rs 200- 203 to the dollar, thereby aiding in the spawning of a black market. Even at the controlled ER of Rs 203, the ER will have had depreciated by 7.69 per cent (Rs 14.50) in the calendar year to yesterday and year on year (YoY) by 8.87 per cent (Rs 18.00) to the dollar, thereby causing cost-push inflation as Sri Lanka is an import dependent economy.
As at 31 December 2020, in the interbank FX market, beginning with ‘cash’ and going up to “one week’s forwards,” the ER was trading at a seemingly inflated value of Rs 187.50/188.50 to the dollar in two way quotes due to CBSL controls, while a year ago due to lesser controls, the benchmark ‘spot’ was trading in the market at Rs 184.80/185.00 to the dollar in two way quotes.
The danger in having a controlled FX market is that it leads to a black market, shortages, queues, rationing, cronyism, nepotism, bribery and corruption, similar to the conditions that prevailed when Sri Lanka practised a closed economy 44 years ago, ie from 1970-77. Also, having a controlled FX regime, encourages illegal money transfer channels such as ‘hawala’ and ‘undiyal,’ to the detriment of the real economy.
MPBCs are prorated to the weighted average yields fetched in secondary market trading of T Bonds and T Bills. CBSL the steward of GoSL debt and of its foreign reserves deals in ‘spot.’ ‘Spot’ trades are settled after two market days from the date of transactions. FVMP is equivalent to the value of the FV of T Bills and T Bonds held by CBSL, the sole and mandated authority to print money.