Tuesday Markets: Inflationary MP Up Rs 1.73B
By Paneetha Ameresekere
Government of Sri Lanka’s (GoSL’s) demand pull inflationary face value money printing (FVMP) debt increased by Rs 1,725 million, thereby marginally increasing GoSL’s FVMP debt as a whole by 0.1 per cent to Rs 1,657,316.32 million (Rs 1.6573 trillion) yesterday.
GoSL’s FVMP debt has been over Rs one trillion for a record consecutive 58 market days to yesterday due to a lack of revenue. GoSL’s at least theoretical MP borrowing costs (BCs) infinitesimally fell by 0.40 per cent (Rs 224.18 million) to Rs 56,071.72 million yesterday to Rs 56,071.72 million.
Money market was short for the twenty sixth consecutive market day to yesterday thereby causing persistent rate pressure, though, market shortfall sharply contracted by 42.22 per cent (Rs 86,716 million) to Rs 118,664 million.
Liquidity steeply increased by Rs 84,991 million (US$ 418.72 million) during yesterday’s trading due to the settlement of CBSL’s swaps with the market and/or GoSL’s US dollar sales/swaps to/with CBSL. Conversions are based on Friday’s administered value of the benchmark ‘spot’ which was Rs 200.98 to the US dollar. CBSL is not transparent in its open market operations data.
Dead 113 Days
The interbank foreign exchange (FX) market was ‘dead’ for 113th consecutive market day to yesterday 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 10.15 per cent (Rs 18.70) 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 184.20/30 to the dollar in two way quotes.
Rs 45.23B NFOs
Net foreign outflows (NFOs) from the bourse increased to Rs 45.23 billion mark, being upped by Rs 28.13 million yesterday, a YoY increase of 5.86 per cent (Rs 2.50 billion) due to sustained uncertainty. Monday was the seventh consecutive market day that the bourse has suffered NFOs. In the 186 market days that have transpired in the calendar year to yesterday, the bourse has suffered NFOs in 163 (87.63 per cent) of those days.
Last year the bourse suffered a record Rs 51.04 billion worth of NFOs due to similar uncertainty. In the 207 market days that transpired last year, the bourse suffered a record NFOs in 90.82 per cent (188) of those days. Consequently, the benchmark ASPI declined for the second consecutive market day to yesterday, this time by 0.09 per cent to 9,640.36 points and the more sensitive S&P SL 20 Index by 0.02 per cent to 3,569.39 points, on a Rs 2.06 billion turnover and on a share volume of 98.50 million yesterday.
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. MPBCs are prorated to the weighted average yields fetched in secondary market trading of Treasury (T) Bonds and T Bills. FVMP is equivalent to CBSL’s FV holdings of T Bills and T Bonds. GoSL’s foreign debt servicing commitments are met from the country’s foreign reserves and not from the market, because if met from the market it will cause further depreciative pressure on the rupee as Sri Lanka is an import dependent economy.