FX market ‘Dead,’ 2nd day-in-a-row

By Paneetha Ameresekere | Published: 2:00 AM Apr 30 2021

By Paneetha Ameresekere

Yesterday’s  interbank foreign exchange (FX) market was a replication of the previous market day (28), performance due to Central Bank of Sri Lanka (CBSL)/Government of Sri Lanka (GoSL) continuing to apply pressure on banks to keep the benchmark ‘spot’ artificially appreciated at Rs 199/200 to the US dollar in two way quotes, whilst, on the other hand, the import market continued to believe that there is  room for the ‘spot’ to further administratively appreciate, resulting in no trades being executed for the second consecutive market day, sources told this reporter.

5-in-a-Row-Failure

Yesterday’s Rs 80 billion riskless, low value Treasury (T) Bond auction, almost like Wednesday’s Rs 45 billion T Bill auction, was a 5-in-a-row failure due to CBSL’s/GoSL’s attempt to maintain an artificially low interest rate regime amidst a situation where the market was continuously demanding higher rates due to pressure caused by a mix of sustained inflation and uncertainty.

Consequently CBSL was able to sell only 55.69 per cent (Rs 44,549 million) of T Bonds at the maximum administered yields (MAYs) of 6.50 per cent and 7.25per cent for the 2023 and 2026 maturities and at a weighted average yield (WAY) of 8.44 per cent for the remaining 2032 tenure, one basis point less than its MAY.

MPBCs Fall 

GoSL’s money printing borrowing cost (MPBCs) decreased for the third consecutive market day to yesterday, this time sharply by 0.69 per cent (Rs 140.10million) to 

Rs 20, 061.19 million led by market preference to invest in riskless, low returns Treasury (T) Bills and T Bonds in secondary market trading rather than lend to the high returns private sector, the engine of economic growth, due to uncertainty. 

CBSL’s non-demand pull inflationary face value money printing (FVMP) assets increased by Rs 82 million, thereby upping its FVMP assets as a whole by 0.01per cent to Rs 893,993.65 million yesterday, partially increasing upward pressure on MPBCs as well. GoSL’s FVMP debt has been over Rs 0.5 trillion for a record 118 consecutive market days to yesterday.

Led by the settlement/s of transactions pertaining to GoSL’s foreign debt servicing commitments and/or CBSL’s swaps with the market  and/or CBSL’s  dollar sales to and/or swaps with GoSL, saw liquidity depreciate for the second consecutive market day to yesterday, this time by Rs 824 million (US$ 4.17million) during trading yesterday. Conversions are based on CBSL’s administered ‘spot’ rate on Monday which was Rs 197.50 to the dollar. Transactions between GoSL and CBSL are foreign reserves neutral.   Consequently net excess liquidity decreased for the second consecutive market day, this time by 0.49 per cent (Rs 4,742 million) to Rs 150,218 million yesterday. 

MPBCs are prorated to the weighted average yields (WAYS) fetched in secondary market trading of T Bills and T Bonds. Investments in T Bills and T Bonds are considered riskless, because, in the event GoSL is unable to honour such debt, CBSL is mandated to print demand pull inflationary money (money printing) and repay such creditors. Money printing exclusive rights are with CBSL.  CBSL deals in ‘spot.’ ‘Spot’ trades are settled after two market days from the date of trading.  CBSL, in its daily ‘open market operations’ statements, doesn’t specify the reasons behind the daily changes to market liquidity. CBSL is the steward of GoSL debt and also of its foreign reserves.

Last month, GoSL’s foreign debt servicing commitments, saw the country’s foreign reserves poorer by US$525.30 million, March (2021) over its end February (2021) value, official data showed.  

CBSL further said that in the calendar year to 4 April 2021 the country’s foreign reserves were drained by nearly US $1,200 million due to GoSL’s foreign debt servicing commitments alone. The value of total foreign debt servicing commitments for the year is US$ 4,000 million.

By Paneetha Ameresekere | Published: 2:00 AM Apr 30 2021

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