MONDAY Markets: Return to Exchange Control Regime Gains Credence
By Paneetha Ameresekere
The fate of the foreign exchange (FX) market once more returning to an exchange control market after a 44-year lapse was further sealed when the administratively inflated ‘spot’ was quoted at Rs199/200 to the US dollar in two way quotes for the ninth consecutive market day to yesterday, with no trades also being done for an equal number of days due to importers banking on the Central Bank of Sri Lanka (CBSL)/Government of Sri Lanka (GoSL) to further administratively revalue the rupee, market sources told Ceylon FT.
Nonetheless, even in this unrealistic situation, the market exchange rate (MER) has depreciated by Rs 11.50 (6.13-6.10 per cent) in two-way quotes in the calendar year to yesterday and year on year by Rs12-12.50 (6.42-6.67 per cent). CBSL’s face value money printing (FVMP) assets decreased by Rs 2,941 million (0.33 per cent) to Rs 876,430.65 million yesterday, thereby easing demand-pull inflationary pressure.
GoSL’s FVMP debt has been over Rs 0.5 trillion for a record 125 consecutive market days to yesterday due to a lack of revenue. GoSL’s money printing borrowing cost (MPBCs) sharply increased by 72.09 per cent (Rs 8,532.38 million) to Rs20,368.368 million yesterday led by CBSL reconfiguring such assets to the more expensive (for GoSL) Treasury (T) Bonds. Friday saw a liquidity appreciation of Rs 7,529 million (US$37.72 million) during trading led by the settlement/s of transactions pertaining to CBSL’s swaps with the market and/or GoSL’s dollar sales to and/or swaps with CBSL.
Transactions between GoSL and CBSL are foreign reserves neutral. Conversions are based on CBSL’s administered ‘spot’ rate on Thursday which was Rs 199.59 to the dollar. Consequently, net excess liquidity increased by 3.39 per cent (Rs 4.588 million) to Rs 139,761 million yesterday. On 31 December 2020 due to less rigid controls, the MER then, which was one week’s forwards, was trading at Rs 187.50/188.50 to the dollar as at 4:00 p.m., while a year ago, the MER which was the ‘spot’ due to ‘no controls’ was trading at Rs 187/187.50 to the dollar in two-way quotes. MPBCs are prorated to the weighted average yields 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.