One Month’s Forwards to the Fore After 26 Days
By Paneetha Ameresekere
The popular market exchange rate (MER) in interbank foreign exchange (FX) trading, which was one month’s forwards after a lapse of 26 calendar days, yesterday, due to controls on the one week’s forwards and below by Central Bank of Sri Lanka (CBSL)/Government of Sri Lanka (GoSL) to control inflation and GoSL’s foreign borrowing costs, nonetheless fell for the third consecutive market day, this time by a rupee, to be trading at Rs 203/204 to the US dollar in two way quotes at 4 p.m. due to continued uncertainty.
The sustained spread of 100 cents between the ‘buy’ and ‘sell’ quotes in the MER is an indication of this uncertainty.
In the calendar year to Friday, the MER has weakened by Rs 15.50 (7.97-7.95 per cent) in two way quotes and year on year by Rs 8.50-9.00 (4.37-4.62 per cent), thereby causing cost-push inflationary pressure as Sri Lanka is an import-dependent economy, as seen by the country suffering perennial deficits in the balance of payments in the current account since 1978.
GoSL’s money printing borrowing cost (MPBCs) sharply decreased by 1.72 per cent (Rs 370.54 million) to Rs 21.20 billion yesterday due to the market’s (licensed commercial banks (LCBs) and primary dealers (PDs)) preference to invest in the low returns, riskless Treasury (T) Bills and T Bonds in secondary market trading rather than lend (LCBs) to the high returns growth engine the private sector due to uncertainty.
CBSL’s non-demand pull inflationary face value money printing (FVMP) assets increased by Rs 11.9 billion to aid GoSL to meet its external commitments, thereby upping GoSL FVMP debt by 1.29 per cent to Rs 933.18 billion yesterday.
GoSL’s FVMP debt has been over Rs 0.5 trillion for a record 108 consecutive market days to Friday due to a lack of revenue.
Settlement/s of transactions pertaining to CBSL’s swaps with the market (LCBs) and/or CBSL’s rupee protection against depreciative pressure in the market (LCBs) and/or GoSL’s foreign debt servicing commitments and/or CBSL’s US dollar sales and/or swaps with GoSL, saw liquidity being depreciated by Rs 41.28 billion (US$206.38 million) yesterday. Conversions are based on CBSL’s administered/indicative ‘spot’ rate on Thursday which was Rs 200.02 to the US dollar. CBSL is the steward of GoSL debt.
Consequently, net excess liquidity declined by 27.5per cent (Rs 29.38 billion) to Rs 77.39 billion yesterday.
Transactions between GoSL and CBSL are foreign reserves neutral, other than in the case where such transactions include rupee protection from depreciative pressure in the market (LCBs) and GoSL’s foreign debt servicing commitments which drain the country’s foreign reserves. GoSL operates through LCBs in the FX market. Last month, led by GoSL’s foreign debt servicing commitments, the country’s foreign reserves were drained by $ 525.30 million, official data showed. CBSL said that in the calendar year to 4 April 2021 the country’s foreign reserves were drained by nearly $ 1,200 million due to such external commitments.