‘Spot’ falls deeper on NFOs; MPBCs

By Paneetha Ameresekere | Published: 2:00 AM Jul 27 2020

By Paneetha Ameresekere

The benchmark ‘spot’ marginally weakened by between seven and three cents in two-way quotes to trade at Rs 185.77/83 to the US dollar in two-way quotes as at 4pm on Friday (24) due to continued net foreign outflows (NFOs) from the financial markets because of uncertainty, sources told Ceylon FT.

In the calendar year to Friday, the ‘spot’ has weakened by between 2.47 per cent and 2.44 per cent (between Rs 4.47 and Rs 4.43) in two-way quotes, thereby causing cost-push inflationary pressure as Sri Lanka is an import-dependent economy.

Meanwhile, continued uncertainty also caused Government of Sri Lanka’s (GoSL’s) money printing borrowing costs (MPBCs) to further decrease on Friday, this time by 5.37 per cent (Rs 45.12 million) and to go deeper into negative territory, i.e. minus (-) Rs 885.01 million at the end of Friday’s trading, because of continuous demand for safe-haven Treasury (T) Bills and T Bonds in secondary market trading. In other developments, GoSL retired maturing face value money printing (FVMP) debt worth Rs 2,000 million on Friday, thereby on the whole reducing its FVMP debt by 0.68 per cent to Rs 290,127.45 million by the weekend (24). This action also helped to reduce GoSL’s MPBCs as well as to mitigate demand-pull inflationary pressure. 

Consequently, net excess liquidity fell by 2.24 per cent (Rs 2,963 million) to Rs 129,558 million at the end of Friday’s trading.

Meanwhile, GoSL’s foreign debt servicing commitments saw the country’s foreign reserves being poorer by US$ 5.18 million (Rs 963 million) at the end of Friday’s trading. Conversions are based on the middle rate of the ‘spot’ as at 4pm on Wednesday, which was Rs 185.75 to the US dollar. ‘Spot’ trades are settled after two market days from the date of transaction. CBSL, the steward of GoSL debt and also of its foreign reserves deals in ‘spot’.  GoSL’s FVMP debt is equal to the FV of CBSL’sT Bills and T Bond holdings. MP is CBSL’s sole and mandated authority. MP is exercised to meet GoSL’s monetary commitments in the absence of adequate revenue and increased GoSL expenditure. 

However, if MP ends up at the hands of GoSL only, without ‘once more’ being passed on to CBSL, for instance as settlement to buy the required dollars to meet GoSL’s foreign debt servicing commitments from the former, it causes demand-pull inflationary pressure.  The market is avoided to meet GoSL’s foreign debt servicing commitments for fear that that would weaken the rupee, thereby causing cost-push inflationary pressure as Sri Lanka is an import-dependent economy.  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 risk-free, because if GoSL is unable to meet such commitments, CBSL is mandated to print demand-pull inflationary MP to pay off such creditors.

By Paneetha Ameresekere | Published: 2:00 AM Jul 27 2020

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