‘Spot’ makes pyrrhic gains

By Paneetha Ameresekere | Published: 2:00 AM Nov 19 2020

By Paneetha Ameresekere  

The benchmark ‘spot’ reversed its three consecutive market day falls at yesterday’s trading to make pyrrhic gains of between 90 and 100 cents to be trading at Rs184.60/70 to the US dollar in two-way quotes at 4:00 p.m. as the seemingly expected rupee devaluation didn’t take place in Tuesday’s Budget, market sources told this reporter.

However, in the calendar year to 4:00 p.m. yesterday the ‘spot’ has fallen by Rs 3.30 (1.82 per cent) in two-way quotes, thereby causing cost-push inflationary pressure as Sri Lanka is an import dependent economy.

Meanwhile, Government of Sri Lanka’s (GoSL’s) face value money printing (FVMP) debt  decreased by 1.78 per cent (Rs 10,000 million) to Rs550,966.87 million yesterday, thereby in part mitigating demand pull inflationary pressure as well.

However, yesterday was  the  twelfth consecutive market day that GoSL’s FVMP debt has been over the Rs half-a-trillion mark due to a sustained lack of revenue , in its second dispensation, after only a day’s ‘respite’ on 2 November  when it went below the Rs half-a-trillion mark, then. 

In related developments, due to the settlement of a GoSL sale of dollars to  Central Bank of Sri Lanka (CBSL) and/or due to CBSL swapping rupees for dollars from the market, liquidity was uplift by Rs 7,245 million (US$ 39.09 million) during trading yesterday. Conversions are based on the middle rate of the ‘spot’ as at 4:00 p.m. on Monday which was Rs 185.35 to the dollar.  Transactions between GoSL and CBSL are foreign reserves neutral.

Consequently GoSL’s MP borrowing costs (BCs)   decreased by 0.41 per cent (Rs 71.06 million) to Rs 17,251.34 million yesterday, led by a decrease in CBSL’s Treasury (T) Bills and T Bond holdings. 

Meanwhile, the market’s net excess liquidity also decreased by 1.72 per cent (Rs 2,755 million) to Rs 157,792 million yesterday, led by the aforesaid retirement of maturing GoSL securities.GoSL’s FVMP debt is equal to the FV of CBSL’s T Bills and T Bond holdings. MP is CBSL’s sole and mandated authority.  However, if MP ends up in the hands of GoSL/ i.e. the public only without ‘once more’ being passed on to CBSL, for instance as settlement to buy the required dollars from the country’s foreign reserves to meet GoSL’s foreign debt servicing commitments, an action  exclusively mandated to CBSL, that causes demand pull inflationary pressure.

CBSL is the steward of the country’s debt and of its foreign reserves, GoSL’s MPBCs are prorated to the weighted average yields fetched in secondary market trading of T Bills and T Bonds. CBSL, the steward of the country’s debt and of its foreign reserves, is not transparent in its interventions in daily open market operations, by keeping mum in regard to the causes for the changes in market liquidity, like what took place yesterday.

Investments in T Bills and T Bonds are risk free, because, in the event GoSL is unable to honour such debt, CBSL is mandated to print demand-pull inflationary money and repay such creditors.

 ‘Spot’ trades are settled after two market days from the date of transaction. CBSL deals in ‘spot.’ The market is avoided to meet GoSL’s foreign debt servicing commitments for fear that that would r weaken the rupee as Sri Lanka is an import dependent economy.

By Paneetha Ameresekere | Published: 2:00 AM Nov 19 2020

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