Tuesday Markets: FVMP debt moves closer to Rs 1 Trillion

By Paneetha Ameresekere | Published: 2:00 AM Jun 16 2021

By Paneetha Ameresekere

The Government’s Face Value Money Printing (FVMP) debt increased for the third consecutive market day to yesterday, with its non-demand pull inflationary FVMP debt increasing by Rs 7,289 million and its overall FVMP debt by 0.81 per cent Rs 910,408.37 million (Rs 0.91 Trillion).

The Govt’s FVMP debt has been over Rs 0.5 trillion for a record 148 consecutive market days to yesterday due to lack of revenue. The Govt’s money printing borrowing costs (MPBCs) sharply increased by 3.47 per cent (Rs 720.37 million) to Rs 21,483.90 million yesterday due to Central Bank of Sri Lanka (CBSL) buying into Treasury (T) Bonds in the primary market. 

Liquidity decreased for the third consecutive market day to yesterday, this time by Rs 12,619 million (US$ 63.17 million) led by the settlement/s of the Govt’s foreign debt servicing commitments and/ or CBSL’s swaps with the market and/or CBSL’s US dollar sales to and/or swaps with the Govt., during trading. Transactions between Govt., and CBSL are foreign reserves neutral.

 Conversions are based on CBSL’s administered ‘spot’ on Friday which was Rs 199.76 to the dollar. The country’s foreign reserves bled by $1.2 billion in the first quarter due to the Govt’s foreign debt servicing commitments which total $ four billion for the full year, where the market is avoided to meet such liabilities for fear that that would cause further depreciative pressure on the rupee and where such liabilities are met from the country’s foreign reserves. 

CBSL lacks transparency in its daily ‘open market operations’ statements. The benchmark administered ‘spot’ was administratively kept unchanged at Rs 199.75/200.25 to the dollar for the 20th consecutive market day to yesterday in the interbank foreign exchange (FX) market, with no trades done, led by moral suasion. 

Friday was also the 32nd consecutive market day that no trades were executed in the interbank FX market. Nonetheless, the unsaid market exchange rate (MER) has theoretically depreciated by between Rs 12.25 - 11.75 (6.53-6.23 per cent) in two way quotes in the calendar year to yesterday and year on year by between Rs 13.80 - 14.20 (7. 42 - 7.63 per cent), thereby causing cost-push inflationary pressure in the event trades were executed at those administered prices. 

An administratively created ‘dead’ FX market for the sake of artificially inflating the value of the rupee, however, impinges on the stability of dollar starved smaller banks and also leads to a scenario of shortages, queues, corruption and a black market, reminiscent to that which beset the economy during the period 1970-1977. 

Net excess liquidity decreased by 6.03 per cent (Rs 5,330 million) to Rs 83,072 million at the end of yesterday’s trading. ‘Spot’ trades are settled after two market days from the date of transaction, CBSL deal in ‘spot.’ CBSL is the steward of the Govt., debt and its foreign reserves. The Govt’s Investments in T Bills and T Bonds are risk free, because in the event the Govt., is unable to repay such debt, CBSL is mandated to print demand-pull inflationary money and repay such creditors.

By Paneetha Ameresekere | Published: 2:00 AM Jun 16 2021

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