Rupee makes pyrrhic gains

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By 2017-10-17

By Paneetha Ameresekere

Christmas seasonal remittances strengthened the benchmark 'spot' by between 10 and five cents over its Friday's (13 October) close to finish yesterday at Rs 153.55/65 to the US dollar in two-way quotes, market sources told this reporter.
Volumes were heavy, they said, but added that this strengthening was temporary, with seasonal import pressure expected to get the better of the rupee in the coming days. Central Bank of Sri Lanka (CBSL) was out of the market, they said.
Nonetheless, Government of Sri Lanka (GoSL) has given a commitment to the IMF in June to increase its net international reserves position by US$ 260 million (13.16%) to US$ 2,236 million by the year end, from a targeted figure of $ 1,976 million as at last month's end.

But buying dollars from the market by CBSL to achieve this target will only cause depreciative pressure on the rupee, thereby causing cost push inflation as Sri Lanka is an import-dependent economy.
As it's the 'spot,' YoY has depreciated by Rs 6.70 (4.56%), having had closed Friday 13 October 2016 at Rs 146.85/95 to the dollar in two-way quotes in 'spot', this newspaper's archives showed.

Lack of revenue saw CBSL printing Rs 5,476 million yesterday to meet GoSL's debt servicing, which in turn was mainly gobbled up to service a US$ 33.86 million (Rs 5,205 million) foreign debt servicing commitment, thereby making the country's foreign reserves poorer by that amount. Conversions are based on Thursday's (12 October) 'spot' value which was Rs 153.70 to the dollar.

As a result, net excess liquidity (NEL) increased by Rs 271 million (1.68%) to Rs 16,394 million yesterday. Meanwhile, due to CBSL's skills in managing GoSL's debt, money printing borrowing costs (MPBCs) fell by Rs 45.09 million (4.41%) to Rs 977.28 million yesterday. However, GoSL's MP liabilities increased by 9.33% to Rs 64,153.51 million yesterday, to be equivalent to 0.5% of GDP as per last year's estimates. Nonetheless, a year ago, MP was at a high point of Rs 107,932.83 million, to be equivalent to 0.9% of GDP as per last year's estimates. Therefore, YoY MP has been deflated by 0.4% of GDP, mitigating demand-pull inflationary pressure.

Subhead: Rs 604.1 million increase
A year ago on 14 October 2016, GoSL's MPBCs shot up by Rs 604.06 million (30.53%) to Rs 2,582.63 million over the previous day's (13 October 2016) figure, led by MP and the prevalence of a high interest rate regime, similar to that which is prevailing currently.
MP increased by Rs 21,210.28 million (24.46%) to Rs 107,932.83 million, interpretation of CBSL data showed. As a result, the market's net shortfall declined by Rs 17,634 million (32.95%) to Rs 35,887 million on 14 October 2016.
Meanwhile, on 14 October 2016, CBSL liberalized the 'spot,' with the 'spot' closing at Rs 146.85/95 to the dollar in two way quotes, hardly unchanged over its previous administered price of Rs 146.90 to the dollar.
The market suffered a net foreign outflow (NFO) of US$ 24.34 million (Rs 3,576.28 million) on 14 October 2016. Conversions are based on the administered 'spot' price as at 11 October 2016, which was Rs 146.90 to the dollar.
'Spot' trades are settled after two market days from the date of transaction. CBSL deals in 'spot.' CBSL is the sole issuer of rupees to the market and sometimes prints money equivalent to the value of its Treasury (T)-Bill holdings to aid GoSL to meet its monetary obligations in the absence of adequate revenue. But MP may cause demand-pull inflationary pressure while increasing GoSL's debt costs.

The 'spot' at times is controlled to minimize Sri Lanka's rupee debt costs. Usually the Treasury is bereft of dollars unless it has raised dollars by a syndicated loan or by a sovereign bond or by a similar such vehicle. Nonetheless, more often than not, GoSL's foreign debt servicing costs are met from CBSL's foreign reserves, after buying the required greenbacks by paying CBSL its rupee value in 'spot' equivalents, a probable reason for 14 October 2016's NFO. Therefore, a weak 'spot' will only inflate GoSL's rupee debt stock. To prevent such a scenario, GoSL at times exerts moral suasion on the 'spot'.

Another reason for 14 October 2016's NFO could have been due to a maturity of a swap entered by CBSL, generally with a foreign bank/s, which are normally awash with dollars to help meet the market's rupee liquidity requirements; a repeat of which may have resulted in yesterday's NFO. On the other hand, the NFO in question could have been due to a combination of meeting GoSL's foreign debt servicing commitments and the maturity of a swap.

The foreign exchange market is avoided to meet GoSL's foreign debt servicing commitments for fear that it would cause depreciative pressure on the rupee.

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