ECONOMYNEXT – Sri Lanka’s banks have reduced their purchases of Treasury bills contracting their holdings absolutely since over recent months, official data shows, as private credit picked up.
Bank holdings of bills peaked in February 2025 at 2,825 billion rupees and has fallen to around 2,737 by June 2025, data published by the central bank show, indicating an absolute reduction of 88 billion rupees.
Sri Lanka’s bill auctions have failed to be fully subscribed in recent weeks at the cut off rates offered by the debt office, with no takers last week for additional bills offered on tap.
Sri Lanka’s bill yields have remained fixed in recent weeks, which analysts have dubbed the ‘ramrod rate anomaly’ in the past. In the past the ‘ramrod rate anomaly’ has been enforced through printing money.
However, banks are still buying bonds which are offered at higher rates.
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The fixing of bill rates and the discouragement of banks from buying bills, and have tended to come before a currency crisis even when budget deficits have been reduced by politicians.
The emblematic year was 2018, when the budget deficit was brought down by then Finance Minister Mangala Samaraweera, rates were cut and money was printed through open market operations and swaps to trigger a currency crisis, higher energy and commodity prices and a voter backlash.
At the time the central bank also jettisoned a ‘bills only’ policy and bought bonds outright, using central bank independence given by the Finance Minister.
Ironically, the start of ‘central bank independence’ in the US in 1951 in the wake of the Fed Treasury Accord was a return to a ‘bills only policy,’ so that market rates would be reflected in government securities, EN’s economic columnist Bellwether says.
“But now it has come to reflect absolute discretion through open market operations as advocated by the International Monetary Fund and others, where a few state macro-economists tend do the complete opposite to operate a political ‘transmission mechanism’.”
When banks or other buyers reduce purchases of bills or cut them absolutely, it becomes difficult to roll-over debt of past deficit, regardless of the current level of the deficit.
The first time Sri Lanka’s central bank discouraged bank investments in government securities was in the 1952/1953 crisis, its first, after running deflationary policy against US printing (ahead of the Fed Treasury Accord) in the first year or two of its operations.
The central bank is now not printing money through open market operations and is operating a scarce reserve regime – though concerns have been raised about inflationary swaps, the single policy rate and moral suasion – and there are no forex shortages.
A so-called ‘fiscal buffer’, in the style of a buffer for oil prices that was built by macro-economists in the Gotabaya Rajapaksa administration has also drawn concerns as a measure that will hinder market interest rates and may also lead to loss of reserves in the short term.
However, if a scarce reserve regime is operated only for clearing and not funding credit, the possibility of out-of-control private credit is vastly reduced as banks will either have to raise deposit rates or delay credit. (Colombo/Aug11/2025 – CORRECTION – T-bill holdings data up to June not July)