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Foreign investor sales of Sri Lanka bonds spike on roll-over

ECONOMYNEXT – Foreign holdings of Sri Lanka bonds dropped 24.75 rupees to 351 billion rupees, in the week to September 02, involving a roll-over of a large tranche of bonds.

Foreign investors have cut their holdings steadily from mid-April following a rate cut, as a balance of payments crisis was fired by an expanding budget deficit financed domestically and money was printed to keep rates down.

Since the April rate cut foreign investors have sold down 114 billion rupees of bonds (about 840 million dollars) adding to foreign reserve losses that came from current transactions, due to expanding credit.

The rupee has come under pressure as hundreds of billions of liquidity was poured into money markets to fire credit by the Central Bank which did not allow rates to go up.

There were also some bond sales in the last quarter of 2014 but, investors returned to bonds in the first quarter following elections.

Analysts have warned that Sri Lanka’s pro-cyclical fiscal-and monetary policy would land the country in trouble and called for reform of the central bank if the country is to progress.

Authorities in Sri Lanka targets dual anchors (the exchange rate as an external anchor and inflation target as a domestic anchor) which is impossible to continue in practice. Such monetary systems generate balance of paymennts crises and high inflation.

Last Friday it abandoned targeting an external anchor starting a process of ‘floating’ but there was no rate hike to combat the domestic imbalance is the credit system. In the first day of reduced interventions the rupee fell around 3 rupees to the US dollars to 138 levels.(Colombo/Sept07/2015)






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