An Echelon Media Company
Friday December 9th, 2022

Foreigners sell bonds as rupee falls, CB says Sri Lanka has enough forex reserves

ECONOMYNEXT  – Foreign investors sold 13 billion rupees of bonds in the week to August 21, accelerating a weakening of the rupee that began earlier in August, but the central bank said it has enough reserves to defend the currency.

"In recent day we have seen pressure on the fx market," Central Bank Governor Indrajit Coomaraswamy told reporters.

"But the underlying factors do not really explain this pressure. So we think it will be short lived.

"There may be other non economic factors, disturbing the market at the moment. Given the strong underlying fundamentals, we do not see this as a problem that is likely to be prolonged."

The rupee had been weakening from early August though foreigners started to sell heavily only this week. In the week to August 21, foreign investor holdings fell to 123.5 billion rupees, from 136.4 billion rupees.

Reserve Buffer

"We have about 700 mn dollar of foreign investors in the rupee securities market," Governor Coomaraswamy said.

"Even if all of that goes out, which it won’t, we can handle it."

Sri Lanka had about 8.4 billion US dollars of reserves and the authorities were comfortable with about 6.5 billion US dollars, he said.

Deputy Governor Nandalal Weerasinge said of total the foreign bond sales seen over the week, central bank interventions covered only about a third of it, the rest was absorbed by the market.

The banking system can absorb foreign bond sales without the currency falling when credit is weak and not all deposits and loan repayments go for credit, analyst have pointed out.

The rupee fell steeply toward 180 to the US dollar over the week, from around 176 in mid July when monetary policy was generally as prudent and was consistent with the exchange rate policy.

Credit Trend

Sri Lanka’s bank credit has been negative in the wake of monetary instability in 2018, which led to a collapse of the currency, an output shock and a rise in bad loans, though there was positive state and private credit in June.

July data showed that private credit was still negative. Imports had also fallen with weak private credit and slowing economic activity.

No data is available for August, though it is known that the government has ramped up spending through a salary hike..

Foreign investors seen selling bonds also on Friday, dealers said, while importers were also spooked, trying to cover.

in Sri Lanka due to recent collapses of the currency and the central bank’s unwillingness to let the currency appreciate even when credit is strong, importers and bond investors are easily spooked or the credibility of the peg is weak.

"What we said was that as part of an inflation targeting regime, we will not defend any particular rate nominal or real," Governor Coomarasamy said.

"But if there is disorderly adjustment, which is not aligned with the underlying fundamentals, we will intervene in the market.

"There should be no earthly reason why it should be happening other than may be some other factors that have arisen in the last few days."

Until the August instability, the central bank had collected about 350 million US dollars form markets, officials said.

The central bank has been given a forex reserve target by the International Monetary Fund.

To collect dollar reserves the central bank has to sell down its Treasury bill stock to mop up rupee reserves from banks.

Until mid-July, the central bank was selling down its Treasury bill stock steadily mopping up liquidity generated from dollar purchases (sterilizing purchases to create a balance of payments surplus).

The complementary monetary and exchange rate policy allows a soft-pegged central bank to re-build forex  reserves, operating a stable and consistent peg with the US dollar in the process, which analysts have said is tighter than a currency board.

Contradictory Policy

But data shows that the central bank allowed unsterilized excess liquidity to remain for an extended period in July and suddenly started to print up to 20 billion rupees of money from August 07 through its overnight and later other lender of last resort facilities.

The money was printed not at the policy lending rate of 8.50 percent authorized by the monetary board, or near it, but close to the deposit rate of 7.50 percent where excess liquidity from a balance of payments surplus is expected to be removed from the banking system ovenight..

More prnting through term and outirght purcahses also continued in August, data shows.

But on August 16, the central bank suddenly removed about 27 billion rupees of liquidity including part a of the newly printed money and retired bills in its portfolio.  Officials said the Treasury repaid 25 billion rupees in to the central bank.

You may also read:

Sri Lanka liquidity drop around money printing bout, rupee fall, from fiscal repayment

Sri Lanka central bank injects cash overnight, term, and outright

 Sri Lanka’s central bank lends liquidity near deposit rate

It is not clear why such a disruptive repayment was made in one go, when monetary stability and the dollar peg could have been kept tight and more dollars bought if the bills were sold down gradually over two or three weeks, analysts say.

It is also not clear why tens of billions or rupees were printed from a week earlier through lender of last resort facilities at near the policy deposit rate in to the banking system that already had excess liquidity.

Banks deposited 50 billion rupees at the excess window on August 15.

Targets

Governor Coomaraswamy told reporters that open market operations were conducted in August to bring the call money rate to the lower end of the corridor, indicating that the central bank was targeting the rate down systematically.

The central bank is also separately targeting deposit rate deeper into the yield curve through price controls.

More money was also printed up to 316 days through outright purchases far below the 12-month rate, showing that attempts were being made to target the long end of the Treasuries yield as well.

Lending rates are also due to be targeted directly through price controls shortly.

On Friday the central bank cut its policy deposit rate further to 7.0 percent from 7.5 percent.

As the rupee collapsed rapidly towards 180 to the US dollar on Friday another 5 billion rupees was printed overnight Friday at 7.30 percent to take excess liquidity at the deposit widow to 30 billion rupees.

Critics of the central bank has called for what has been dubbed ‘floating with excess liquidity’ to be made into a criminal offence.

Currencies rapidly falls when a soft-pegged central bank injects money to prevent reserve money from contracting after intervening in forex market especially when credit is positive. (Sri Lanka has to reform soft-peg to avoid monetary instability, default: Bellwether).

Another 10 billion rupees of printed money was offered for 7 days but there were takers for only 550 million rupees, which was not given. Whether it was not given to because the rate offered was too high or too low is not known.

One reason for August 23 the rate cut was the recent uptick in the auction rates of Treasury bills, Governor Coomaraswamy said.

Sri Lanka’s central bank is no longer printing money directly through bill auctions to target the long term yield curve to create balance of payments pressure.

Rate cuts earlier in the 2019, were made without printing money, by lowering the floor rate and mopping up money to keep overnight rate abover maket, andabout 20 basis points above the floor policy rate of 7.50 percent.

Another reason lower that floor rate was to target growth and an output gap, Governor Coomaraswmay ssaid under a modified inflation targeting regime.

"We continue to have an output gap where the potential growth is 5 percent and the current growth rate for 2019 is 3.1 percent.

"And output gap stabilization is an important concern in a flexible inflation targeting regime and that again argues for a relaxation of monetary policy."  (Colombo/Aug24/2019)

Leave a Comment

Your email address will not be published. Required fields are marked *

Leave a Comment

Leave a Comment

Cancel reply

Your email address will not be published. Required fields are marked *

Sri Lanka president slams power regulator chief after conflicting with minister

ECONOMYNET – The powers to change the electricity tariff in Sri Lanka is vested with the Minister of Power and not the Public Utilities Commission (PUCSL), President Ranil Wickremesinghe told the Parliament.

The minister of Power and Energy, Kanchana Wijesekara has requested an upward price revision to be implemented in two phases both in January and July next year, saying the recent tariff hike was not enough for the state-run utility provider Ceylon Electricity Board (CEB) to continue uninterrupted power supply.

However, Jaynaka Ratnayake, the Chairman of the PUCSL had said  the recent tariff hike is enough for the CEB to cover the cost of production and it will not allow another price hike. However, he has said a twice a year price revision is necessary though it should be in April and October instead of January and July.

President Wickremesinghe said the PUCSL chief was opposing the tariff hike due to his personal reasons.

“The power is vested with the Minister and me. I am the one who made the PUCSL act and I know what is in it,” Wickremesinghe told the parliament on Thursday. quoting a letter from the Attorney General which mentioned provisions in the island nation’s Electricity Act.

Accordingly the Act, the PUCSL would be statutorily obliged to give effect to such policy. It is observed that neither the Act nor the PUCSL Act contains any provisions that empowers the PUCSL to change or act invariant of such policy guidelines.

“The Chairman of the PUCSL is misguiding the general public. I have to meet him and see,” Wickremesinghe said.

WIckremesinghe said the Chairman does not want the tariff hike because he owns one of the highest electricity consuming companies.

“He is the Chairman of the Trillium corporation. It is the firm that takes up the most energy”, he said.

The Trillium group is managed by Janaka Ratnayake and he also holds positions as the chairman and CEO of Trillium Property Management & Services Ltd., City Housing and Real Estate PLC, Trillium Residencies Ltd., Computer Care (Pvt) Ltd., and Rent a Comp Services (Pvt) Ltd., and JR Management Consultants (Pvt) Ltd.

“It means when the electricity bill increases, his expenses increase as well”

He said the CEB still has a loss of 300 billion rupees since 2013 and it needs to be covered.

The CEB issue can be solved only in three ways, either printing more money, increasing value added tax or increasing the tariffm, he said. (Colombo/Dec08/2022)

Continue Reading

Sri Lanka President bemoans over inconsistent LNG deals

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe bemoaned over successive governments’ liquefied natural gas (LNG) deal that has brought in all the world powers into the discussion.

Wickremesinghe’s center-right United National Party (UNP) had discussions with India and Japan between 2002-2004 for an LNG project.

“Following dialogues with India and Japan, the UNP government could come to agreements to get two LNG power plants. After we were defeated the successor government, without cancelling those agreements granted it to New Fortress company in USA,” Wickremesinghe told the parliament.

“Thereafter, as they did not like New Fortress, they gave it back to Pakistan and China. So within the same premises, there were China, Pakistan, India, USA, Japan and only Russia was not there.”

“It was wonderful that a world war did not ignited there as there were five main powers in the world.”

“Now there is no LNG or anything here and now they ask me to solve this issue.”

Wickremesighe’s outburst comes as his government is forced to raise tariffs on power prices after successive governments failed to implement cheap and renewable power generation projects.

He said a total loss for the state-run Ceylon Electricity Board since 2013 was 300 billion rupees and a possible drought next year could increase the 2023 electricity cost to 420 billion rupees.

“If it rained, we need Rs. 352 billion while Rs. 295 is required if rained so much to have floods. How are we going to find this money? We would have to print money, but Rupee would depreciate. We would have to increase VAT but it would increase the price of all commodities or to charge it direct.” (Colombo/Dec08/2022)

Continue Reading

Air quality drop forces Sri Lanka to close schools; public warned

ECONOMYNEXT – A rapid drop in air quality in Sri Lanka has forced the Colombo government to close all schools across the country after a deep depression over Southeast Bay of Bengal, officials said.

The Education Ministry, issuing a special notice on Thursday said, it has decided to close all government schools for Friday, after discussing with the officials in Meteorology Department and Disaster Management Center.

An official said the drop was due to the deep depression over Southeast Bay of Bengal carrying the air from India.

Due to the depression over South east Bay of Bengal (370 km east of Trincomalee) has concentrated into a cyclonic storm “Mandous” by Wednesday night.

“Cyclone in the Bay of Bengal that is the prime reason for the increase in the pollution load as we receive more wind from India,” H.D.S.Premasiri, Senior Scientist, Coordinator-Air Quality, noise and vibrations at National Building Research Organization (NBRO) told EconomyNext on Thursday.

Officials said there is a likelihood of the cyclone moving west-northwestwards and further intensify into a severe cyclonic storm tonight and cross North Tamil-Nadu, Puducherry and South Andhra Pradesh coast around midnight of 09 th December and the maximum wind speeds will be 70-90 km per hour and can increase up to 90 in sea areas.

“Hopefully, today we can expect normalization in the environment and the effects of the fog will disappear”.

According to the NBRO’s real time Air Quality Index Indicator, the quality of air in northwestern coastal district of Puttalam has dropped drastically and indicated a particular matter (PM) 132, while Kegalle (85) and Mannar (84) were the districts which had next worst air quality.

According to NBRO, Battaramulla, Polonnaruwa, Dambulla, Kegalle, Mannar and Puttalam indicate a poor quality of air due to higher PM.

“The fog will lead to lung and breathing issues,” Premasiri said.

“So the public is warned to wear a mask when they travel outside. The pollution highly prevails in city areas and has a less impact on the other parts of the areas.” (Colombo/ Dec08/2022)

Continue Reading