COLOMBO (EconomyNext) – Lifting a ceiling on Treasury bills would help reduce state interest costs by allowing debt to be issued at shorter term maturities, Deputy Economic Policy Minister Harsha de Silva said.
The lifting of an 850 billion rupee ceiling does not prevent the administration from paying salaries and advances in April to state workers, De Silva said, after parliament blocked a move to sell more Treasury bills.
A faction of the main opposition voted 52 against with 31 voting for, when most of the members backing the administration had left the chamber, on the agreement that the motion would not be voted on, the ruling United National Party minority government said.
De Silva said lifting the ceiling would allow the administration to sell debt with a maturity of one year or less, instead of selling longer tenure bonds only at higher costs.
Usually the cost of borrowing money rises with the maturity debt, as credit and other risks rise with time, with the yield at different maturities called the yield curve.
"If you look at the yield curve we can get one year money for 7 to 7.5 percent from one year Treasury bills," De Silva said.
"But for 10-year bond we may have to pay 10 percent. What we wanted to do was to improve Treasury management."
The mix between Treasury bills and bond is decided to put the lowest debt burden on the people. By preventing it, the burdens on the people hand increased."
There is no bar on the government to raise money by selling bonds, de Silva said.
In April 130 billion rupees were needed in April to pay salaries and advances. By April 19, only 19 billion rupees remained to be raised, de Silva said.
Sri Lanka had sold 829 billion rupees worth Treasury bills, just under the 850 billion rupee ceiling.
Some leeway in Treasury bills are also important for monetary policy, allowing the Central Bank to print money to meet actual cash shortages in the broader economy.
In April it is customary for the Central Bank to buy up Treasury bills and print money to meet a seasonal cash drawn during the Traditional New Year period, though this year there is ample excess liquidity in the interbank money market to meet cash drawdowns.
However some leeway in the Treasury bills sale limit is also needed for the Treasury to indirectly appropriate forex reserves to settle foreign debt.
Unless there is a legal bar, such moves could also be met by purchasing a bond, though as a matter of prudent monetary policy, the Central Bank stopped taking on bonds to its portfolio during the tenure of A S Jayawardene as its Governor.
The government could also settle some maturing bills with bond proceeds and build up a slack in the capacity to issue bills when necessary.