Sri Lanka bans banks from buying international sovereign bonds

ECONOMYNEXT – Sri Lanka’s central bank has barred licensed commercial banks and the state-run National Savings Banks from buying international sovereign bonds which are trading at steep discounts.

“The Central Bank of Sri Lanka observes that a sizable amount of investment in Sri Lanka
International Sovereign Bonds (ISBs) has been made by licensed banks thus far during the year,” the central bank said.

“Furthermore, it has been observed that licensed banks continue to purchase Sri Lanka ISBs using
inflows to the current account of the balance of payments, thereby adding undue pressure to the
domestic foreign exchange market.

“In consideration of these developments, licensed commercial banks and National Savings Bank
are required to suspend the purchase of Sri Lanka ISBs with immediate effect for a period of
three months.”

The central bank on December allowed banks to buy bonds provided it was financed with new borrowings.

Related Sri Lanka banks restricted from buying sovereign bonds for six months

The direction was withdrawn.

A sovereign bond maturing in July 2021 is trading at a discount of about 30 percent.

Sri Lanka’s credit rating has been downgraded progressively to ‘CCC’ after after tax cuts in December 2019 and money printing in March and April drove the rupee close to 200 to the US dollar.

Under a so-called flexible exchange rate the central bank delays deploying a weak side convertibility undertaking until a ‘disorderly market condition (DMC)’ of which the market has no prior knowledge.

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The rupee was offered at around 193 to the US dollar in one week forwards on Wednesday as spot and spot next markets dried up. Spot next (a day after spot) quote were seen around 190.50 levels, market participants said. (Colombo/Dec24/2020)

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