Bonds & Forex

Sri Lanka CB Governor defends EPF bond purchases

Monday April 25, 2016 7:38 am

ECONOMYNEXT – Sri Lanka’s Central Bank Governor Arjuna Mahendran defended the Employees Provident Fund’s purchases in the secondary market, which is under the control of the agency at a February 25, 2016 press conference.

Excerpts from the press conference.

Question: Governor, the EPF has been buying the secondary market recently quite heavily, long bonds. What is the rationale for going heavily into the secondary market?

Governor: I thought they stopped. No, they haven’t been buying anything in the last few weeks. In fact some of the primary dealers are complaining to me that as a result you know… volumes are drying up in the secondary markets.

Question: The EPF is buying quite heavily in the secondary market at much lower at lower rates than the auction rate? What is the rationale not to go to the auction and buying like one and a half….?

Governor: …No, no, the EPF is a regular bidder in the auction. At every auction they bid along with the primary dealers. That’s why we have auctions so that so you know you get a market rate.

Now if the EPF bids lower than its competitors in the market, it will lose out and won’t get full allocation on whatever it wants to buy.

And then it has to go into the secondary market. That is how any market player operates. You go into the primary market and you bid that is how we establish a reasonable market rate, in the primary auctions. Then if you have unsatisfied demand, then you go and buy in the secondary market.

Now if the secondary market prices move against you or in favour depends on your reading of the market situation and all that. The point is that the market system has to work.

At the end of the day we cannot have private placements and negotiated rates of interest. That is a thing of the past.

So the EPF probably… I mean they go into a primary auction and they have surplus cash after the auction, because they did not get the full allocation they asked for, and they necessarily have to go to the secondary market to earn a yield on that balance cash. Right?

Question: Can you give us information on how much? Say for example the EPF has been buying in the secondary market versus the auction? I mean if they are so unsuccessful at the auction – unusually, than they were in the past. Why are they so unsuccessful, when in the past they were not so unsuccessful?.

Governor: How can you say they were so unsuccessful? That is dependent on how skilful the managers are in getting allocation right? So they are bidding against the market. Now the market has a view. That rates are going up or down. In a volatile situation like now, because the currency is volatile etc, interest rates are sort of moving in both directions on a daily basis. I do not think the EPF is doing any worse than anybody else out there. How are you judging that they are doing badly?

The point is they are giving 10.5 percent yield on their entire portfolio of 1.4 trillion rupees which to me is a remarkable attestation to their skills. These guys are superb. The EPF managers in my opinion is some of the best guys I have worked with in fund management.

To be generating 10.5 percent yield on a portfolio of that size in a market where interest rates have been falling sequentially for the last five years is I think heroic. And I give them full marks.

Question: As to the success in the primary market, what I am saying is there were 35 bonds, 2041 bonds. For example the 41 bond was auctioned at 12.05. 12.04, 12.09. I think it went up to 12.20 in the cut-off. We don’t really get the cut-offs now. But then two weeks later we find the EPF buying at 10.80 and 11.00. May be one percent off the auction rate. Subsequently there is another auction at a similar rate (12.15). We did not see that kind of actions by the EPF in the past. They used wait and put at auctions. These wild variations they are investing at, isn’t that unusual?

Governor: I don’t know sorry, I would like to see the data. But the points is this. Interest rates were coming down in early January. And you know they, they subsequently move up, that is part of the reason why we raised interest rates, so that they did not fall too precipitously. Right? Our job at the central bank is to see that rates are kept reasonably stable. Now if the EPF was buying at a lower rate – I would imagine that it was because they got a big cash inflow, of the monthly EPF contributions and they can’t just let that money lie around. They probably put it in… bought bills in the secondary market.. to get 10.8 percent, which is better than putting it in overnight call deposits where they would get only 4 or 5 percent.

So that’s the fund manager’s decision. But I don’t know, what is your point?

Question: My point is if they are so skilful, why are they putting at 10.8 percent, even if they waited another two or three weeks….?

Governor: (Interrupting) They cannot get 10.8 percent anywhere else.

Question: No. Even if they waited another three weeks in the call money the next auction went at the same rate – at about 12.00

Governor: That is with hindsight. No. If you are fund manager sitting there and the rates are 10.8 percent how do you know whether it is 12.00 or 9.0 percent next week? They took a better judgement and made that call. I don’t see the point. The guys are sitting on cash they have to generate 10.5, 11 percent every year so he is managing that skilfully. I think getting that kind of return, year after year, for the last 20 years is a great testament to the skill of these people. There are very few funds, anywhere in the world that give those sorts of returns.

Economy

Sri Lanka’s foreign reserves Fall in Sept 2026; CB buys dollars

Sunday October 11, 2026 5:43 pm

ECONOMYNEXT – Sri Lanka’s foreign reserves fell 1.1 percent to US$ 6,851 million by the end of September 2026, down from 6,929 million dollars a month earlier amid central bank purchasing US$64.2 million on a net basis in the month.

The Central Bank has been aggressively buying dollars to boost the reserves.

Analysts say the Central Bank’s year end reserve target of US$8 billion is achievable with the dollar inflows from the IMF and other multilateral institutions in the final quarter of 2026.

The Central Bank sold dollars in May amid sharp depreciation of the rupee currency that month

The Bank sold over US$211 million net in May, marking the first net selling in 22 months.

The Central Bank has net bought US$1,548.8 million in the first nine months of 2026 following a net purchase of US$2 billion last year.

The rupee was under high downward pressure in May as the imports bill for fuel rose unusually high following the Middle Eastern escalation amid continued demand for dollars to buy new vehicles.

However, it reversed course and gained in the next two months before falling in September.

The Central Bank has been buying dollars aggressively from the market to boost foreign currency reserves to meet the targets the country agreed with the IMF under the US$3 billion external fund facility and to repay the island nation’s multilateral and bilateral loans.

The Central Bank in May raised its Overnight Policy Rate amid heavy depreciation of the currency.

The Central Bank’s aggressive reserve building comes ahead of the repayment of foreign debts to sovereign bond holders. This repayment is scheduled to start from April 2028.

After successfully exiting sovereign default through a debt restructuring agreement and securing an IMF Extended Fund Facility (EFF) programme, Sri Lanka has been rebuilding its reserves to meet key targets for macroeconomic stability.

For debt repayment, adequate reserves are essential to meet upcoming external obligations without resorting to new borrowing or accumulating arrears.

While Sri Lanka has made significant progress in restructuring bilateral and commercial debts, any sustained erosion of reserves raises concerns about its ability to sustain the recovery trajectory and fully normalize relations with international markets.

Analysts say policymakers will likely need to focus on boosting export earnings, attracting foreign investment, and prudent fiscal management to reverse the decline and safeguard the hard-won gains from the IMF-supported programme. (Colombo/October 11/2026)

Economy

Sri Lanka spends less than 30-pct of 2026 capital spending through Sept: sources

Sunday October 11, 2026 5:00 pm

ECONOMYNEXT – Sri Lanka has spent less than 30 percent of 2026 capital spending, two government sources said, with the government expects to fully utilize it before the end of this year.

Sri Lanka has allocated Rs.1,380 billion for 2026 capital spending, but has spent only around Rs.385 billion through the first nine months of the year, two government sources familiar with the details told EconomyNext.

Sri Lanka’s chronic failure to utilize its full budgetary allocations for capital investment reflects deep-rooted structural inefficiencies in public financial management and project execution, analysts and economists say.

They warn of lower economic growth in the future if the government fails to implement its planned capital investment projects.

The government has repeatedly said most of the spending occurs in the last quarter of the year.

Cabinet Spokesman and Media Minister Nalinda Jayatissa said on Tuesday (06) that 70 percent of the spending is finalized in November and the government is unable to give an update on the total spending as of that day.

Year after year, bureaucratic delays, protracted procurement disputes, politicized project selection, and a lack of technical expertise within line ministries leave a significant portion of capital expenditure unspent on the Treasury books.

This capital under-utilization carries severe long-term repercussions for the island’s economic trajectory.

By failing to deploy allocated funds into critical infrastructure such as transport networks, modernized power grids, and digital public systems, Sri Lanka suffers from lower productivity growth and worsening structural bottlenecks as well as a decline in overall gross domestic product (GDP) potential.

In a fragile post-default macroeconomic climate, this persistent shortfall also sends a negative signal to international development partners and private investors.

It demonstrates an institutional inability to absorb capital effectively, thereby stalling the very structural transformation required to safely out-grow a historic debt burden.

President Anura Kumara Dissanayake’s government has promised to change the process to fast-track the spending, but the move is yet to materialise, analysts say. (Colombo/October 11/2026)

Bonds & Forex

Foreign investors buy Sri Lanka rupee bonds for second week

Sunday October 11, 2026 3:40 pm

ECONOMYNEXT – Foreign investors bought Sri Lanka rupee bonds for a second straight week in the week ended on October 9, Central Bank data showed, amid a stable rupee.

With the latest inflows, the island nation has witnessed net foreign buying in 15 of the last 17 weeks.

Offshore investors bought a net Rs. Rs. Rs. 3,242 million (US$9.8 million) worth of Sri Lanka rupee bonds. The net buying extended the net foreign inflows into the rupee bonds to Rs. 5.1 billion in the last two weeks following a Rs. 16.5 billion outflow in the previous two weeks.

The inflows helped boost foreign holdings in government securities to 202 billion rupees.

Analysts said a less volatile local currency helped foreign buying last week.

The rupee had been steady for more than three years before the sharp depreciation in May with the Central Bank citing higher oil and vehicle imports amid a lingering conflict in the Middle East.

The rupee has fallen 6.3 percent through October 9 this year.Globally, investors are cautious about economic growth due to the impact of the latest Middle East escalation.

The island nation has enjoyed a total inflow of around 60.7 billion rupees into local currency bonds so far this year, following a net inflow of 71.5 billion rupees last year.

The island nation has seen an uptick in inflation in the last six months following a nearly 50 percent hike in fuel prices.

The government raised fuel prices in the last week of September after reducing it in June and August.

The Central Bank raised its key monetary policy rate by 100 basis points in May to curb inflationary pressure stemming from higher demand.

Before the May rate hike, the Central Bank kept its key policy rates steady since May 2025 after reducing them by 825 basis points over 24 months since June 2023 and foreign investors have been buying rupee bonds despite slight depreciation in the local currency (Colombo/October 11/2026)

Economy

Sri Lanka Central Bank stubbornly defends 5% inflation target

Friday October 9, 2026 7:38 pm

ECONOMYNEXT – Sri Lanka Central Bank stubbornly defended the 5% inflation target it recommended and signed with the government for the next three years citing that it was the only “optimal solution” and rubbished claims that the target is high and erodes the purchasing power of the general public.

Economists and monetary policy critics have strongly advocated that the Central Bank lower its official inflation target from 5% to 2%, emphasizing that a lower target is essential to break the country’s historical cycle of currency instability.

Proponents of the 2% target argue that a 5% baseline implicitly embeds a continuous, compounding erosion of domestic purchasing power, increasing price levels by over 15% across a three-year window.

In a country recovering from hyperinflation, critics contend that a targeted 5% annual inflation creates an environment where nominal prices and living costs permanently outpace real wage growth, continually straining lower- and middle-income households.

However, the Central Bank recommended to the government and signed a three-year agreement to maintain the 5% inflation target for the three years through October 2029.

Central Bank Governor Nandalal Weerasinghe explained at a panel discussion with his junior officers that countries choose inflation targets depending on their growth potential and ability to grow.

“So, this is where one can argue, why 2% inflation, is it better? Looking at the purchase power, it looks better, but it’s not better,” he told the gathering in response to a question.

“It is worse, because it will create a country that can grow, much lower below its potential…. It’s not welfare optimization. It will make a lot of people worse off than it will make a lot of people better off.”

A primary structural argument for adopting a 2% inflation target centers on external stability and protecting the Sri Lankan rupee.

When Sri Lanka maintains a 5% inflation target while its key international trading partners such as the United States, Eurozone, and major Asian economies aim for 2%, a structural inflation differential of around 3% is built directly into the economy.

According to economic theory and historical precedent, this persistent inflation gap exerts steady downward pressure on the domestic currency, forcing nominal exchange rate depreciation.

Advocates argue that lowering the target to 2% would align Sri Lanka with global standards, anchor long-term exchange rate expectations, and prevent recurring balance-of-payments vulnerabilities.

Only 5%

However, Weerasinghe said the 5% target has the “right balance” and the Central Bank had conducted extensive research before arriving at the decision.

“I think, we don’t see any other counterfactual to say, it’s not 5%, it’s 4%, or 2%, or 3%, or 6%, or 7%,” he said.

“A lower inflation target can make the solution worse than what we think…. It won’t be better because everyone can be benefited out of higher growth.”

“If you are coming to a solution, where inflation can drag down the growth below potential, that won’t be the optimal solution.”

“We are all convinced and that’s why we have made the recommendation, government also agreed.”

He said the central bank will reassess and come up with the right level that could be lower in the future and that decision will be data-driven and evidence-based.

Analysts have stressed that a 2% inflation target is critical for lowering long-term interest rates and encouraging capital investment.

Under a 5% target, which carries an allowed accountability band of 2 percentage points, permitting inflation to fluctuate between 3% and 7%, lenders and foreign bondholders demand a higher inflation risk premium to compensate for potential price volatility.

This inflates domestic borrowing costs for both private enterprises and the government. By committing to a tighter 2% anchor, the central bank would provide greater policy credibility, reduce nominal interest rates across the yield curve, and foster a far more predictable environment for long-term private sector investment and debt sustainability.

The data showed, the Central Bank missed the inflation targets for most quarters in the three-year period through end September 2026.

The Bank has blamed lower energy prices for disinflation and missing the target below the lower band of 3% and higher energy prices for breaching the target above upper limit of 7%. (Colombo/October 09/2026)

Bonds & Forex

Sri Lanka rupee closes at 330.85/95 to US dollar spot, bond yields edge up

Friday October 9, 2026 5:22 pm

ECONOMYNEXT – Sri Lanka’s rupee closed at 330.85/95 to the US dollar in the spot market on Friday, from 330.95/331.00 the previous day, while bond yields closed slightly higher, dealers said.

A bond maturing on 01.08.2030 closed at 11.30/35 percent, up from 11.25/35 percent.

A bond maturing on 15.10.2030 closed at 11.37/40 percent, up from 11.30/40 percent.

A bond maturing on 01.02.2031 closed at 11.42/47 percent, up from 11.35/45 percent.

A bond maturing on 15.12.2032 closed at 11.75/85 percent, up from 11.75/80 percent.

A bond maturing on 15.10.2034 closed at 12.10/15 percent, from 12.05/15 percent. (Colombo/Oct9/2026)

Markets

Sri Lanka stocks close up, ASPI gains 0.41-pct

Friday October 9, 2026 4:06 pm

ECONOMYNEXT – Sri Lanka’s Colombo Stock Exchange closed higher on Friday, CSE data showed, with the benchmark All Share Price Index moving up 0.41 percent.

The ASPI was up 82.57 points at 20,316.91, while the more liquid S&P SL20 was up 0.45 percent, or 26.19 points, at 5,788.75.

The ASPI ended the week down 496 points from last Friday, amidst a mixed week of trading.

Positive contributors to the ASPI were Dialog Axiata (up 0.91 percent at 44.50 rupees), Hatton National Bank (up 0.93 percent at 379.00 rupees), Commercial Bank of Ceylon (up 0.38 percent at 200.00 rupees), Richard Pieris and Company (up 4.30 percent at 26.70 rupees), and Laugfs Gas (up 7.35 percent at 40.90 rupees).

SMB Finance (down 9.09 percent at 1.00 rupee), LOLC Holdings (down 1.25 percent at 415.25 rupees), Haycarb (down 1.37 percent at 198.50 rupees), and Industrial Asphalts (Ceylon) (down 16.67 percent at 0.50 rupees) were top negative contributors.

Market turnover was 1.05 billion rupees. Diversified financials led turnover with 233.69 million rupees, followed by capital goods with 200.09 million rupees.

During the session, crossings in Lanka Milk Foods (LMF) in the first half of the trading day drew market interest, Raynal Wickremeratne, Head of Research and Strategy at NDB Securities, said.

“Usually 20,000 is also a psychological limit,” Wickremeratne said. “When it comes back closer to that, people also might feel like it’s worth buying, so that’s why sometimes coming close to that you might have a bit of a move.” (Colombo/Oct09/2026)