Header Ad

Sri Lanka central bank chief talks down gilt yields

ECONOMYNEXT – Sri Lanka’s central bank does not expect government securities yields to rise and would follow a policy of ‘guided yields’ Central Bank Governor W D Lakshman said after keeping rates unchanged in March amid debt unprecedented monetization.

In February longer gilt tenors had begun to edge up despite excess liquidity in money markets amid market concerns over forex reserves losses and distortions appearing forex markets such as dollar yields outpacing rupees, despite currency weakening.

“Although we do not expect a further market decline we do not expect it to increase either in the near future,” Governor Lakshman told reporters Thursday, after the rate setting Monetary Board kept the policy corridor unchanged at 5.50 and 4.50 percent.

The central bank would continue to follow a policy of ‘guided yield’ by issuing directions prior to auctions, he said.

“We will continue with that and hope that things will continue,” Governor Lakshman said.

“We will work as things demand.”

The central bank was setting price controls on 3, 6 and 12-month bills and then limited it to the 12-month yield. Last week it was raised by one basis point to 5.10 percent.

Over February Sri Lanka’s gilt yields had moved up around 50 basis points.

The central bank had said market rates were at a ‘historic low’ and would keep then there.

In 2020 Sri Lanka ran a balance of payments deficit of 2.3 billion dollars as the shock of low interest rates and liquidity injections were absorbed by foreign reserve run down, though in the second quarter private credit collapse also reduced demand.

Advertisement

 

 

 

Central government borrowings from the banking system in 2020 was 1.8 trillion rupees with foreign financing negative.

Related

Sri Lanka prints 505 billion rupees in 2020, bank borrowings top 11-pct of GDP

Sri Lanka domestic borrowings exceed deficit, repays Rs352bn to foreign lenders by Oct 2020

Sri Lanka 2021 budget deficit targeted at 8.9-pct of GDP

Of that around 650 billion was through central bank credit (printed money) a part of which remained as excess liquidity deposited in the agency at the end of the year, and the rest went out as forex reserve losses.

For 2021 domestic borrowings of 1.6 trillion rupees and 99 billion foreign financing was planned in a budget. Sri Lanka has been finding it difficult to access commercial debt credit with credit downgraded to downgrade to ‘CCC’

This year government revenues are expected to improve.

In 2021 the central bank is expecting private credit to recover to 850 billion rupees up sharply from 372 million dollars in 2020.

In the past a strong pick up in private credit had usually been accompanied by pro-cyclical money printing to keep rates down, which tends to trigger forex shortages and currency crises, critics have said. It is the followed by a negative output shock. (Colombo/March04/2021 – Update III)

Latest Comments

1 Comment

  1. Burning expensive air-fuel for easy and comfortable transport but unprofitable journeys by the big-shots and their families will definitely have a big impact on the economy.

Latest comments

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