ECONOMYNEXT – Sri Lanka’s central bank said interest free advances given to the government under its old law has been converted to Treasury bills, and 2.4 trillion in Treasury bills to longer term bonds as part of a domestic debt restructuring.
The conversion of provisional advances, which were a loan in perpetuity with no practical roll-over risk, now become 220 billion rupees of negotiable bills, which will add to the so-called gross financing need (GFN). They will also earn interest adding to the deficit.
Provisional advances, were a type of printed money allowed to be given by the central bank when it was set up in 1950 by Western economic advisors, at a time when short-term interest rates were low around the world and in Sri Lanka of around 2 percent under a tight monetary standard.
At as given exchange rate, the injections has tended to trigger forex shortages, unless the money was mopped up through other means.
A stock of Treasury bills, which the central bank acquired to mis-target rates, through crippling auctions of maturing bills to target short term gilt yields, and to sterilize interventions to target an artificially low policy including to sterilize sales of proceeds of swaps, were also converted to bonds to bring down the GFN.
A total of 2.49 trillion rupees of bonds were issued, which will have a step-down coupon starting from 12.4 percent.
The rates are lower than the market rates for bills at present and will reduce the interest bill of the budget without having to transfer profits.
Profits transfers in the past, which comes closely in the heels of provisional advances has tended to trigger forex shortages (at a given exchange rate) or pressure the currency in the past. (Colombo/Sept22/2023)