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Saturday April 20th, 2024

Sri Lanka central bank on track to make forex losses as net foreign assets fizzle out

ECONOMYNEXT – Sri Lanka’s central bank is on track to make quasi-fiscal losses on its dollar book as its net foreign assets declined to around 51 million US dollars in July and reserve related and other liabilities come up to its gross foreign reserves, data shows.

The reserve banking for the domestic note issue had also fizzle out to 0.97 percent by July.

The central bank’s net foreign assets fell to 10.3 billion rupees or about 51 million US dollar in July 2021 from around 4.2 billion US dollars a year earlier, amid so-called Modern Monetary Theory liquidity injections.

The central bank’s gross foreign reserves fell to 2,833.5 million US dollars in July from 4,060 million US dollars in June.

However about 1.3 billion dollars of the reserves are owed the International Monetary Fund, about 580 million dollars in swaps and also there is usually a liability to the Asian Clearing Union countries.

In the past the central bank used to report book profits when the currency was inflated (depreciated) with money printing.

However when foreign assets turn negative the central bank will begin to accumulated quasi-fiscal losses on its dollar book.

The central bank now holds 1.2 trillion rupees of Treasuries, which will bring it ‘profits’.

A central bank can also run sterilization losses on injected liquidity. If banks deposit liquidity in windows at 6.0 percent, which have been injected through bond purchases at 5.23 there is a sterilization loss.

Though such activities are clearly monetary however they will eventually eat into the capital of the bank and the Treasury will have to bail the bail it out.

“..[O]perations of a less obviously fiscal—and more obviously monetary—character, such as sterilization or open market operations, are commonly referred to as QFAs because of the large losses they can entail sooner or later affect the budget,” notes the IMF.

The remaining gross reserves will also bring in interest earnings, but the central bank will have to pay interest on IMF loans. The swaps also have premiums which usually bring income.

However swap turned negative in 2021 amid as dollar yields outpaced rupee yields amid money printing and sovereign bond yield falls amid downgrades.

An IMF special drawing rights allocation is also neutral on net foreign assets as interest earn on the holding is balance out on interest rates paid on the allocation.

If the SDR allocation is used, the central bank will have to pay interest and also run book quasi-fiscal losses.

Central bank swaps also do not increase net foreign assets.

Meanwhile the net foreign assets cover for rupee notes was less than one percent by July 2021.

Foreign assets have been declining steadily since money was printed through overnight and term reverse repo injections to target a call money rate and then bonds bought outright for output gap targeting and followed by modern monetary theory from 2020.

The central bank has raised the statutory reserve ratio effective September 02, which is also likely to widen the deficit, since the margin is fully sterilized at 6.0 percent through overnight window. The move however will also reduce sterilization losses.

Analysts and economists had urged authorities to convert the central bank to a currency board.

However now it is too late with no dollar cover for the note issue.

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Central Bank quasi-fiscal activities (QFAs) are usually defined as activities should have been carried out by budgets.

Sri Lanka’s central bank has already funded a Zimbabwe style re-finance scheme for Covid loans and another such credit scheme for state enterprises has been requested.

In August policy rates were raised however bond auctions are still not functioning. Analysts have urged the central bank to get bond auctions working again.

In countries where central bank’s have run massive QFA’s and lost control of monetary policy, market or de facto dollarization has taken place.

Sri Lanka’s central bank was set up by John Exter, US Fed money doctor, in the style of several similar so-called Prebisch-Triffin central banks in Latin America.

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How Sri Lanka, Latin America was busted by Fed money doctors creating strongmen, anti-Americanism: Bellwether

Ecuador (David Grove), El Salvador (Henry Wallich/John Adler) are officially dollarized while other countries such as Cuba (Henry Wallich) and Venezuela have dollarized de facto.

The central bank of Phippines also set up by Exter, had to be re-capitalized after quasi-fiscal losses.
(Colombo/Sept03/2021)

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Sri Lanka discussing giving extra land, water for Chinese oil refinery

ECONOMYNEXT – Sri Lanka is in discussions with China’s Sinopec to give extra land and assure water supplies after the company decided to expand the capacity of a planned oil refinery in Hambantota, Energy Minister Kanchana Wijesekera said.

“There are concerns on how the water supply is going to be provided for the refinery,” Minister Wijesekera told reporters Friday.

The refinery will need more land and also revise conditions in a Board of Investment agreement, he said.

Read more
Sinopec to double capacity of new refinery in Sri Lanka’s Hambantota

Recommendations and decisions from Sri Lanka’s side had already been sent and Sinopec is expected to revert back in May.

“We are hoping to sign the agreement once everyone has agreed,” Wijesekara said.

The principle agreements are expected to be signed by June, he said.

The refinery could sell up to 10 percent of its output in the domestic market.

“There is no commitment by the government to purchase anything,” Minister Wijesekera said. (Colombo/Apr19/2024)

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Sri Lanka rupee closes weaker at 302.00/50 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 302.00/50 to the US dollar in the spot forex market on Friday, down from 301.50/302.00 a day earlier, dealers said.

There was increased demand for dollars after the central bank bought 715 million dollars from forex markets. In the previous two months it was buying on average about 200 million US dollars, leaving market participants and bank in a ‘oversold’ position.

There were some official dollars sales Friday dealers said.

READ Sri Lanka rupee quoted wide to US dollar as peg inconsistencies flare up

Bond yields were broadly steady.

A bond maturing on 15.12.2026 closed at 11.30/40 percent down from 11.35/40 percent.

A bond maturing on 15.09.2027 closed at 11.95/12.05 percent up from 11.90/12.05 percent.

A bond maturing on 15.12.2028 closed stable at 12.15/25 percent.

A bond maturing on 15.09.2029 closed stable at 12.30/40 percent.

A bond maturing on 01.10.2032 closed stable at 12.40/50 percent. (Colombo/Apr19/2024)

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Sri Lanka stocks close down, banks trade down

ECONOMYNEXT – The Colombo Stock Exchange closed down on Friday, data on its site showed.

The broader All Share Index closed down 0.38 percent, or 44.80 points, at 11,753; while the S&P SL20 Index closed down 0.53 percent, or 18.46 points, at 3,456.

Turnover was at 1.4 billion. The diversified financials (Rs366mn) and banks (Rs266mn) sectors continued to see selling pressure.

“This was possibly due to uncertainty around the bond discussions,” market participants said.

With the exception of Sampath Bank Plc (up at 77.50) all other banks traded down in the day. Commercial Bank of Ceylon Plc was down at 104.50, Hatton National Bank Plc was down at 188.50, and DFCC Bank Plc was down at 77.00.

LOLC Finance Plc saw the most trades and closed up at 6.40. Another LOLC company, Browns Investments Plc, also saw high traded volumes and closed up at 5.60.

Softlogic Capital Plc was up at 7.00, and Softlogic Holdings Plc was up at 11.20. A trading suspension imposed on SHL.N0000 was lifted effective today as the company submitted the annual report for the year ended 31st March 2023.

However, shares of the Company will remain in the Watch List “due to Qualified Audit Opinion and Emphasis of matter on going concern in the Independent Auditor’s Report in the Audited Financial Statements for the year ended 31st March 2022.”

Dialog Axiata Plc, which announced its merger with Bharti Airtel Thursday, saw its share price close up at 11.90.

“There was some traction on index heavyweights,” market participants pointed out.

Top contributors to the APSI included Aitken Spence Plc (up at 134.50), Ceylon Tobacco Company Plc (up at 1,245.25, and Lion Brewery (Ceylon) Plc (up at 1,048.50).

There was a net foreign inflow of 5 million. (Colombo/Apr19/2024)

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