Sri Lanka excess liquidity drops ahead of dollar bond repayment

ECONOMYNEXT – Sri Lanka’s excess liquidity in money markets, generated mostly from unprecedented money printing triggering forex shortages dropped to 166.7 billion rupees on January 2021, ahead of a repayment of dollar denominated bonds.

An unsterilized sale of foreign exchange to repay a dollar Treasury bond or to intervene to maintain a peg, results in a contraction of excess liquidity and reserve money.

About 194 million dollars of dollar denominated bonds styled Sri Lanka Development Bonds are maturing on January 21.

A 200 million dollar auction of Sri Lanka Development Bonds to settle on January 22 drew 62 million dollars of bids and the 43.5 million dollars of bonds were sold.

Investors have a chance to subscribe to bonds at weighted average yield today.

Sri Lanka has met all maturities of dollar bonds on time. On December 31, a 37 million dollar tranche matured.

In 2021 about 1.3 billion US dollars of SLDB are due to mature.

However domestic Treasuries have been repaid with printed money, turning paper securities into bank notes exchangeable for dollars, creating foreign exchange shortages and raising default risks.

It is not clear whether today’s liquidity will also be replaced with more money.

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