ECONOMYNEXT – Sri Lanka has failed to sell 35 percent of a 40 billion rupee Treasuries offer at an ‘auction’ where ceiling yields are pre-determined by the debt office.
The debt office which is a unit of the central bank set ceiling yields of 4.67 percent for 3-month bills, 4.78 percent for 6-month bills and 5.0 percent for 12-month bills.
Any shortfalls below the fixed yield is usually taken up with printed money adding to excess liquidity and potential foreign reserve losses if the liquidity turns into imports through the credit system. It is not clear whether November credit has weakened.
At the December 09 auction, 8.5 billion rupees of 3-month bills were offered and 11.98 billion was sold at 4.67 percent.
12.5 billion rupees of 6-month bills were offered at 2.165 billion rupees were sold at 4.77 percent.
19 billion rupees of 12-month bills were offered at 17.5 billion sold at 5.0 percent.
The debt office had also set ceiling for bond ‘auctions’.
Sri Lanka’s central bank Governor W D Lakshman had said money is being printed in the style of Modern Monetary Theory.
Sri Lanka moved to Treasuries auctions after monetization led to an economic closure in 1970s and high inflation and currency depreciation that undermined a re-opening of the economy.
Sri Lanka is now facing difficulties in repaying foreign debt after several years of monetary instability and tax cuts in December 2019 led to credit downgrades.
Severe financial repression accelerated during the last administration with the central bank forcing dealers to buy bonds at cut off rates, which was later followed by controls on lending and deposit rates. Now 5 -year price ceilings are planned on housing loans.
The central bank also summarily jettisoned a ‘bills only policy’ and started to target the longer term yield curve through open market operations and ‘operation twist’ style exercises in the course of the last two soft-peg crises. (Colombo/Dec09/2020)