ECONOMYNEXT – Sri Lanka has failed to sell 41 percent of a 47.5 billion rupee Treasuries auction, with a ceiling rate of 5.26 percent set for 12-month securities, with most bids coming for 3-month bills, data from the state debt office showed.
24.7 billion rupees of 3-month bills were sold at 5.22 percent, flat after calling bids for 15 billion.
1,337 million rupees of 6-month bills were sold at 5.23 percent, up 01 basis point from two weeks ago.
1,650 million rupees of 12-month bills were sold at 5.25 percent, flat, after calling bids for 16.5 billion rupees.
The debt office which is a unit of the central bank has set a 5.26 percent ceiling rate for 12-month bills.
Sri Lanka has failed to sell Treasury bills to real buyers in a series of auctions over the past year and unsold bills had been bought with printed money, making the ceiling rate a de facto longer term policy rate below the 5.50 percent overnight window.
Sri Lanka has been hemorrhaging forex reserves as the newly printed money turned into credit, of the Treasury went to the central bank with printed money in hand seeking convertibility.
It is not clear how much of the offered bills were already held by the central bank, whose holdings have topped 1.1 trillion rupees.
In 2020 Sri Lanka was hit by a 2.3 billion rupee balance of payments deficit. In 2021 before the repayment of a billion dollar bond, the BOP deficit was 1,029 million dollars.
Sri Lanka is now under the worst import controls since the 1970s when also large volumes of money was printed due to failed Treasuries auctions.
“The responsibility of absorbing the unsubscribed portion of the Treasury bill issue fell on the central bank,” ” a classical economist wrote in the 1975 anniversary publication of the agency amid forex shortages, exchange controls, price controls, and an import substituting closed economy.
“A major drawback in financing of budget deficits with central bank credit is that while the process involves an expansion in the money supply, it is not necessarily accompanied by an expansion by a corresponding increase in national product.
“Consequently, increased demand emanating from central bank financing of budget deficits had to be satisfied by increased recourse to foreign supplies with resulting pressure on the country’s external payments.
“Thus, though the Government fiscal problem and the balance of payments deficits were two distinct problems, they were nevertheless inter-related, in that the balance of payments deficits and loss of external assets arose partly out of the method by which the government sought to finance its deficits.”
In 2021, Sri Lanka is facing a bigger problem than the current account (trade) payments. Sri Lanka’s sovereign credit has been downgraded in the wake of ‘flexible exchange rate’ and tax cuts and it is unable to roll over commercial debt. (Colombo/July28/2021)