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Sri Lanka fails to sell 42-pct of Treasuries offered

ECONOMYNEXT – Sri Lanka has failed to sell 42 percent of 45 billion rupees of Treasury bills offered at an auction Wednesday amid pre-set ceiling yields, data from the state debt office showed.

In 3-month bills 16.1 billion rupees were sold at 5.01 percent, up 02 basis points after offering 10 billion.

In 6-month bills 8.9 billion rupees of 6-month bills were sold at 5.07 percent, up 01 basis point after offering 10 billion rupees.

In 12-month bills only 657 million rupees were sold at 5.11 percent, up 01 basis point after offering 25 billion rupees.

Sri Lanka pre-announces a controlled yield for the 12-month maturity, before the auction.

This week the controlled yield was raised 02 basis points to 5.12 percent.

Sri Lanka abandoned the sale of ‘rupee securities’ at pre-determined prices under then-governor A S Jayewardene to end financial repression and high levels of monetary instability seen in the 1980s, and moved to bond auctions.

But over the last few years the central bank had been targeting the call money rate and various points on the yield curve as well as lending and deposit rates. A bill only policy set by Governor Jayewardene was also abandoned during the last UNP led administration.

Analysts say the actions show that interest rates are being used as a final target leading to monetary instability. However the central bank’s core mandate is economic and price stability.

Sri Lanka has being printing unprecedented volumes of money over 2020, and running down reserves defending the peg mostly against financial account transactions.

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Analysts have urged authorities to halt the printing of money to conserve foreign reserves and avoid a further depreciation and monetary instability.

Sri Lanka’s central bank now owns 800 billion rupees of securities and the rupee has fallen below 200 rupees to the dollar in the spot next market.

Market dollar yields have outpaced rupee yields and forward rates are negative. In 2020 Sri Lanka ran a 2.3 billion US dollar balance of payments deficit after printing around 650 billion rupees.

Sri Lanka is now under the worst import controls since the 1970s.

“The Treasury had to finance its expenditures increasingly by resort to Treasury bills despite the fact that no significant tenders forthcoming to absorb the successive issues of Treasury bills,” an unknown classical economist at the central bank wrote in its 25 year anniversay publication in 1975 amid import and exchange controls.

“The responsibility of absorbing the unsubscribed portion of the Treasury bill issue fell on the central bank.

“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.

“With the continued loss of reserves and the accumulation of external liabilities, the ability of the Central Bank to maintain the international value of the rupee was gradually undermined. ”

However now there is demand. Though the bill sale is supposed to be a multiple price market determined auction, it is operating under fixed ceiling price. (Colombo/Mar17/2021 – Updated II)

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