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Wednesday October 20th, 2021
Bonds & Forex

Sri Lanka fails to sell 51-pct of Treasuries auction amid price controls

ECONOMYNEXT – Sri Lanka has failed to sell 51 percent of a 64 billion rupee Treasuries auction, despite a ceiling rate being raised 08 basis points to 6.05 percent, data from the debt office showed.

29.86 billion rupees of 3-month bills were sold at 6.01 percent up 09 basis points after offering 18.0 billion rupees.

Zero 6-month bonds were sold.

915 million rupees of 12-month bonds were sold at 6.05 percent, the new ceiling rate.

The ceiling rate serves as a de facto policy rate to print large volumes of money and trigger foreign exchange shortages.

Following last week’s auction failure, 39 billion rupees was printed. How much new money will be created depends on the how much of the volume offered is already with the central bank.

Following a string of bond auction failures and the denial of convertibility for the new rupees created to buy the unsold bond by the central bank the exchange rate moved towards 238 rupees pushing up food prices and leading to rationing of letters of credit.

Sri Lanka has declared emergency law to seize food stocks allegedly held by ‘hoarders’, a charge that was liberally hurled at businesses in the 1970s when also the central bank was buying large volumes of bonds with printed money.

Price controls have also been slammed.

From September 01 however the statutory reserve ratio was doubled to 4.0 percent and the newly printed money of the note-issue bank has been absorbed by the SRR hike.

Injecting liquidity makes outflows of foreign exchange higher than the inflows. State workers are usually paid the with money and they buy up goods in the economy, triggering imports.

In most hyper-inflating central banks in the past, public sector salaries and soldiers pay have been primary drivers.

Economists and analysts had for several years urged to curb the domestic operations of the central bank or set up a currency board to prevent high inflation and currency depreciation.

However the central bank has now lost all its net reserves. In many cases such situations have led to market dollarization.

Sri Lanka has a Latin America style central bank set up by a Federal Reserve money doctor.

Ecuador, El Salvador also set up by money doctors from the Federal Reserves’ Latin America unit are dollarized and Cuba is de facto dollarized. (Colombo/Sept08/2021)

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