Sri Lanka fails to sell 56-pc of Treasuries, yields up amid price controls
ECONOMYNEXT – Sri Lanka has failed to sell 56 percent of a Treasuries auction this week despite a slight hiking of a price control in the ‘auction’ amid continued pressure on the rupee, official data show.
The debt office offered 38 billion rupees of bills and sold only 16.7 billion rupees, leaving 21.9 billion rupees or 56 percent of the offer unsold.
The central bank usually buys the unsold volume with printed money, creating excess liquidity in money markets, adding loanable reserves to the banking system, triggering a balance of payments deficit, import controls and import substitution.
After the failure of last week’s bill auction, excess liquidity went up to 154 billion rupees from 131 billion rupees.
“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,” a classical economist wrote in the 1975 anniversary publication of the central bank amid forex shortages, exchange controls, price controls, and an import substituting closed economy.
“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. ”
In the 1970s there were insufficient bids to auction, he wrote. However it 2021 the 38 billion rupee auction was oversubscribed by up to 54.9 billion rupees, but price controls have prevented the sale of the Treasuries at the ‘auction’ which is supposed to be multiple price.
This week the price control for 12-month bills was raised to 5.09 percent from 5.05 percent. The price control for 3 and 6 months bills have been lifted a few weeks earlier, but the in practice no bids are accepted higher than the 12-month yield.
The debt office sold 9.5 billion rupees of 3-month bills after offering 5.0 billion, at a yield of 4.82 percent, up 10 basis points.
The debt office sold 4.2 billion rupees of 6-month bills after offering 8.0 billion rupees at a yield of 4.93 percent, up 08 basis points.
The debt office sold 2.9 billion rupees of 12-month bills after offering 25 billion rupees, at the 5.09 percent price control, up 05 basis points.
Analysts have pointed out that the by taking maturing bills into its balance sheet, the central bank in addition to financing any current budget deficit with printed money, also turns already financed deficits of the past into reserve money or bank notes redeemable for foreign exchange.
During the last administration the central bank was given full independence to conduct monetary policy but it jettisoned a bills only policy and bought legacy bonds through open market operations, and injected cash through multiple means to keep rates down and trigger currency crises, critics have said.
In all cases, falling forex reserves had forced a return to more prudent policy.
Analysts have pointed out that most of Sri Lanka’s economic troubles have come from making interest rates a final target for monetary policy instead of an intermediate one, amid the operation of soft-pegged exchange rate regime. (Colombo/Feb18/2021)