Sri Lanka fails to sell 60-pct of Treasuries, short term yields up

ECONOMYNEXT – Sri Lanka has failed to sell 60 percent of offered Treasury bills at an auction though short term yields rose marginally closer to a price controlled 12-month yield, data from the state debt office showed.

The debt office, which is a unit of the central bank sold 9.44 billion rupees of 3-month bills after offering 7.0 billion rupees at a yield of 4.90 percent up 08 basis points from a week earlier.

The debt office sold 6.791 billion rupees of bills after offering 10.5 billion at a yield of 4.99 percent up 06 basis points from a week earlier.

Only 580 million rupees in 12-month bills were sold after offering 25 billion rupees, at the controlled price last week of 5.09 percent which was flat.

The debt office offered a total of 42.5 billion rupees of bills and sold only 16.81 billion rupees.

The office had been buying large volumes of Treasury bills to keep down auction yields creating currency pressure and a balance of payments deficit over the last year.

Sri Lanka’s import are under the worst controls since 1970s when also large volumes of bills were bought by the central bank.

“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.

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“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 2020 Sri Lanka ran a 2.3 billion US dollar balance of payments deficit in 2020.

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