An Echelon Media Company
Wednesday July 6th, 2022

Sri Lanka fails to sell 60-pct of Treasury bills at price ceiling

ECONOMYNEXT – Sri Lanka has failed to sell 60 percent of 50 billion rupees of Treasury bills offered at an auction on June 17, at a ceiling yield of 5.21 percent, with only small volume of 12-month bills sold, data show.

14.83 billion rupees of 3-month bills at 5.17 percent after offering 10 billion rupees.

4.7 billion rupees of 6-month bills were also sold at 5.17 percent after offering 20 billion rupees.

275 million rupees of 12-month bills were sold at 5.21 percent after offering 20 billion.

The debt office, which is a unit of the central bank, buys bills which cannot be sold due to the 5.21 percent ceiling with printed money, effectively making it a de facto policy rate at which money is injected to the banking system to trigger currency pressure and balance of payments deficits.

A large volume of Treasury bills amounting to almost 900 billion rupees are held by the central bank already and no data is released on how much of it was rolled over without injecting additional rupee reserves into the banking system to create forex shortages.

Over April and May the central bank sold down a part of its bill stock at the de facto policy rate indicating that the Treasury bill yield ceiling was serving as a tool to automatically sterilize liquidity in both directions subject to domestic credit developments, analysts say.

Sri Lanka is now under the worst import controls since the 1970s, when there was no active bond market like now and money was also printed.

“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 wrote in 1975, in the central banks’ 25 anniversary publication.

“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. ”

The government received 500 million US dollar loan from China Development Bank in April giving it the ability to repay some foreign loans. (Colombo/June17/2021)

Leave a Comment

Your email address will not be published.

Leave a Comment

Leave a Comment

Your email address will not be published.