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Monday December 11th, 2023

Sri Lanka fails to sell 74-pct of Treasury bills at auction amid BOP deficits

ECONOMYNEXT – Sri Lanka has failed to sell 74 percent of a 45 billion rupee ‘auction’ of Treasury bills conducted under price controls, official data shows as a balance of payments deficit continues and the monetary authorities bill stock topped 824 billion rupees.

The debt office managed to sell more 3-month bills with the one year yield curve continuing to flatten towards to 5.11 percent ceiling placed on 12-month yields.

In 3-month bills 9.0 billion rupees were sold at 5.04 percent, up 03 basis points, after offering 10.0 billion rupees.

In 6-month bills 1.1 billion rupees were sold at 5.08 percent, up 01 basis point after offering 15 billion rupees.

In 12-month bills 1.3 billion rupees were sold at 5.11 percent, the price-controlled yield, after offering 20 billion rupees.

The central bank has been purchasing large volumes of bills by printing money to keep rates down expand reserve money and trigger a balance of payments troubles for over a year under so-called ‘Modern Monetary Theory’.

It is not clear whether the central bank already holds a part of the 45 billion rupees in bills offered.

In the week to March 24, the central bank’s Treasury bill stock rose to 824 billion rupees from 810 as a bill ‘auction’ failed to fully sell the offer amid price controls.

A further 37 billion rupees were borrowed by banks which were short of rupee reserves from its overnight window. Any outright purchase of bills from this auction would ‘validate’ the borrowing into non-borrowed reserves.

The rupee is now at over 200 to the US dollar from around 182 at the beginning of 2020.

In 2020 Sri Lanka ran a balance of payments deficit of 2.3 billion dollars.

Sri Lanka is now under the worst import controls since the 1970s and prices of banned items are soaring giving large profits (rents) to import substitution business also known as the cronies or Mercantilists.

In Sri Lanka there is a strong mercantilist belief that monetary instability in the form of currency falls and BOP deficits are caused by trade rather than monetary policy.

There is also no knowledge that the domestic solvency is required to maintain external solvency.

In 1975 a classical economist had warned against the practice of printing money to buy Treasury bills explaining the link between failed bill sales, the balance of payments and rupee.

In 2021 there is demand for bills, but they are not sold under the price control which has been set at 5.11 percent for this week’s auction.

“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. ”

In January 2021, the BOP deficit was 690 million US dollars. Sri Lanka’s external drain in 2020 and 2021 is mostly caused by debt repayments after confidence was dented by previous money printing which led to currency collapses and growth shocks.

The current BOP deficit dates back to around August 2019, when money was printed despite running a pegged exchange rate to target an output gap.

Sri Lanka’s central bank constitution however has no growth mandate, only a mandate for price and economic stability. (Colombo/Mar25/2021)

Comments (1)

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  1. Thappan Dong says:

    I feel very sorry for the printing machine. Allow the printing press to take a break before it malfunctions. With the import restrictions its hard to find spare parts 😢

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  1. Thappan Dong says:

    I feel very sorry for the printing machine. Allow the printing press to take a break before it malfunctions. With the import restrictions its hard to find spare parts 😢

Sri Lanka’s ousted utilities regulatory chief convinced he’ll be president

ECONOMYNEXT — Sri Lanka’s former public utilities regulatory chief Janaka Ratnayake, who was removed in May following a parliamentary vote, has confirmed that he intends to run for president.

Speaking to reporters on Sunday December 10 in the wake of an hours-long island-wide power outage the previous evening, Ratanayake said he will be the definite winner at a future presidential poll.

“I announced [my intention to run] officially on December 07, my birthday. I’m definitely coming as a presidential candidate. That’s not all, I’m the definite president at a future presidential election,” he said.

Ratnayake, in his first media appearance in months, was responding to questions about newspaper advertisements published on December 07 announcing his future candidacy.

Sri Lanka’s parliament on May 24 opted to remove the former chairman of the Public Utilities Commission of Sri Lanka (PUCSL), with 123 members voting in favour. This marked the first time a head of an independent government commission was sacked by Sri Lanka’s parliament.

Power & Energy Minister Kanchana Wijesekara, who had been at loggerheads with the regulatory chief, said at the time that the official had acted obstinately without the concurrence of fellow commission members.

The minister levelled five charges against Ratnayake, the first twoof  which were based on a February 10 verdict by the Court of Appeal rejecting an application filed by the offiical against an electricity tariff hike. Opposition legislators slammed the decision saying it undermined independent commissions.

Ratnayake’s presidential ambitions have been known for some time. A day before parliament voted to remove him, he told reporters: “If I can change the country, I will definitely join politics, because my intention is to serve the people and what is right.”

Ratnayake had blocked delayed a tariff hike in early 2023, resulting in losses to the state-run Ceylon Electricity Board (CEB), Minister Wijesekara claimed at the time. The PUCSL had als onot enabled tariff hikes for nine years, requiring its governing law to be changed, Wijesekera said.

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Sri Lanka wants university research to lead to commercially viable products

ECONOMYNEXT – Sri Lanka’s ministry of industries wants to ensure commercially-ready products and services are produced by university research, by facilitating partnerships with factories and entrepreneurs.

After a currency crisis, Sri Lanka’s government is in a drive to boost its trade balance by increasing exports.

“Our export basket hasn’t changed recently, partly because our small and medium entrepreneurs don’t have sufficient research and development facilities (like the multinationals) to innovate their products for the export market,” Additional Secretary of the Ministry of Industries, Chaminda Pathiraja said.

“At the same time, state universities and research institutes produce a large amount of research findings yearly, which end up sitting in those institutions; they don’t reach the industry,” Pathiraja said at a press briefing to announce a program on commercialization of new products and research, to be held tomorrow at the Waters Edge.

The networking forum will bring innovators and manufacturers together to focus on the commercialization of research for the value added tea, coir, spice, dairy products, gem and jewellery and packaging products industries.

“We want to encourage collaboration, through programs like our University Business League etc, so that the research output can be commercialized, and what is produced by our factories can increase in quantity and quality. We must focus on the export market.”

The objective of this program, he said, was to reduce the gap in acquiring innovators’ ideas and skills by the investors, and ultimately boost the manufacturing sector’s efficiency in alignment with the export market.

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Sri Lanka rupee opens at 327.00/50 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee opened at 327.00/50 to the US dollar on Monday, from 327.00/30 Friday, dealers said.

On the Colombo Stock Exchange, both indices opened up: The All Share Price Index 0.28 percent at 10,823, and the S&P SL20 0.35 percent at 3,113.85.

Bond yields were up.

A bond maturing on 01.08.2026 was quoted at 14.05/20 percent from 14.05/15 percent.

A bond maturing on 15.01.2027 was quoted at 14.05/20 percent from 14.10/25 percent.

A bond maturing on 01.07.2028 was quoted at 14.20/50 percent from 14.20/35 percent.

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