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Saturday May 18th, 2024

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)

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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 suffers over $138mn foreign outflow from govt bonds in 2024 after rate cuts

ECONOMYNEXT – Foreign investors have dumped 41.6 billion-rupee ($138.6 million) worth of Sri Lanka government securities in the first 20 weeks of 2024, the central bank data showed, after reduction in the key policy interest rates.

The foreign holding in Sri Lanka’s treasury bills and treasury bonds fell to 75.9 billion rupees on the week ended on Friday (17), May 2024, from 117.4 billion rupees on the week ended on December 29.

The central bank rate has reduced the key policy rates by 50 basis points so far in 2024, extending the rates cut by 700 basis points since June last year.

The rupee appreciated 9.1 percent in the first four months, but the gain failed to attract foreign investors amid a dragged debt restructuring negotiation with external private creditors.

Currency dealers said lackluster demand for dollars due to dampened imports with heavy controls, boom in both tourism revenue and remittances have helped to increase the dollar liquidity in the market, leading to the appreciation of the local currency.

The dealers said foreign investors can earn capital gain if they had bought government securities before the appreciation and now the offshore investors might be selling their bonds.

“They are also discouraged by policy rate cut because that will reduce their returns from the rupee bond investments,” a currency dealer said.

The yield in 12-month T-bills has fallen 336 basis points in the first four months of this year, the central bank data showed.

The central bank also reduced the Statutory Reserve Ratio (SRR) of commercial banks by 200 basis points in August last year to boost liquidity in the market with an aim to reduce market interest rates.

Under tough International Monetary Fund (IMF) conditions for its $3 billion loan program, the central bank raised key monetary policy rates in 2022 and last year to bring down inflation which hit over 70 percent in 2022. The inflation has fallen to the lower single digit now.

The rupee has appreciated to around 300 against the US dollar this week from around 330 level early in November. The local currency was at 365 rupees against the US dollar in early 2022. Depreciation causes capital loss for foreign investors. (Colombo/May 18/2024)

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Sri Lanka’s ‘Sancharaka Udawa’ tourist fair seeks to involve universities

ECONOMYNEXT – Sri Lanka’s ‘Sancharaka Udawa’ tourism fair kicked off this week to promote interaction between industry stakeholders and relevant Government bodies, including the Tourist Police, and also universities.

“Several universities, including Colombo, Uva Wellasa, Kelaniya, Sabaragamuwa and Rajarata were given free stalls to facilitate student interaction with industry professionals,” Chairman of the Sancharaka Udawa Organising Committee, Charith De De Alwis said in a statement.

The event takes place today (18) at the BMICH and houses stalls for hoteliers, tour and transport services, with a goal of attracting 10,000 visitors.

Organized by the Sri Lanka Association of Inbound Tour Operators (SLAITO) and the Sri Lanka Tourism Promotion Bureau (SLTPB), the 11th edition of Sancharaka Udawa offers a platform for both B2B and B2C sectors.

“Sancharaka Udawa houses over 170 exhibitors and a footfall of more than 10,000 visitors,” De Alwis said.

This year’s edition will include participants from outbound tourism sectors to facilitate capacity building. The event provides networking opportunities for industry newcomers and veterans.

“The networking platform offers opportunity for small and medium-sized service providers integrating them into the broader tourism landscape. The anticipated outcome is a substantial increase in bookings particularly for regional small-scale tourism service providers.” (Colombo/May18/2024)

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Sri Lanka’s CEB sells LTL shares to West Coast IPP for Rs26bn

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Board has sold shares of an affiliate to West Coast Power Company Limited, an independent power producer giving profits of 25.9 billion rupees in the March 2024 quarter, interim accounts showed.

The sale has been carried out as a transfer.

“Twenty-eight percent (28-pct) of share ownership of CEB within LTL Holding’s equity capital has been transferred to West Coast Power Company Ltd for a total consideration of Rs 26 billion as part of a partial settlement of outstanding dues…” the March interim accounts said.

“This transaction resulted in a net gain of Rs25.9 billion rupees which has been recognized and reflected in the ‘Gain from Share Disposal’ in the individual financial statement in CEB.”

LTL Holdings is a former transformer making unit of the CEB set up with ABB where the foreign holding was sold to its management.

The firm has since set up several IPPs.

West Coast Power operates a 300MW combined cycle IPP in Kerawalapitiya promoted by LTL group liked firms in which both the Treasury and Employees Provident Fund also have shares.

Its operational and maintenance contract is with Lakdhanavi, another private IPP. The firm has been paying dividends.

The capital gain from the transfer of shares helped the CEB post profits to 84 billion rupees for the March 2024 quarter.

CEB reported gross profits of 62.7 billion rupees from energy sales and 30.6 billion rupees in other income and gains in the March 2024 quarter. Other income was only 3.1 billion rupees in last year. (Colombo/May18/2024)

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