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Wednesday February 1st, 2023

Sri Lanka foreign reserves drop to US$2.83bn after bond repayment, liquidity injections

ECONOMYNEXT – Sri Lanka’s gross official reserves dropped to 2,833.5 million US dollars in July 2021, from 4,060 million in June after a billion US dollar bond and some other accounts were repaid in July, official data show.

Sri Lanka has been injecting unprecedented volumes of liquidity into banks as excess rupee reserves triggering a balance of payments deficit under so-called ‘Modern Monetary Theory’ (an extreme form of ‘stimulus’ after cutting taxes in a fiscal ‘stimulus’, triggering a run on reserves and credit downgrades.

The reserves are the lowest since July 2009, when the country had just finished a war and was rebuilding reserves. At the time monetary policy was tight and prevented a monetary meltdown amid the collapse of the Federal Reserve housing bubble.

In 2021 liquidity has also boosted imports, despite controls on items like vehicles, which bring the highest level of taxes, dollar for dollar, hurting tax revenues, triggering more money printing and reserve losses.

Sri Lanka is heavily steeped in Mercantilism and the link between credit, liquidity and monetary instability is not understood.

It is also the practice of Mercantilists to measure forex reserves in terms of imports, through trade bills need not be paid with reserves as long as liquidity is not injected in to commercial banks.

Sri Lanka’s gross forex reserves were 2.6 months of imports measured as the average of past 12 months in June 2020.

Though July import data is not released, but if imports are below the June level of 1.65 billion dollars and reach at least the February level of 1.52 billion dollars reserves are now around 1.8 months of past imports.

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With the Peoples Bank of China swap, which can be drawn down and used to pay for Chinese imports, forex resources are about 2.8 months of imports.

State Minister for Money and Capital Market Nivard Cabraal has said that the reserve fall in July would be temporary.

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Sri Lanka reserve fall after bond payment will be temporary: Minister Cabraal

The International Monetary Fund is expected to disburse around 800 million dollars in special drawing rights in August 2020, and the central bank is also negotiating a 250 million US dollar swap with Bangladesh Bank which has been approved in principle subject to a sovereign guarantee.

Central Bank Governor W D Lakshman had said that a 400 million US dollar swap is also expected from India.

However swaps indebt the central bank and analysts had warned that if liquidity is continued to be injected the monetary authority will end with negative foreign assets.

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Last week some corrective action was taken in the form of a 05 basis point hike in the 12-month ceiling rate for Treasury bills, through which debt is monetized and liquidity is injected to trigger a run on forex reserves. (Colombo/Aug14/2021)

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Sri Lanka bond yields down at close

ECONOMYNEXT – Sri Lanka’s bond yields were down at close following a bond auction on Wednesday, dealers said while a guidance peg for interbank transactions remained unchanged.

“The rates were steady at the auction,” a dealer said.

“This can be a signal to the market saying the rates will go down in the future.”

A bond maturing on 01.07.2025 closed at 32.40/60 percent, down from yesterday’s 32.60/85 percent.

A bond maturing on 01.05.2027 closed at 29.10/35 marginally down from yesterday’s 29.20/75 percent.

The Central Bank’s guidance peg for interbank US dollar transactions remained unchanged at 362.14 rupees against the US dollar.

Commercial banks offered dollars for telegraphic transfers at 371.38 rupees on Friday, data showed. (Colombo/Feb 01/2022)

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Sri Lanka bill auction hits pothole after 2025 bond spike

ECONOMYNEXT – Sri Lanka sold only 45 billion rupees in Treasury bills at Wednesday’s auction after offering 120 billion rupees, data from the state debt office showed, amid market confusion over a spike in a two year bond at an earlier action.

30.1 billion rupees of 3-month bills were sold at 29.91 percent, unchanged from a week earlier after offering 60 billion rupees for auction.

5.1 billion rupees of 6-month bills were sold at 28.72 percent, flat after offering 30 billion.

10.3 billion rupees of 12-month bills were sold at 27.72 percent after offering 30 billion.

Phase II subscriptions have been opened.

The market was foxed after the 2025 bonds were accepted at sharply higher yield than market on January 30, dealer said.

There was further confusion as the there was an outright purchase of 2025 at around 29 percent earlier in January.

Some investors speculated that the authorities were trying to drive more buyers towards short end bonds as bill volumes were getting larger. (Colombo/Feb01/2023)

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Sri Lanka services exports down 5.9-pct in 2022

ECONOMYNEXT – Sri Lanka’s services exports were estimated to have fallen 5.9 percent to 1,876.3 million US dollars, the island’s Export Development Board said.

Services exports estimated is made up of ICT/BPM, construction, financial services, transport and logistics.

There are more than 500 ICT companies, the EDB said.

Sri Lanka’s merchandise exports were up 4.6 percent to US dollars 13.1 billion dollars in 2022 from 2021.

Sri Lanka’s goods exports are slowing amid lower growth in Western markets. (Colombo/ Feb 01/2023)

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