Sri Lanka gets US$1.5bn bond proceeds into government reserves

ECONOMYNEXT – Sri Lanka’s has received the proceeds of a 1.5 billion US dollar sovereign bond which is now in the country’s official forex reserves, Deputy Governor Nandalal Weerasinghe said.

Sri Lanka’s ‘official reserves’ are both the central bank’s own reserves which backs the monetary base and also the Treasury’s dollar account balance.

Weerasinghe said the sovereign bond proceeds are in the government’s dollar account.

The money is expected to be retained by the Treasury to settle foreign loans repayments as they fall due.

Sri Lanka has already received a 300 million dollar tranche from a 500 million dollar syndicated loan which is expected to close in early August.

For fiscal inflows to come in to the central bank’s balance sheet, the Treasury has to sell them in return for freshly created rupees, the central bank.

The rupees have to be ‘sterilized’ or mopped up by selling rupee securities to permanently build up reserves. If not the rupees will come up for ‘redemption’ in forex markets as imports, when the government spends them or the credit system disburses them.

Sri Lanka’s interbank money market is facing a 40 to 50 billion rupees liquidity shortage after interventions in forex markets mopped up rupees, which is now filled though overnight cash auctions.

The liquidity shortage has been stable from around the second week of July indicating that the credit system is showing signs of balancing out.

There were expectations in money markets that some of the dollar proceeds will be sold by the Treasury to the central bank to generate rupees and clear the liquidity shortfall.

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Weerasinghe said liquidity will continued to be managed through overnight cash auctions. Term reverse repo auctions will be conducted only if the shortfall is deemed to be permanent, he said.

Injecting liquidity overnight encourages banks to raise deposits or curtail credit or both, which may involving raising deposit rates, in a bid to clear the maturity mis-match.

Reducing excessive credit and fully financing credit through deposits and loan repayments without resorting to central bank credit, stops pressure on the currency and balance of payments. (Colombo/July21/2016)

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