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Sri Lanka halts banks from buying sovereign bonds till April 09

ECONOMYNEXT – Sri Lanka has extended a ban on domestic bank purchases of international sovereign bonds till April 09, 2021, in a bid to contain pressure on the exchange rate, the central bank said.

“The central bank with a view to easing pressure on the exchange rate and considering the substantial amount of possible/potential outflow of foreign exchange by banks and its import on banks’ risk management, licenses commercial banks and National Savings Banks are hereby informed to suspend the purchase of Sri Lanka International Sovereign Bonds with effect from March 23, until April 09, 2021,” Governor W D Lakshman said in a direction to lenders.

A purchase by domestic banks of sovereign bonds anticipates the repayment that has to be made by the Treasury and spreads the external payment pressure across time instead of one day.

Earlier in the week the central bank also suspended a dollar surrender requirement placed on banks after the rupee came under pressure amid excess liquidity injected mainly through failed bill auctions.

Sri Lanka’s rupee had come under pressure from liquidity injections made by failed Treasury bill auctions, despite the worst import controls since the 1970s which has created shortages of goods and given large profits to tax arbitraging import-substitution Mercantilists.

If banks pile up dollars to give the central bank using excess liquidity from failed Treasury bill auctions, there is pressure on the peg.

From last week liquidity windows have also added to the pressure. (Colombo/Mar21/2021)

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