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Wednesday February 1st, 2023

Sri Lanka lifts price control on T-bills in key stability move

ECONOMYNEXT – Sri Lanka has lifted yield controls on next week’s 12-months Treasury bills auction abolishing a 12-month de facto policy rate through which large volumes of liquidity was injected, leading to forex shortages and reserves losses.

Newly appointed Central Bank Governor Nivard Cabraal had said he was placing stability ahead of growth.

“There are no shortcuts,” he said in his first speech at the central bank. “Sometimes there are tough policy measures to be taken.

“When we take policy measures there are always repercussions from another side. Sometimes if you do not take those policy measures you meander along.”

“When a tool is used, and one area is getting cured, it can emerge as a problem in another area,”

“It is not easy to manage this balance. You have to be conscious of all the outcomes that generally arise when you take certain policy measures.”

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Sri Lanka’s economy is operating under difficult conditions like many other economies, but vaccination is going at an accelerated pace helped by China’s Sinopharm, but interest rate controls and an earlier tax cut had triggered forex reserve losses from liquidity injections.

The debt office which is a unit of the central bank is offering 39.5 billion rupees of bills at the auction on 22 September 2021.

No mention was made of the yield controls. The yield controls started in the second quarter of 2020 from early April 2020.

The debt office is offering 10 billion rupees of 3-month bills, 13 billion rupees of 6-month bills and 16.5 billion rupees of 12-month bills.

Investors had been bidding only for 3-month bills over several months, leading to large volumes of new money being injected, which analysts said was leading the country towards dollar sovereign default.

Last week, the debt office also increased ceiling rates of a bond action, without lifting them all together, and there was surprisingly strong demand for a 2031 bond at around 10 percent.

“There may be some spikes in rates as bidders try to find a level,” one dealer said. “But they will settle after some time.”

A bond maturing on 01.12.2024 closed at 8.00/20 percent after the price controls were lifted, slightly higher from an earlier level of around 7.98 percent.

A 01.02.2025 bond closed at 8.90/90 percent up from 8.75/90 percent.

Sri Lanka had unrealistically low-interest rates amid a budget deficit of over 10 percent of GDP, which led to a number of anomalies in the forex markets and steady foreign reserve losses.

In late August the central bank hiked policy rates by 50 basis points to 6.0 percent, but failed to remove the price ceiling, leading to more liquidity being injected.

A statutory reserve ratio rate of 2.0 percent was also hiked to 4.0 percent creating a big liquidity short, which was fully sterilized with new liquidity at 6.0 percent.

It was not clear why the SRR was raised and overnight rates hiked, before removing the de factor rates further along the yield curve.

Meanwhile Sri Lanka’s forex markets are still dysfunctional with a non-credible peg decreed at 203 to the US dollar with no convertible undertaking deployed and unlimited amount of liquidity injected overnight at 6.0 percent to sterilize liquidity shorts. (Colombo/Sept15/2021 – correction yield control 2020 2Q not 2021 as mentioned in an earlier version of this story)

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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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