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Friday January 21st, 2022
Economy

Sri Lanka markets being allowed to work, confidence key: Governor Cabraal

POLICY MATRIX: Through low rupee rates incentives are still given not to sell dollars and not to sell forward and borrow rupees including to hold stocks.

ECONOMYNEXT – Sri Lanka’s central bank is on a path to allow markets to work again but confidence was key to make them function well, Central Bank Governor Nivard Cabraal said as bond markets limped back from price controls, but forex market were still dysfunctional.

Progress will be somewhat slow but effective, he said.

Governor Cabraal lifted Treasury bill auction price controls which had led to a so-called ‘ramrod rate anomaly’ seen prior to and during currency crises in Sri Lanka where the yield curve flattens and rates remains rock solid (ramrod) across time as money is printed to maintain artificial rates.

Sri Lanka’s spot market is not functioning with a price control at 203 to the US dollar which is not backed up by a convertibility undertaking leading to off-market settlements, while forward cover to importers is banned.

However with low rupee yields exporters are in any case no inclined to sell forward, or even spot.

Cabraal said some markets were not functioning partly due to weak confidence.

“There are some instruments that have been stopped by the central bank,” Cabraal told EconomyNext. “Some which have not been stopped.

“What we are doing is allowing markets to move in the way that they should perform. So I think when confidence returns and all these instruments are being accessed once again normalcy will return

“We are working towards normalcy not particular instruments only. And we are confident that will occur.”

Cabraal last week met with exporters and importers. Exporters were urged not to hoard dollars and importers not to bring down excessively large stocks.

At the moment however low rupee rates discourage spot and also forward selling.

Last week controls on Treasury bill auctions, were lifted. But data showed that at least two billion rupees had been printed despite the foreign reserves falling to low levels.

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Cabraal removes Sri Lanka bond auction price controls

“Already we have been in conversation with so many stakeholders I think bond markets is not divorced from the rest of the economy,” he said.

“They are part and parcel of the economy. If there is a general build-up of confidence across the board bond markets will have also confidence transmitted to them. I am targeting the entire economy together.”

“There is some good vibrations being cause and a lot of have responded favourably.

“In another week or two most of these will be different from what it was two week ago. So I am confident that markets will also respond.”

There is some demand for medium to longer term bonds above 10 percent based on recent trends.

Analysts say for the moment bond investors will be willing to buy at a rate which may take into account the possibility of a future rise in rates especially in the short end.

In the past the central bank did not have the ability to buy bonds and de-stabilize the yield curve due to a ‘bills only’ policy instituted by then-Governor AS Jayewardene and also maintained by Governor Cabraal.

Jettisoning of the policy allowed bond yields also to be manipulated, either by crippling auctions or through separate outright purchases to inject money into what was not a floating exchange rate but a regime with a foreign reserve building convertible monetary base.

Cabraal said policies have to implement taking an overall view.

“All these are inter-connected,” he said. “When we are making interventions we have to make sure that one does not affect the other adversely.”

“Naturally the progress will be somewhat slow, but effective. We will go forward but all macro-fundamentals will go together.” (Colombo/Sept26/2021)

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