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Wednesday June 7th, 2023

Sri Lanka may have lost Rs10.4bn from direct placement of bonds: forensic audit

ECONOMYNEXT – Sri Lanka may have lost up between 9.9 to 10.4 billion rupees in over 1,100 direct placements of bonds made by-passing auctions, between 2005 and 2015, a forensic audit has estimated.

The audit by BDO India was commissioned following a recommendation of a presidential commission of inquiry into so-called ‘bondscams’ in 2015 and 2016 through rigged auctions.

Losses are estimated as deviations from a ‘base rate’ calculated from secondary market yields.

A separate report estimated that between 6.6 billion rupees and 9.6 billion rupees may have been lost in 2015 and 2016 though rigged auctions, where insider information may been used by dealers like Perpetual Treasuries Ltd, connected to a relative of then-Central Bank Governor Arjuna Mahendran.

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Sri Lanka may have lost Rs9.6bn in 2015/16 bond sales: forensic audit

The bonds were then dumped on the EPF at higher prices (lower interest rates). The forensic audits also found that dumping on the EPF had begun during the direct placement period.

Data for 2002 to 2004 were not available at the central bank, the auditors said.

The forensic audit report said there were multiple irregular practices in direct placements, and questionable or unauthorized sales of bonds.

Some bonds had been issued to different rates on the same day, the report said. Market prices however can change at different times of the day.

Most the ‘losses’ calculated had however gone to the Employees Provident Fund and state banks.

Out of 10.4 billion in losses to the EPF was estimated to have received 6.4 billion rupees of the losses, the Bank of Ceylon 1.5 billion, NSB Fund Management 1.5 billion and People’s Bank 497 million rupees.

A separate report said that the EPF had also been sold bonds by the central bank at low rates, making it suffer big losses.

The Monetary Board of the central bank had approved direct placements in 2008 (when Sri Lanka was in the midst of a war and balance of payments trouble) to so-called ‘captive’ state agencies in a belief that it would bring down rates.

The practice had continued with private banks and dealers also being given bonds.

In 2008 however Sri Lanka’s domestic borrowings more than doubled to 314 billion rupees from 145 billion, and foreign borrowings were negative perhaps for the first time in post-independent history, according to fiscal data.

Twelve month Treasury bills had hit 19 percent.

First Capital Treasuries was estimated to have benefitted up to 118 million rupees, Commercial Bank was estimated to have benefitted up to 117 million rupees, Acuity Securities 81 million rupees, Wealth Trust Securities 50 million, Seylan Bank 25 million, Capital Alliance 23 million, Entrust Securities 22 million, Seylan Bank Asset Management 12 million, HSBC 11 million, NatWealth Securities 8 million and Perpetual Treasuries 0.25 million rupees.

At the time Perpetual Treasuries was not active in the primary market, and it was buying bonds from other dealers and dumping on the EPF, a separate forensic audit said. (Colombo/Jan24/2020 – Update II)

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Sri Lanka Treasuries yields plunge, 12-month down 318bp

ECONOMYNEXT – Sri Lanka’s Treasuries yields plunged across maturities at Wednesday’s auction with the 12-month yield falling 318 basis points, in one of the biggest one day falls, data from the state debt office showed.

The 3-month yield fell 244 basis points to 23.21 percent.

The 6-mont yield fell 339 basis points to 21.90 percent, along with the 12 months to 19.10 percent.

The short-term yield curve is inverted.

The central bank last week cut its policy rate 250 basis points in a signaling move but is not printing money to enforce the rate cut.

The debt office sold all 140 billion rupees of offered securities. (Colombo/June07/2023)

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Sri Lanka forex reserves rise US$722mn in May 2023

ECONOMYNEXT – Sri Lanka’s foreign reserves grew 722 million US dollars to 3,483 million US dollars in May 2023 from 2,761 million US dollars in April, official data showed amid weak credit and better inflows.

Sri Lanka lost almost all its reserve in over two years as the central bank sold reserves and printed money to keep rates down (sterilized reserves sales) including borrowed dollars from India.

Gross official reserves fell to a low of 1,705 million US dollars in September 2022.

Sri Lanka’s central bank hiked rates in April 2022 to slow credit and also stopped printing money after it ran out of borrowed Asian Clearing Union dollars from India.

Sri Lanka’s gross official reserves are made up of both monetary reserves of the central bank and any balances of the Treasury account from loans or grants it gets.

The central bank’s net foreign reserves are still negative after busting up borrowed reserves to suppress rates. By April (before the collection of reserves in May) the central bank’s net reserves were negative by 3.7 billion US dollars.

In May alone 662 million US dollars were bought from the market, Central Bank Governor Nandalal Weerasinghe said.


No pre-determined level to stop Sri Lanka rupee appreciation: CB Governor

Borrowing dollars through swaps and busting them up, was invented by the US Federal Reserve as it was printing money and breaking the Bretton Woods system in the early 1970s.

Sri Lanka received a 350 million US dollar tranche from the Asian Development Bank and 331 million US dollars from the IMF to the Treasury for budget support.

The loans can be sold to the central bank by the government to generate rupees and spend. However, since credit is weak, not all the inflows go out of the country particularly as the central bank is conducting deflationary open market operations on a net basis.

By allowing the rupee to appreciate unlike in previous episodes of recovery in an IMF program, after a bout of money printing, the central bank is bringing down inflation – in some cases absolute prices – and restoring confidence and easing the ‘pain’ of ‘monetary policy’ or stimulus.


Why is Sri Lanka’s rupee appreciating?

Though exports are falling, tourism revenues are also picking up.

The budget support loans, tourism receipts less the reserve collected will widen the trade deficit. Building foreign reserves involves lending money to the US or other western nations and is similar to repaying foreign debt. (Colombo/June07/2023)

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SriLankan Airlines expects $50 mln profit in FY 2023/24 

ECONOMYNEXT – Sri Lanka’s loss making national carrier is aiming to earn a profit of 50 million US dollars, its Chief Executive Officer said, after it incurred a loss of nearly 500 million US dollars in the previous financial year.

“I think the outlook for next year is even stronger,” Richard Nuttall, CEO at SriLankan said in an interview with Channel News Asia.

“Assuming that the world stays the same in the year ahead, we expect Sri Lanka’s economy to rebound and tourism to come back, we are forecasting $50 million profit next year,” he said.

‘The Airlines incurred a whopping loss of 168.6 billion Sri Lanka rupees in the financial year 2021/22 ended in March 31, 2022, compared to the loss of 49.7 billion rupees in the previous year, the Sri Lankan has said in the past.

SriLankan Airlines is one of the 52 loss making state enterprises that the International Monetary Fund had recommended for restructuring. President Ranil Wickremesinghe’s government has been considering absorbing the cumulative losses of more than $1 billion and privatizing the national career.

Nuttall said though the currency depreciation did not have any impact on the profitability last year, the country’s short supply of jet fuel hurt the airline.

“So if you look at the year we just had, the year started with the economic challenges in the country in Sri Lanka. We had travel advisories. and the country ran out of jet fuel in July and August. I have never worked for an airline which does not have jet fuel in its home country before,” he said.

“So everything had to stop in India. We lost payload.” (Colombo/June 07/2023)

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