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Monday June 27th, 2022

Sri Lanka prints Rs19bn despite lifting Treasuries price controls

ECONOMYNEXT – Sri Lanka has printed 19 billion rupees out right after partially successful Treasuries auctions over the week as a note-issue bank took up the balance amid continuing external trouble and mounting reserve related liabilities, data show.

The central bank’s Treasury bill stock went up to 1,469.84 billion rupees on October 14, from 1,450.21 billion rupees a day earlier as Treasuries were bought outright to keep rates down.

Meanwhile window borrowings went up to 188 billion rupees from 147 billion rupees.

Sri Lanka’s monopoly note-issue bank has been steadily losing reserves amid ‘Modern Monetary Theory’ from 2020 and less aggressive Keynesian stimulus which started on top of bad fiscal policy in 2015/2016.

In 2018 a milder version of MMT was practiced by bombarding the credit system with liquidity from overnight reverse repo, term reverse repo, dollar/rupee central swap.

Sri Lanka’s net borrowings have been rising steadily from 2015 as monetary policy deteriorated.

With call money rate targeting Sri Lanka lost the protection of a wide policy corridor which limits reverse repo injections and sterilization when economic activity picks up and the peg is defended. The corridor itself was narrowed in a damaging move later.

In another damaging move which is appears to violate Section 112 of the is constitution the note issue bank started buying bonds to its balance sheet.

While some progress has been made with bond auctions analysts say it is vital to get them fully operational as soon as possible to end reserve losses and monetary instability.

The central bank now has a net dollar liability instead of reserves on it reported 2.5 billion dollar gross reserves and can run quasi-fiscal losses and can even default unless corrective action is speeded up.

Analysts have warned that it is vital for bond auctions to succeed and a partially failed auction is as bad as fully failed auctions in terms of forex shortages and possible external default.

The central bank withdrew 10.5 billion rupees from plus banks getting in a sterilization trap after printing money in the auction.

Up to now 24.45 billion have been withdrawn after printing money in the style of Zimbabwe’s central bank, before the country hit hyper-inflation, though there is still a positive gap between the two rates.

“The central bank itself is likely to be insolvent on its dollar liabilities before the end of the year unless money printing is halted,” EN’s economic columnist Bellwether warned when price controls were in effect and foreign reserves were still positive.

“However any kind of half-hearted Treasury bill and bond auctions, partially failed bond or bill auctions with some volumes of printed money will lead to progressively higher interest rates but the reserve losses and currency depreciation will continue.”

The same would apply to any eventual float of the currency (a suspension of convertibility) if partial interventions are made for petroleum payments. (Colombo/Oct18/2021)

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