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Sri Lanka prints Rs29bn as yield ceilings buckle Treasuries auctions

ECONOMYNEXT – Sri Lanka’s has printed 10 billion rupees to monetize a Treasuries auction as the debt office failed to sell all the Treasury bills offered at last week’s auction on top of 19 billion rupees monetized a week earlier, official data show.

The central bank’s Treasury bills stock which is the main domestic assets stock of the agency rose to 319 billion rupees as the money was printed up from 309 billion rupees a week earlier.

The debt office, which is a unit of the central bank failed to sell around 30 percent of the offered volumes at the auction due to a re-announced explicit yield ceiling/price floor.

The debt office monetized 19 billion rupees a week earlier, as 60 percent of the offered bills were unsold.

If price controls are set, it is not clear why the debt office goes through the motion of a auction.

Excess liquidity in money markets which was at 134 billion rupees before Treasuries auctions were successful had grown to 170 billion rupees by last Friday.

Liquidity can also grow when the central bank buys dollars in the interbank forex market, when domestic private credit is weak. Sri Lanka’s private credit was negative in May and June.

But the country is also under severe import controls not seen since the collapse of the Bretton Woods system in 1971, after money was printed in March, driving private credit up, while a so-calle ‘flexible exchange rate’ panicked importers as the currency fell to 200 to the US dollar as money was printed.

Sri Lanka started intervening in Treasuries auctions in 2020 in an overt monetization program. But in the run up to each balance of payments crisis except in 2015 and 2018 when open market operation and a so-called buffer strategy was used, Treasuries yields have been targeted with printed money.

In the 1970s large volumes of state financing came from central bank triggering the worst known import controls in history. By 1976, reserve money was 2.7 billion rupees and net foreign assets were negative 433 billion rupees, data show.

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Meanwhile the Federal Reserve, who has fully floating rate (money supply is entirely backed by paper securities) is printing large volumes money. God is now over 2,000 dollars an ounce, from 35 dollars before the collapse of the Bretton Woods amid output gap targeting. (Colombo/Aug10/2020)