ECONOMYNEXT – Sri Lanka has printed 39.97 billion rupees after a failed Treasury bill ‘auction’ operated under price controls, taking the central bank’s Treasury bill stock to 1,261 billion rupees on September 03 from 1,221 billion a day earlier, data shows.
The central bank conducted a 68.5 billion rupee Treasury bill auction on September 01 and failed to sell 43.24 billion rupees of the auction under a price control of 5.97 percent set for 12-month bills.
The price control serves as a de facto policy rate and the central bank prints money to buy up the bills.
After a series of failed bill auctions and outright purchases outside auctions to finance the budget and refinance private firms, the central bank has run out reserves to exchange for the new money.
On September 01 however the central bank raised a margin banks must keep with the agency, creating space to absorb the newly printed money.
The money will be effectively mopped up by the hike in the statutory reserve ratio from 2.0 percent to 4.0 percent at no cost to the central bank.
The cost will be borne by the banking system and borrowers, in the form of higher future interest rates.
After the settlement of the failed bill auction, the money printed overnight to fill the SRR liquidity shortfall and past foreign reserve losses from rupee redemptions or convertibility fell from 290 billion.7 billion rupees to 267.41 billion rupees.
The money is injected into mostly over-trading lenders who had failed to keep extra cash for the SRR hike.
In Sri Lanka state banks which finance state enterprises and the deficit are among lenders who are short of cash and have to go the window.
Cash plus banks deposited 85.69 billion rupees in the 5.50 percent window on September 03, up from 76 billion rupees a day earlier.
Sri Lanka’s foreign banks as well as one or two larger private banks are usually cash plus in most currency crises and do not contribute to central bank re-financed credit which leads to forex shortages, analysts say.
The central bank was earlier printing money at around 5.20 percent for failed bill auction. Following the rate cut, the central bank will make sterilization losses on the fresh liquidity.
Any convertibility provided to the holders of the printed money will also lead to further reserve losses and foreign exchange losses, analysts had warned. The central bank’s foreign assets have declined sharply to match or reserve liabilities.
The central bank has stopped providing convertibility (dollars) for the newly printed money for most trade transaction leading to a rationing of letters of credit and a fall of the exchange rate towards 230 to the US dollar.
The money printed after the failed bill auction however will be absorbed through the SRR hike.
In an over-the-counter market among importers and exporters the rupee had fallen to around 230 to the US dollar.
Sri Lanka has also imposed price controls triggering shortages of several foods. Political actors are blaming ‘hoarders’ for the shortages as in 1970s, when most of the Treasury bills were bought by the central bank creating forex shortages and import controls. (Colombo/Sept06/2021)