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Thursday April 18th, 2024

Sri Lanka rupee crosses 230 to dollar, Rs127bn printed overnight to sterilize SRR hike

ECONOMYNEXT – Sri Lanka’s rupee crossed 231 to the US dollar in the over-the-counter market for importers and exporters while 127 billion rupees were injected at the overnight printing rate of 6.0 percent for banks to meet (sterilize) a hike in a deposit margin.

Sri Lanka raised the statutory reserve ratio, a margin that bank must keep with the central bank from 2.0 percent to 4.0 percent effective September 01 but the interbank market was already short despite earlier injections.

The central bank had lifted convertibility for most trade transactions, weakening the rupee.

OTC Float

There is no longer an interbank spot market to establish a uniform and transparent clearing price for the rupee/dollar exchange rate and exporters and importers are ‘shopping’ dollars in an informal OTC market leading to a near floating rate.

Importers are making direct calls to exporters, chief executives and finance managers to persuade them to sell at various rates, while those with dollars are going away from their usual banks to sell.

Some finance officials who did not get the same price as some other exporter had come under criticism for allegedly selling at a lower rate, market participants said. Financial officials do not like to entertain calls, but are increasingly finding it difficult not to do so.

On Wednesday the rupee crossed 230, a psychological level to reach 231 to the US dollar.

“It is a kind of floating rate since convertibility has been lifted for the most part,” EN’s economic columnist Bellwether says.

“However liquidity is still coming from failed bond auctions and some interventions are being done which are also sterilized with new liquidity preventing rates from going up, so the exchange rate does not stabilize.”

How to floating and fixed rates work?

Domestic Operations

The day before the SRR went into effect the market was short by 41 billion rupees, usually an effect of convertibility offered by the monetary authority (dollars sold) and 150 billion rupees had already been printed through the overnight 6.0 percent window.

In order to maintain peg interest rates have to go up after the intervention. But due to the overnight sterilization, liquidity is re-injected.

“This is the classic contradictory policies of a ‘flexible’ exchange rate,” explains Bellwether. “There is no monetary policy to support a firm peg where interventions should lead to a fall in the monetary base and a rise in rates.

“Neither is there a policy to support a float where the monetary base should not be affected by forex inflows and outflows without any dollar sales or purchases by the central bank, which permits the overnight rate to remain fixed along with the monetary base. This is why countries with a Latin America style or an IMF recidivist peg if you like, have severe monetary instability.”

After the SRR hike, another 127 billion rupees was printed through the overnight window to ‘sterilize’ the liquidity short.

Meanwhile, better managed banks which were plus cash, and had deposited 109 billion rupees in the central bank’s excess window cut their holdings to 72 billion rupees to meet the SRR hike.

The overnight call money rate hit the 6.0 percent policy ceiling on September 01, amid the liquidity shortage. Call rates last hit 6.0 percent in May 2020.

Sri Lanka’s bond markets are however still dysfunctional with price controls preventing offered bills being sold.

An August 25 bill auction and a September 02, auction, which failed to sell all securities had led to money being printed.

Related

Sri Lanka prints Rs17.6bn after dysfunctional bill, bond auctions, sugar seized

However the market was already short by 41 billion rupees by September 31, before the SRR hike.

Now overtrading banks are short a total of 277 billion rupees, which may further discourage subscriptions to bonds, analysts say.

Frozen Bonds

It is not clear why authorities raised the SRR before bond auctions were made to function again.

Bond auctions were frozen on Wednesday with no trading and no regular quotes, dealers said.

A solitary 01.12.24 bond was briefly quoted at 8.05/20 percent on September 01, from around 08.05/15 percent levels are day earlier.

Sri Lanka’s economic controls are intensifying as forex shortages worsen amid dysfunctional bond auctions. Unsold bonds are being converted to reserve money, and paid as salaries to state workers and meet other expenses, triggering imports from their recipients.

Analysts say it is vital to get the bond auctions functioning. There is now a 205 billion net liquidity shortage sterilized overnight.

The US Federal Reserve is also firing a global commodity boom by purchasing bonds in a so-called Powell Bubble. In 1951 however Fed Governor Marriner Eccles ended a bubble famously getting independence for the Treasury and saving the Bretton Woods system of soft-pegs from an early collapse.

“You only protect the public credit by maintaining confidence in the Government and in its securities and to the extent the public will buy and hold those securities,” Eccles said in 1951.

“The thing we are doing is to make it possible for the public to convert Government securities into money and to expand the money supply of this country by $7 billion in six months.

“We are almost solely responsible for this inflation…the whole question of having rationing and price controls is due to the fact that we have this monetary inflation, and this Committee is the only agency in existence that can curb and stop the growth of money.”

On September 01 authorities said sugar stocks of five private firms were seized for ‘hoarding’ and will be sold under price control to consumers.

Similar claims had been made in the 1970s when price controls created shortages when the central bank was the main buyer of government bonds leading to a ‘controlled economy’. (Colombo/Sept02/2021)

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Sri Lanka’s discussions with bondholders constructive: State finance minister

ECONOMYNEXT – Sri Lankan authorities continue to engage all debt restructuring negotiations in good faith, within principles of equitable treatment among creditors, and with maximum transparency within the norms of such negotiations, State Minister of Finance, Shehan Semasinghe has said.

“It is standard practice, when a representative group of bondholders is formed, to entertain confidential discussions with such group and its appointed advisors. In the case of Sri Lanka, the Ad Hoc Group of Bondholders represents holders controlling more than 50% of the bonds, which make them a privileged interlocutor for Sri Lanka,” Semasinghe said on X (twitter).

“It is well understood that given the price sensitive nature of the negotiations, and according to market regulations, discussions with the Group and its advisors are to be conducted under non-disclosure agreements. This evidently restricts the ability of the Government to unilaterally report about the substance of the discussions.

“The cleansing statement, which was issued on the 16th of April, at the conclusion of this first round of confidential discussions with members of the Group, aims at informing the Sri Lankan people, market participants and other stakeholders to this debt restructuring exercise, about the progress in negotiations. It provides the highest possible level of transparency within the internationally accepted practices in such circumstances.

“As informed in this statement, confidential discussions held in recent weeks with bondholders’ representatives proved constructive, building on the restructuring proposals presented by both parties. During the talks both sides successfully bridged a number of technical issues enabling important progress to be made. Sri Lanka articulated key remaining concerns that need to be addressed in a satisfactory manner.

“The next steps would entail further consultation with the IMF staff regarding assessments of the compatibility of the latest proposals with program parameters. Following these consultations, we hope to continue discussions with the bondholders with a view to reaching common ground ahead of the IMF board consideration of the second review of Sri Lanka’s EFF program.”

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Sri Lanka rupee weakens at 301.00/302.05 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 301.00/302.05 to the US dollar in the spot forex market on Tuesday, from 299.00/10 on Tuesday, dealers said. Bond yields were broadly steady.

A bond maturing on 15.12.2026 closed stable at 11.30/35 percent.

A bond maturing on 15.09.2027 closed at 11.90/12.05 percent up from 11.95/12.00 percent.

A bond maturing on 15.12.2028 closed at 12.10/20 percent down from 12.10/15 percent.

A bond maturing on 15.07.2029 closed at 12.25/40 percent.

A bond maturing on 15.03.2031 closed at 12.30/50 percent. (Colombo/Apr17/2024)

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Sri Lanka Treasury Bill yields down across maturities

ECONOMYNEXT – Sri Lanka’s Treasuries yields were down across maturities at Wednesday’s auction with the 3-month yield moving down 7 basis points to 10.03 percent, data from the state debt office showed.

The debt office sold all 30 billion rupees of 3-month bills offered.

The 6-month yield fell 5 basis points to 10.22 percent, with 25 billion rupees of bills offered and 29.98 billion rupees sold.

The 12-month yield dropped 4 basis points to 10.23 percent with 18.01 billion rupees of bills sold after offering 23 billion rupees. (Colombo/Apr17/2024)

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