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Monday March 4th, 2024

Sri Lanka rupee, forex markets in pickle as LC rationing froths

ECONOMYNEXT – Sri Lanka’s forex markets are mired in tight trading restrictions and banks found it increasingly difficult to accommodate customer requests for letters of credit market participants said, as money printing and excess liquidity continue to pressure the rupee.

Sri Lanka’s rupee is now in a non-credible peg at 200 to the US dollar with over 100 billion rupees (about 500 million US dollars) in excess liquidity pressuring the peg via potential new credit.

Last week another 22 billion rupees (about 100 million US dollars) were printed to keep Treasury bill yields below 5.21 percent, which is functioning as a de facto ceiling policy rate.

Related

Sri Lanka prints Rs22bn after failing to sell bills at ceiling rate

LC Rationing

With interbank forex trading coming to a virtual standstill banks are finding it difficult to cover letters of credit obligations in time, forcing them to ration LCs to customers who have access to printed money from the central bank to do business with.

“We cannot accommodate the requests for LCs so we have to ration them,” a banker said. “There is no regulation to say to ration them, but we are forced to do it.”

Bank NOPs were slashed in April as credit demand picked up and printed money hit forex markets.

Then a non-credible peg was imposed at around 200 to the US dollar, making it difficult for banks to cover their positions after providing dollars for customers to cover bills and LCs.

Problems with LCs began to emerge shortly after but has now intensified.

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Sri Lanka forex market caught between moral suasion and slashed NOPs

Sri Lanka’s non-credible peg to US dollar devalued to 202 amid LC struggle

Several banks are now running short (negative) net open positions.

This week isolated forward transactions took at 200 to the US dollar as some banks tried to reduce their negative NOPs, market participants said.

Forward legs at discount in swap market

In the swap market one year forwards are quoted at discounts with domestic dollar yields overtaking the rupee rates kept down by money printing.

The year was quoted this week at 1700/2200 levels or a discount of around 17 rupees.

Banks are mandated to sell to importers around 200 to the US dollar.

However it is not clear whether a similar restriction applies to capital outflows with foreign investors in particular selling out of stocks in bid to protect their money.

Sri Lanka has been following excessively loose monetary policy associated with Sterling crises in the late 1960 and the collapse of the US dollar and the Bretton Woods soft-peg system in 1971, which worsened after 2015.

During the recent past a highly unstable and discretionary external anchor called a ‘flexible exchange rate’ which had zero credibility in the market was coupled with discretionary domestic anchor called the ‘flexible exchange rate’ with predictable consequences.

In 2020, unprecedented liquidity injections were made under so-called Modern Monetary Theory, with pegged exchange rate regime.

Though the peg is now enforced at 200 to the US dollar with multiple controls, there is no monetary policy to back it analysts say as long liquidity is injected.

A US money-doctor set up Sri Lanka’s soft-pegged central bank in 1950 in the style of several set up in Latin America abolishing a currency board that had kept the exchange rate and free trade since 1885.

A false promise was made that that the agency will be able to engage in discretionary credit policy (print money) and also supply foreign exchange in unlimited quantities as the currency board had done since 1885.

Economists and analysts have been calling for the central bank’s open market operations to be restrained, and if not for it to be abolished altogether so that resident of Sri Lanka can get on with their lives without monetary instability.

From 2015 large volumes of liquidity has been released into banks to keep call money rates at the middle or bottom of the policy corridor in a steep regression of policy.

The China-backed Colombo Port City is to be protected from the soft-pegged central bank through multiple currency dollarization.

Related

Sri Lanka Port City dollarization upheld, constitution violation from depreciation: SC

Sri Lanka’s Supreme Court has upheld the right of Port City residents to be protected from depreciation.

(Colombo/June22/2021)

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Sri Lanka’s CEB reports Rs61bn profit for 2023 with Dec quarter gains

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Bord has reported a profit of 61.2 billion rupees for the year to December 2023, turning around from a loss of 298 billion last year, with all the profits coming in the last year amid heavy rain and price hike, interim accounts show.

The CEB reported profits of 77.9 billion rupees for the December quarter, compared to a loss of 182 billion rupees last year.

About 94 billion rupees in losses were forex losses, coming from the central bank, which printed money to suppress rates and triggered a steep currency collapse in a failed float with a surrender rule.

CEB revenues rose 55 percent to 156 billion rupees in the December quarter, cost of sales fell 45 percent to 78 billion rupees amid heavy rains, giving a gross profit of 78.2 billion rupees for the quarter.

In the year to December, CEB revenues were 606.6 billion rupees, up 96 percent from 308 billion rupees, while cost of sales rose from 444 billion rupees to 506 billion rupees. Gross profits were 99.6 billion rupees.

At group level, which includes LTL Holdings, profits were 75 billion rupees for the year, with income taxes of 6.3 billion rupees, provided.

CEB consolidated profits were 68.4 billion rupees, with other shareholders of subsidiaries accounting for 7.2 billion rupees.

Equity was 498 billion rupees at company level by December 31, with 126 billion rupee capital contribution as well as profits earned in the last quarter. (Colombo/Mar05/2024)

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Sri Lanka rupee opens at 308.20/50 to the US dollar

Sri Lanka stocks reversed its falling trend and gained for the first time in six sessions on Tuesday closed stronger on Tuesday (21).

ECONOMYNEXT – Sri Lanka’s rupee opened at 308.20/50 to the US dollar Monday, from 308.80/90 on Friday, dealers said.

Bond yields were broadly steady.

A bond maturing on 01.08.2026 was quoted stable at 10.90/11.00 percent.

A bond maturing on 15.09.2027 was quoted at 11.90/12.00 percent from 11.90/12.05 percent.

A bond maturing on 01.07.2028 was quoted at 12.20/30 percent from 12.15/35 percent.

The Colombo Stock Exchange opened up; The All Share was up 0.60 percent at 10,755, and the S&P SL20 was up 1.24 percent at 3,077. (Colombo/Mar4/2024)

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Sri Lanka central bank swaps top $3.2bn by December

ECONOMYNEXT – Sri Lanka’s central bank borrowed US dollars from various counterparties through swap transactions, which had topped 3.2 billion US dollars by December 2024, official data show.

The net short position, including swaps disclosed by the central bank, grew by over almost 1.28 billion US dollars from December 2022 to 3,280 million dollars.

The gross position grew from 2,263 million dollars to 3,280 million US dollars over the year.

The central bank supported some state banks with dollars to cover their dollar exposures, which had since been paid back.

By December reported gross reserves of the central bank was 4,491 million US dollars, against swaps of 3,280 billion US dollars.

Swaps of around 1500 related to the People Bank of China.

Swaps allow a central bank to increase gross reserves, without raising domestic interest rates.

Swaps with domestic counterparties lead to liquidity being injected into money markets, which can be mopped if domestic credit growth is moderate.

At the moment many private banks have large dollar positions invested outside the country, which cannot be used for transactions domestically because of a money monopoly given to macro-economists. (Sri Lanka repays debt or collects reserves of U$5bn via banking system since rate correction)

However unwinding swaps after private credit has picked, or engaging in swaps after private credit has picked up, may lead to money being injected to maintain the policy rate, leading to excess credit by banks and balance of payments deficits and or currency collapses, analysts say.

Central bank swaps in the third quarter of 2018 led to a collapse of the currency under the ‘exchange rate as the first line of defence’ policy peddled to Sri Lanka, critics have said earlier.

Domestic currency proceeds of swaps were the primary ammunition to bust East Asian currencies in 1997-98.

Any depreciation after the swap proceeds have been used for imports (effectively mis-targeting rates) a central bank will run a forex loss.

The PBOC however had put a rule, preventing the use of the swap after gross reserves fell below 3 – months of imports, preventing Sri Lanka from getting into further trouble through the use of official reserves for private imports.

Sri Lanka’s central bank also used borrowings from the Reserve Bank of India, via the Asian Clearing Union to run BOP deficits.

Losses from exposed dollar positions of central banks which have gained ‘independence’ from fiscal rules and parliaments and engaged in macro-economic policy, including the Fed, have led to taxpayers bearing the losses in the end.

Swaps were invented by the Fed in the early 1960s, as it deployed macro-economic policy (printed money for growth) threatening its gold reserves and the Bretton Woods system.

Sri Lanka has other borrowings also, including from the IMF, which has made net foreign assets of the central bank negative. (Colombo/Mar05/2024)

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