Sri Lanka says can repay bonds, as the rupee plunges after money printing

ECONOMYNEXT – Sri Lanka’s central bank which manages debt for the Treasury said the government had enough money to repay bonds, denying charges made by some opposition spokesmen, as the rupee slid to record lows after a bout of money printing.

"The payment of interest and principal at maturity on due dates (timely payment) and not before the due date is followed to the rule by CBSL in discharging its agency function of managing public debt on behalf of the government," the Central Bank said in a statement.

"The availability of funds to pay maturity (including the interest component) for Treasury bills and coupon and maturity for Treasury bonds in 2018 also highlights the substantial liquidity available with the government in servicing its debt liabilities.

The central mainly de-stabilizes the economy and generates balance of payments troubles by printing large volumes of money to purchase Treasury bills to its balance sheet, flooding banks with cash, to keep rates down, which then hit the foreign exchange market.

The central bank can also perpetuate BOP crises by defending the currency after printing money to keep rates down amid high credit growth and filling liquidity shortages by purchasing Treasury bills with printed money (sterilized forex sales) to keep rates down.

In 2017 however as credit slowed, it bought dollars, and mopped up liquidity by selling down its Treasury bill stock (sterilized forex sales) and built up reserves.

The central bank said its Treasury bill stock fell from 293 billion rupees in April 2017 to 69 billion rupees on April 25, 2018.

However from the last week of March as interest rates went up amid a tax change which triggered capital flight from bonds to banks, the central bank cut rates.

On April 02, when 92 billion rupees of bonds and at least another 15 billion rupees of coupons were to be settled only 80 billion rupees were offered for rollover.

On settlement day the central bank’s Treasury bill stock went up from 12 billion to 43 billion rupees. It is not clear whether printed money was used to repay bonds, pushing up excess liquidity.





On April 04, when the central bank cut rates, excess liquidity in the banking system shot up to 60 billion rupees, and the Treasury bill stock to 75 billion rupees, compared to 31 billion rupees.

Ahead of this cash locked up through term repo deals were also released permanently, loosening the system.

On April 05 the bill stock went up to 73 billion rupees.
Over the traditional New Year it is customary to inject extra cash in to the system also pay salary advances to state workers.

The printed money is then mopped up as cash comes back.

Additional cash was also injected temporary cash via term and overnight reverse repo auctions, some of which have been now been terminated.

However the T-bill stock is still at 69 billion rupees by April 25, not counting repo deals terminated in late March.

The rupee has plunged over the last two weeks with many banks flushed with excess liquidity, though some were still borrowing printed money.

On Thursday when the rupee hit 157.65 to the US dollar in the spot market the central bank injected 30 billion rupees overnight.  Another 15 billion rupees injected on April 18 through a reverse repo deal is due to expire on April 26.

Sri Lanka’s rupee had come under pressure from shortly after the money printing central bank was created in 1950 leading to draconian exchange controls.

A currency soft-peg weakens essentially because the central bank resists rate increase by printing money. East Asian hard peg allow banks to run short reserves instead of permanently injecting money during the Chinese New Year.

Some and economists have called for the central bank to be abolished to protect the savings and salaries of people from inflation and currency depreciation.  An inflation targeting law to limit the discretion of the central bank to generate high levels of inflation. (Colombo/Apr26/2018)

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