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Sri Lanka sells 2-year bonds below policy rate after money printing

ECONOMYNEXT – Sri Lanka had sold 35 billion rupees of 2-year, 5- month bonds at 5.86 percent below the 6.5 percent policy rate, data from the state debt office showed, as banks were flushed with excess liquidity from unprecedented money printing and a cut in the statutory reserve ratio.

The debt office also sold 25 billion rupees of 7-year 1-month bonds at 6.97 percent after offering the same volume.

The 35 billion rupee offer for 2-year 5-months drew bids of 83 billion rupees and a 7-year bond had drawn bids of 54 billion rupees.

Sri Lanka’s bond yield had fallen sharply after the central bank printed money and also cut the statutory reserve ratio releasing more money for banks to lend or invest in bonds.

Data showed that in April private credit growth had plunged, after a spike in credit in March powered by printed money drove the rupee down.

However, bond yields of countries that did not print money including Vietnam which kept its exchange rate stable had also plunged as private credit fell with Coronavirus controls slowing down activities.

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Sri Lanka private credit tumbles in April 2020, more money printing

Sri Lanka had injected 459 billion rupees into the money markets since February and 244 billion had been mopped up from about 1.3 billion dollars of central bank reserves spent.

Around 175 billion rupees of the liquidity came in as cuts in the statutory reserve ratio, which is the share of deposits banks must keep in the central bank to 2 percent from 5 percent.

The cuts in the SRR which while releasing money which can trigger excess demand and forex reserve losses in the short-term, also structurally lowers interest rates by reducing intermediation costs making the banking system more efficient.

About 200 billion rupees of excess liquidity remains, which could take up to another 1.1 billion dollars of reserve sale to mop up if private credit picks up. In the meantime, the money could be spent by the government via bond sales (deficit financing) in state salaries and other expenses.

The central bank has announced up to 150 billion rupees of Zimbabwe-style re-finance at a deeply subsidized rate of 4 percent which is also below the policy rate of which only 28 billion rupees had been disbursed up to the third week of June due to the lack of a credit guarantee.

Sri Lanka’s central bank has announced a credit guarantee and encouraged banks to lend their own resources.

However the slightly higher policy rate may help prevent excessive mal-investments and further foreign reserve losses, analysts say.

Sri Lanka has lost 1.3 billion dollars since the money printing bout (monetary stimulus) came in the wake of tax cuts (fiscal stimulus), attracting a one-notch downgrade of the sovereign rating to ‘B-‘ in early 2020.

Analysts had urged authorities to maintain monetary stability and reform the central bank’s domestic operations to avoid downgrades. (Colombo/June29/2020-sb)

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