Sri Lanka spends US$447.5mn for peg defence in August

ECONOMYNEXT – Sri Lanka has spent 447.25 million US dollars in August 2015 to defend a soft-peg with the US dollar up from 352.5 million US dollars in July amid continued money printing, official data show.

Sri Lanka has a money printing central bank which targets interest rates by printing money and also tries to target an exchange rate peg, getting into balance of payments crises with almost boring regularity, analysts say.

The country goes into balance of payments crisis first by resisting an interest rate hike with money printing when state borrowings pick up when private credit is strong.

The cycle rapidly accelerates when printed money is injected to the banking system to fill liquidity shortages coming from peg defence (sterilized foreign exchange sales). The injections continue to fire credit and imports.

When foreign reserves begin to fall capital flight is triggered. Due to the way Sri Lanka’s other state loans are settled, the burden of loan settlements also fall on foreign reserves when there is excess liquidity in money markets, analyst say.

On September 04, the Central Bank ended a heavy interventions, which could end a vicious cycle of sterilized interventions and safeguard foreign reserves. Foreign reserves fell to 6.4 billion dollars, down from 9.1 billion when credit started to pick up.

However last week more money was printed to avoid sovereign default, and liquidity is still being generated by outright monetization of debt.

In the week to September 09, foreign investors sales of rupee bonds reduced to 2.4 billion rupees sharply down from 25 billion rupees a week earlier.

Total bond holdings are now down to 348.2 billion rupees from 465.5 billion rupees when a rate cut spooked jittery investors. (Colombo/Sept14/2015)





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