Sri Lanka spot forex trading comes to a halt; heavy moral suasion

ECONOMYNEXT – Outright spot market transactions in Sri Lanka’s forex markets ground to a halt this week amid heavy moral suasion dealers said, as money printing to finance the budget deficit continues.

The rupee was quoted at 14.40/45 to the US dollar in the one week forward market placing the implied spot US dollar at around 144.30 to the US dollar.

Amid heavy moral suasion, dealers have abandoned trading in the spot market. In the past when the Central Bank clamped down the spot market after generating balance of payments pressure with loose monetary policy, dealers used to trade in the spot next market (settlement three days).

The central bank engaged in a failed float in September which saw the rupee sliding from around 134 to 144 to the US dollar after engaging in heavy moral suasion.

Money printing and interventions resumed.

Unlike in the past the attempted float was made without a rate hike or any attempt to correct fundamental problems with the budget, which was being accommodated by loose monetary policy.

In January foreign selling in rupee bonds have also picked up.

The central bank withdrew some liquidity Friday to mop up liquidity coming from a maturing term repo auction. On Friday over 20 billion rupees is expected to be printed to repay maturing government after all bids for Treasury bills were rejected at Wednesday’s auction.

Another 30 billion rupee auction was called to withdraw cash ahead of the printed money flooding markets.

Sri Lanka has a ‘soft’ or ‘non-credible’ peg which is on a one-way depreciation track.

Analysts have called for reform of the Central Bank to reduce its discretion to de-stabilize the rupee and the economy by money printing.

The financing of the government’s net cash deficit with central bank credit (printed money) was identified as the root cause of Sri Lanka’s economic troubles as far back as 1966.