Sri Lanka to buy dollars, sell down central bank domestic assets: Governor
ECONOMYNEXT – Sri Lanka’s Central Bank plans to sell down more of its Treasury bill stock, while continuing to purchase dollars from forex markets, and unwinding dollar forwards, Governor Indrajit Coomaraswamy said.
So far this year, the Central Bank had already bought about $700 million from forex markets and plans to buy $500 million more, Governor Coomaraswamy said.
Governor Coomaraswamy said there was no truth in speculation that dollar purchases would put pressure on the rupee.
Economic analysts say dollar purchases would not put pressure on the rupee as long as the rupees created (unlike other market participants who buy with existing rupees without changing the monetary base, a central bank buys dollars with newly printed money, impacting monetary policy, boosting credit and imports) are mopped up by selling down its Treasury bill stock.
Coomaraswamy said the Central Bank’s Treasury bill stock has been brought down from 300 billion rupees to about 188 billion rupees up to the first week of June.
"We have to take it down a little bit more, with interest rates tapering down now," he told a forum organized by Fitch Rating.
The International Monetary Fund’s deal with Sri Lanka last year did not contain a requirement to bring down domestic assets (sell down the Central Bank’s Treasury bill portfolio), which analysts warned early on was major flaw in a deal with a monetary authority will lax policy.
EN’s economic columnist warned as early as April 2016 that unless a net international reserve target (NRI) was accompanied by a commensurate net domestic assets (NDA) target, the rupee would depreciate even with an IMF deal. (http://www.economynext.com/Foreign_investors_buy_into_Sri_Lanka_bonds-3-4756-.html)
Sri Lanka has a ‘managed float’, but the Central Bank follows an overly lax policy in liquidity management, giving unlimited amounts of printed money to overtrading banks that give loans without deposits and readily convert their bill holdings to money with no questions asked.
Partly due to the lax credit politics fostered within the banking system, rates have to be higher than needed to kill credit demand to end a balance of payments crisis cum credit bubble, critics say.
A so-called soft-pegged central bank generates a balance of payments crisis by firing bank credit with newly minted money created by the acquisition of Treasury bills.
The Central Bank also creates money by rejecting bids at bill auctions and buying up a part of the offering. In April 2015, the Central Bank disastrously cut policy rates and released over 200 billion rupees of liquidity mopped up on short-term basis and then went on to print more money.
The Central Bank’s pro-cyclical activity is familiar to many analysts, as well as some investors and dealers, who are now able to easily predict BOP crises, as soon as the Central Bank takes baby steps to create one.
Governor Coomaraswamy said the Central Bank was also unwinding dollar forwards.
Dollars acquired by a central bank through forward contracts are ‘borrowed’ and are not ‘purchased’ unlike dollars acquired against non-interest bearing rupee notes.
The IMF deal also requires the Central Bank to unwind forward dollar positions. (Colombo/June11/2017)