ECONOMYNEXT – Sri Lanka would shift to a bond auctioning system, which the Central Bank has spent several months developing, from August, Central Bank Governor Indrajit Coomaraswamy said.
The bond auction has been developed following consultations with international experts and domestic stakeholders, he told a forum in Colombo organized by Fitch, a rating agency.
He said some bunched up domestic debt maturities have been cleared. The Central Bank hoped to use the quiet periods to raise more money to maintain a buffer.
Governor Coomaraswamy said he did not want to reveal details of the new bond auction process until the Monetary Board approved the process. The US Treasury and experts of lending agencies had been consulted on revamping the bond auction process.
Governor Coomaraswamy had said earlier that bonds will be sold on an ‘underwriting’ system, but declined to elaborate.
Unlike other regulators such as the Public Utilities Commission and the Securities and Exchange Commission, which have more modern governing laws, the Central Bank does not have a process of formal public consultation on a preliminary policy proposal devised on an expert consultation.
Sri Lanka’s government securities sales, where the Central Bank tries to keep rates down using state-controlled ‘captive’ funds (financial repression) or by printing money outright through ‘quantity easing’ style activity amid high credit growth, have been blamed by critics for repeated balance of payments crises and economic instability in the post-independent era.
Sri Lanka started auctioning bonds in the mid-1990s, ending the practice of privately placing long-term debt (called rupee securities) mostly to state-controlled funds at fixed rates, helping reduce chronic currency depreciation 20 percent plus annual inflation, which the Central Bank used to generate in the 1980s.
Although bond auctions started as a method of ending financial repression, making gilt yields more market determined, large volumes of Treasury bills have been bought with printed money from time to time – usually when budgets deteriorated or oil prices rose – to generate balance of payments crises, forex reserve losses and eventually steep currency collapses.
Long-term bond auctions were also undermined by private placements, which also delayed rates responding to changes in credit demand, especially when budgets deteriorated suddenly.
In early 2015, under thenCentral Bank Governor Arjuna Mahendran, Sri Lanka suddenly shifted to an all-auction based process without any prior warning. But, critics pointed out that the system was rigged by offering small volumes and then accepting much larger volumes.
After Governor Coomaraswamy took over in mid-2016, auctions have been more transparent and rates have moved more in step with state credit demand, helping stabilise the economy. Rates are currently falling with a narrowing budget deficit.
The credibility of Central Bank actions have improved under Coomaraswamy.
After a massive bout of printing to repay maturing debt at the turn of 2017, which analysts say is due to fiscal dominance, the Central Bank has improved monetary policy and the pressure on currency markets has reduced.
Sri Lanka has, in the past, also resisted rates falling after BOP crises ended, or budget deficits reduced, by accepting larger-than-offered volumes at bond auctions, helping preserve the effects of a ‘hard landing’ and delaying an economic recovery, according to some critics.
Analysts who study the market closely say, Central Bankers seem to have a deep distrust of markets and try to manipulate auctions by rejecting bids (and paying higher rates later) when deficits expand, or misleading market participants by suppressing information despite the economic crises that are created by failed attempts at defying ground realities in credit markets.
Sri Lanka runs into balance of payments crises every 3 to 5 years.
Sri Lanka has a system of multiple price auctions, but suppresses cut-off rates, which is also a sign of the deep malaise that plagues the system, according to critics. Transparent cut-off rates, which help draw more buyers, are a key factor in successful multiple price auctions.
Authorities have defended their failed attempts at ‘outsmarting’ the markets, and creating economic crises, by saying that the actions are aimed at countering ‘speculation’ or attempts to manipulate rates by market participants. (Colombo/June08/2017)