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Sri Lanka undersells Treasury bills at auction, 12-month yield targeted

ECONOMYNEXT – Sri Lanka has raised 19.25 billion rupees from a Treasury bill auction on April 04, after offering 30 billion rupees of securities for sale, with 12-month bills sharply under-sold to keep rates fixed for the fourth week in a row, data from the state debt office showed.

The debt office sold 10.25 billion rupees of 3-month bills after offering only 8.0 billion rupees in the maturity allowing the average yield to move up to 6.84 percent from 6.75 percent.

4.1 billion rupees of 6-month bills were sold after offering 6.0 billion rupees and the weighted average yield rose was allowed to rise to 10 basis points to 6.90 percent.

4.8 billion rupees of 12-month bills were sold after offering 16 billion rupees fixing the rate at 7.0 percent for the fourth week in a row.

About 10.3 billion rupees of bills were undersold as a result of targeting the 12-month yield.

During the past three weeks, data appeared to show that the central bank had printed money to take up the under-sold Treasury bills.

By underselling bills at auction and using printed money the central bank can target 3, 6 or 12 month bills.

After the creation of the central bank Sri Lanka in 1951 with money printing powers Sri Lanka has mainly created monetary instability (currency falls, balance of payments troubles and inflation) mainly by targeting Treasuries rates with printed money, analysts have said.

The practice had made Sri Lanka a top customer of the International Monetary Fund.

The 2018 crisis however was created by targeting the call money rate with excess liquidity, analysts have pointed out.

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By printing money, Sri Lanka undermines the credibility of the peg, triggers capital flight, and forces rating agencies to downgrade the sovereign rating.

Measures to restore the credibility of the peg, (higher rates than is needed if market rates were allowed to fluctuated gently, trade and exchange controls) does lasting damage to economic output and policy credibility. (Colombo/May05/2020)

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