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Thursday June 8th, 2023

Sri Lanka will not restructure T-bills outside Central Bank, bonds voluntary: Governor

ECONOMYNEXT – Sri Lanka will not re-structure Treasury bills outside of central bank holdings and will engage with major T-bond holders for voluntary ‘optimization’ Governor Nandalal Weerasinghe said.

“There will be some treatment on central bank held Treasury bills,” Governor Nandal Weeasinghe told a creditor presentation Thursday.

“Other Treasury bill holdings will not be treated. Treasury bonds we envisage voluntary optimization.”

Sri Lanka has to at least extend the maturities of bonds to reach a gross financing need target averaging 13 percent of GDP in 2027-2032 based on projections in an IMF debt sustainability analysis. Of that foreign debt service has be below 4.5 percent of GDP on average.

“Local currency creditors participation in a debt optimization will help reaching the DSA targets,” Treasury Secretary Mahinda Siriwardena said.

“Authorities are exploring options for domestic debt operations aimed at liquidity relief while preserving financial stability to avoid further eroding Sri Lanka’s repayment capacity.”

The government and advisors will “invite consultations with major T-bond holders to gauge options and constraints”, he said.

Governor Weerasinghe and Treasury Secretary Mahinda Siriwardene said Sri Lanka is likely to outperform the growth targets in the IMF debt sustainability analysis given past history. The IMF DSA is projecting 3.1 percent growth in the next few years.

Sri Lanka grew at rates around 4 to 5 percent during a 30 year war, but growth started to fall after serial currency crises hit the country under flexible inflation targeting with output gap targeting (monetary stimulus) during peacetime. In 2020 taxes were also cut for stimulus, going beyond open market operations and outright purchases of bonds seen earlier.

Meanwhile state spending went up from 17 to 20 percent of GDP under state expansionist revenue based fiscal consolation after spending based consolidation (cost cutting) was thrown out of the window from 2015 to 2019, critics say.

Sri Lanka is now trying to cut spending and excessive growth of the public sector, based on normal economic principles, to limit the burden of the unaffordable state on productive sectors and the poor, while preserving essential spending.

According to the latest IMF program, fiscal consolidation will be “primarily” revenue based.

Sri Lanka’s Treasury bill and bond yields were higher than required due to uncertainty over whether they will be re-structured and the so-called ‘gilt’ status will no longer apply.

The lack of an early cut off date for domestic debt is a key problem in the IMF’s current debt resolution framework as domestic bond buyers are the last resort lenders after most foreign creditors stop lending, when the IMF says a country’s debt is no longer sustainable.

Download presentation from here.

Sri Lanka and debt advisors will engage with major Treasury bond holders, Weerasinghe said.

Key T-bond holders are Employment Provident Fund, Employment Trust Fund, insurance companies and banks.

Sri Lanka is also conducting a asset quality of review of banks.

Based on its results a debt optimization options will be offered paying attention to asset liability mis-matches, Weerasinghe said.

By preserving banking sector stability foreign investors are more likely to get repaid. (Colombo/Mar30/2023)

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  1. Sharanga Tharisha Senanayake says:

    What is the status of Treasury bills as at today? The decision which was to be made on 30 th April 2023 has been delayed.Does this mean that it is still uinder further discussion as to wheter the treasury bills will be included in the hair-cut or not?We need a clear direction please!

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  1. Sharanga Tharisha Senanayake says:

    What is the status of Treasury bills as at today? The decision which was to be made on 30 th April 2023 has been delayed.Does this mean that it is still uinder further discussion as to wheter the treasury bills will be included in the hair-cut or not?We need a clear direction please!

Sri Lanka’s shares slip on profit taking and selling pressure

ECONOMYNEXT – Sri Lanka’s shares closed lower on Wednesday after four consecutive gains in previous sessions spiraled into selling interest and profit taking, an analyst said.

The main All Share Price Index was down 0.28 percent or 24.39 points to 8,722.06, this is the lowest the index has been since May 02, while the most liquid index S&P SL20 was down 0.40 percent or 9.92 points to 2,468.44.

“The market was gaining in the previous sessions and there is selling and profit taking present today, due to continuously being on green,” an analyst said.

In the previous sessions the market was seeing gains, due to lowered policy rates and low inflation stimulating buying interest and driving the sentiment up, an analyst said.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

“There are gradual improvements in the market sentiment, with positive sentiments coming in from lowered policy rates and inflation,” an analyst said.

The market generated foreign inflows of 12 million rupees and received a net foreign inflow of 18 million rupees, due to low share prices and discounted shares followed by a dividend announcement.

The market generated a revenue of 554 million rupees, this is the lowest the turnover has been since May 10, while the daily turnover average was 1 billion rupees. From the total generated revenue, the banking sector contributed 120 million rupees, Diversified Banks contributed 115 million rupees and the Capital Goods Industry generated 78 million rupees.

Top losers during trade were Sampath Bank, Commercial Bank and Aitken Spence. (Colombo/June06/2023)

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Sri Lanka Treasuries yields plunge, 12-month down 318bp

ECONOMYNEXT – Sri Lanka’s Treasuries yields plunged across maturities at Wednesday’s auction with the 12-month yield falling 318 basis points, in one of the biggest one day falls, data from the state debt office showed.

The 3-month yield fell 244 basis points to 23.21 percent.

The 6-mont yield fell 339 basis points to 21.90 percent, along with the 12 months to 19.10 percent.

The short-term yield curve is inverted.

The central bank last week cut its policy rate 250 basis points in a signaling move but is not printing money to enforce the rate cut.

The debt office sold all 140 billion rupees of offered securities. (Colombo/June07/2023)

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Sri Lanka forex reserves rise US$722mn in May 2023

ECONOMYNEXT – Sri Lanka’s foreign reserves grew 722 million US dollars to 3,483 million US dollars in May 2023 from 2,761 million US dollars in April, official data showed as deflationary policy and weak credit reduced ‘above the line’ outflows.

Sri Lanka lost almost all its reserve in over two years as the central bank sold reserves and printed money to keep rates down (sterilized reserves sales) including borrowed dollars from India.

Gross official reserves fell to a low of 1,705 million US dollars in September 2022.

Sri Lanka’s central bank hiked rates in April 2022 to slow credit and also stopped printing money after it ran out of borrowed Asian Clearing Union dollars from India.

Sri Lanka’s gross official reserves are made up of both monetary reserves of the central bank and any balances of the Treasury account from loans or grants it gets.

The central bank’s net foreign reserves are still negative after busting up borrowed reserves to suppress rates. By April (before the collection of reserves in May) the central bank’s net reserves were negative by 3.7 billion US dollars.

In May alone 662 million US dollars were bought from the market, Central Bank Governor Nandalal Weerasinghe said.

Related

No pre-determined level to stop Sri Lanka rupee appreciation: CB Governor

Borrowing dollars through swaps and busting them up, was invented by the US Federal Reserve as it was printing money and breaking the Bretton Woods system in the early 1970s.

Sri Lanka received a 350 million US dollar tranche from the Asian Development Bank and 331 million US dollars from the IMF to the Treasury for budget support.

The loans can be sold to the central bank by the government to generate rupees and spend. However, since credit is weak, not all the inflows go out of the country particularly as the central bank is conducting deflationary open market operations on a net basis.

By allowing the rupee to appreciate unlike in previous episodes of recovery in an IMF program, after a bout of money printing, the central bank is bringing down inflation – in some cases absolute prices – and restoring confidence and easing the ‘pain’ of ‘monetary policy’ or stimulus.

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Why is Sri Lanka’s rupee appreciating?

Though exports are falling, tourism revenues are also picking up.

The budget support loans, tourism receipts less the reserve collected will widen the trade deficit. Building foreign reserves involves lending money to the US or other western nations and is similar to repaying foreign debt. (Colombo/June07/2023)

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