Sri Lanka’s central bank buys US$87.5mn amid weak credit

ECONOMYNEXT – Sri Lanka’s central bank had bought 87.5 million US dollars from banks in June to stop the rupee appreciating and maintain a peg with the US dollar, official data showed.

There were no dollar sales. In May the central bank bought 45 million US dollars and sold 40 million dollars to maintain a peg at around 176 to the US dollar. The rupee has been allowed to apprciate from aound 183 to the US dollar.

In the month of June the central bank also sold down its Treasury bill stock from 138 billion rupees to the US dollar to 124 billion rupees, mopping up liquidity and permanently locking the purchased dollars (sterilized purchases) in monetary reserves.

by the secon week of July the Central Bank’s Treasury bill stock has been sold down to 108 billion rupees.

Mopping up inflows permanently from bank balance sheets, generates an imbalance in the outflows of dollars from the banking system, putting upward pressure on a currency peg.

Sri Lanka’s private bank credit is also negative, allowing rates to fall despite some liquidity being mopped up to build forex reserves.

The central bank however has kept short term rates higher than the market (higher-than-a-currency-board) though a 7.50 percent deposit window and repo auctions conducted around 7.70 percent.

Analysts have called for term repo auctions to be terminated so that short term rates can fall further.

You may also read:

Sri Lanka should phase out term repo deals and allow rates to fall: Bellwether

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Sri Lanka bad loans grows 4.8-pct in June after soft-peg collapse

Sri Lanka private credit negative in May, CB credit sharply down

There is however a risk to the credit system from a spike in government spending especially in July, amid a fall in tax revenues.

Central Bank Governor Indrajit Coomarasswamy said the floor rate was not cut at the last monetary board meeting due to a possible fiscal risk.

Sri Lanka has a soft-pegged exchange rate where money is printed to control a ceiling policy rate which tends to collapse the currency, triggering capital flight, high inflation, low growth, bad loans and higher nom

Analysts have called for a higher ceiling rate to protect the credit system and the setting up of a currency board to bring back monetary stability and low nominal rates.(Colombo/July15/2019)

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