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Friday August 19th, 2022

Sri Lanka’s central bank ‘saves’ US$27mn in forex reserves

ECONOMYNEXT – Sri Lanka’s central bank has sold down 5.6 billion rupees from its Treasury bill portfolio potentially saving 27.6 million US dollars at a peg (convertibility undertaking) of 203 to the US dollar, official data shows.

On July 16, 2021, the central bank sold down its Treasury bill stock to 911.44 billion rupees from 917.05 billion a week earlier following a successful Treasury bill auction.

The central bank offered 56 billion rupees in bills at last week’s bill auction and sold all of it, though most came from the 3-month end.

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A week earlier also there was a 4 billion rupee sell-down of bills.

The central bank has bought hundreds of billions of rupees Treasury bills by injecting new rupee reserves into banks (printing money) boosting loans, investments and consumption above the dollar inflows to the country.

Sri Lanka has imposed exchange controls and import controls after injecting rupee reserves into banks. However the trade deficit in the first five months of the year exceeded the 2019 level as credit flowed into new areas.

Instead of limiting liquidity injections and slowing domestic credit to balance inflows with outflows (or selling down bills to collect reserves on a net basis to repay debt), the central bank injected liquidity driving credit and imports.

During the five months to May 2021 the trade deficit was 3.6 billion US dollars, up from 3.1 billion US dollars in 2019 when the central bank was following deflationary policy selling down its T-bill stock up to July.

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Sri Lanka import controls shattered by credit, money printing in May

Sri Lanka raises de facto policy rate 02bp to 5.25-pct

When the new rupees hit the forex market, the central bank has to sell its dollar reserves to maintain the exchange rate and ‘redeem’ the rupees to maintain the peg running down forex reserve on a net basis.

The central bank last week raised its ceiling rate by 02 basis points for Treasury bills which has became the key de facto policy rate through which most of the money was injected to the market in 2020 and 2021.

The rate was seen to inject or withdraw money, effectively sterilizing in both directions in recent months either withdrawing or injecting liquidity.

“The apparent blind sterilization goes to show that the short term gilt yields are being used as a final target,” EconomyNext economic columnist Bellwether says.

“There have been also claims made by authorities that keeping rates down has helped save interest costs on government debt. Actually what happens is that a given convertibility undertaking or peg foreign reserves are run down.

“It is the same as financing the deficit through central bank forex reserves, except that there is high level of monetary instability and the peg also breaks.”

Sri Lanka set up a central bank with a non-credible peg (anchor) at 2.88 grains to gold in 1950 abolishing a credible peg maintained by a currency board arrangement from 1885.

The hard was peg initially set up against the Indian silver rupee, before the creation of the Reserve Bank of India. RBI, sometime after its creation also shifted its anchor to gold.

Sri Lanka’s forex reserves have been steadily eroded since August 2019 after liquidity injections began under an ‘output gap targeting’ exercise and sharply ratcheted up in 2020 under so-called Modern Monetary Theory, a type of un-anchored monetary policy.

Of late the central bank has decreed a 203 non-credible convertibility undertaking for banks, but is not giving dollars to back it up, leading to rationing of dollar for current account transactions, leading to parallel markets.

But the central bank is selling dollar to the Finance Ministry to repay loans, enforcing the convertibility undertaking through the financial account, leading to forex reserves.

When liquidity is injected to the banking system to give loans, in excess of deposits and loan repayments, the resulting cascading expansion in domestic credit, triggers an outflows of foreign exchange in excess of inflows.

The sell down of central bank held securities, which withdraws liquidity (contractionary sterilization or deflationary policy), pushes short term rates up, slows credit and reduces outflows.

But the banking system however has 61 billion rupees of net excess liquidity, with 45 billion rupees also borrowed from the overnight window at 5.5 percent.

Sri Lanka started the year with 266 billion rupees of excess liquidity which have been drained through mostly convertibility provided to loan repayments.

Some cash has also been absorbed by also been an expansion of reserve money as inflation picked up and demand for cash went up partly for precautionary reasons.

In 2021 another 45 billion rupees had been injected through a so-called temporary provisional advance, a tool built by the creator of the central bank, Fed money doctor John Exter, to block permanent injections of rupees.

However the central bank started to buy Treasury bills on a long term basis, shortly after he left the bank and created the first currency crises as the US Fed fired a commodity bubble purchasing Liberty Bonds around 1951.

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Sri Lanka’s central bank should guard against bankruptcy as Fed lights commodity fires

Global commodity prices, including oil, are now rising due to the ‘Powell bubble’ fired by the US Fed contributing to overall monetary instability and analysts have warned that the central bank’s dollar liabilities may exceed its assets. (Colombo/July19/2021)

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Sri Lanka schedules 3-hour power cuts for Aug 20, 21: regulator

ECONOMYNEXT – Sri Lanka will impose power cuts of up to three hours on Saturday August 20 and Sunday August 21, Public Utilities Commission (PUCSL) Chairman Janaka Ratnayake said.

All areas (A, B, C, D, E, F, G, H, I, J, K, L, P, Q, R, S, T, U, V and W) will have power cuts of 1 hours and 40 minutes between 10.30 am and 06.00 pm and 1 hour 20 minutes from 06.00pm to 10.00 pm.

Click here for a detailed schedule.

The state-run Ceylon Electricity Board (CEB) said supply interruption time and restoration time will vary within 30 minutes as indicated above.

Sri Lanka’s daily scheduled power cuts that were reduced to one hour in July with power generation from hydro power plants contributing more than 50 percent to the main grid reducing thermal power plant use was extended to three hours last week due to a breakdown at the Norochcholai coal power plant.

According to officials, the breakdown happened in Unit 1 of Norochcholai which will take around two weeks to repair.

The Minister of Power & Energy said Unit 2 is undergoing scheduled maintenance work while Unit 3 will continue to operate. West Coast and other fuel power pPlants will be used to manage the supply, the ministry said. (Colombo/Aug02/2022)

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Sri Lanka guidance peg edges T-bond yield edge down

ECONOMYNEXT – Sri Lanka Central Bank’s guidance peg for interbank transactions edged down on Friday (19), while yields in Treasury bonds picked up slightly and in T-bill remain unquoted in dull trade, a day after the Central Bank announced the policy rates will remain stable, dealers said.

A bond maturing on 01. 06. 2025 closed at 27.95/28.05 percent on Friday, slightly up from 27.90/28.00 percent on Thursday.

No T-bills were quoted on Friday, dealers said.

Meanwhile Sri Lanka’s central bank announced a guidance peg for interbank transactions further weakened by three cents to 361.00 rupees against the US dollar on Friday from 360.97 rupees.

Data showed that commercial banks offered dollars for telegraphic transfers between 368.00 and 370.00 for small transactions.  (Colombo/ Aug 19/2022)

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Sri Lanka records 10 new COVID-19 deaths in 48 hours as case numbers rise

ECONOMYNEXT –  Sri Lanka recorded 10 COVID-19 deaths in the 48 hours from August 17 to 19 taking the country’s pandemic death toll to 16,640, health ministry data showed.

Sri Lanka is experiencing a slight increase in COVID-19 cases with the relaxation of public health restrictions relating to face masks and public gatherings.

Health authorities said the situation will be monitored constantly and have asked the general public to continue to follow basic hygiene measures in order to control the spread of the virus again in the community.

In August alone 2,924 new cases were recorded in Sri Lanka, with 84 deaths attributed to the disease.

So far in 2022, from January onward, health authorities have identified 81,157 patients to date.

Epidemiology unit data showed that 874 patients are currently receiving treatment, out of which 716 are receiving home based care.

The spread of the virus has increased with the use of public transport rising after an easing of a fuel crisis.

Sri Lanka is also facing difficulties in securing essential medicine supplies for the health sector due to a forex shortage.

Health officials said if the number of COVID-19 patients rise to a level the health sector cannot manage,  with the added issues of fuel and medical shortages, the health system might collapse.

“It is the responsibility of us all. There is no use trying to forcibly control people. We all have the responsibility to reduce or stop the spread of the virus before it gets out of control. We have been living with it for the past two years,” Deputy Director General of Health Services Dr Hemantha Herath said. (Colombo/Aug19/2022)

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