Sri Lanka prints 19 billion rupees despite lifting of Treasury bill price controls

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ECONOMYNEXT – Sri Lanka printed 19 billion rupees just after partially successful Treasury bill auctions during the week, as a banknote-issuing bank took the balance amid persistent external problems and related growing liabilities to reserves, according to the data.

The outstanding central bank treasury bills rose to 1,469.84 billion rupees on October 14, from 1,450.21 billion rupees a day earlier, as treasury bills were bought to maintain low rate.

Meanwhile, over-the-counter borrowing has increased from 147 billion rupees to 188 billion rupees.

Sri Lanka’s monopoly banknote-issuing bank has steadily lost reserves amid 2020 ‘modern monetary theory‘ and less aggressive Keynesian stimulus which began in addition to poor fiscal policy in 2015/2016 .

In 2018, a milder version of MMT was practiced by bombarding the lending system with liquidity from overnight reverse repo, forward repo and central dollar / rupee swaps.

Sri Lanka’s net borrowing has increased steadily since 2015 due to the deterioration in monetary policy.

With call rate targeting, Sri Lanka has lost the protection of a broad political corridor that limits reverse repo injections and sterilization when economic activity picks up and anchor is defended. The hallway itself was narrowed in a damaging move later.

In another damaging move that appears to violate article 112 of the constitution, the note-issuing bank has started buying bonds on its balance sheet.

While some progress has been made with bond auctions, analysts believe it is essential to make them fully operational as soon as possible to end the loss of reserves and monetary instability.

The central bank now has a net liability in dollars instead of reserves.

Analysts have warned that it is vital for bond auctions to be successful and that a partially failed auction is as bad as a totally failed auction in terms of currency shortage and possible external default.

The central bank withdrew 10.5 billion rupees from banks plus, falling into a sterilization trap after printing money at the auction.

So far $ 24.45 billion has been withdrawn after printing currency the Zimbabwe central bank style, before the country hit hyperinflation, although there is still a positive gap between the two rates.

“The central bank itself will likely be insolvent on its dollar liabilities before the end of the year unless money printing is halted,” EN Bellwether’s business columnist warned when price controls were in place. strength and that foreign exchange reserves were still positive.

“However, any kind of half-hearted treasury and bond auction, partially failed bond or bond auctions with certain volumes of printed money will result in progressively higher interest rates, but losses of reserves and currency depreciation will continue. “

The same would apply to a possible floating of the currency (a suspension of convertibility) if partial interventions are made for oil payments. (Colombo / October 18/2021)


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