Sri Lanka’s central bank treasury bill stockpiles rupees 1.9 billion amid sterilized interventions


ECONOMYNEXT – Sri Lanka’s central bank treasury bill outstanding reached $ 1.9 trillion with overnight cash injections reaching Rs 451 billion, data shows amid a withdrawal from the festival and continuous sterilization losses of reserves.

At the end of November 2021, the estimated stock of central bank treasury bills exceeded 1.8 trillion rupees with $ 310 million in interventions sterilized by injecting around 60 billion rupees in new money.

The stock of central bank disclosed treasury bills (properly held) began to decline after central bank governor Nivard Cabraal lifted price controls on bonds and bond yields , allowing the paralyzed market to function and the deficit to be financed by private savings instead of printed money.

However, the central bank injects the same money back overnight through its permanent deposit facility, as the forex markets are still dysfunctional and it cannot buy dollars to inject liquidity and replenish foreign exchange reserves at rates. current interest.

With the Sri Lankan rupee’s peg to the US dollar losing credibility, the central bank must also sell dollars to maintain the peg.

However, to maintain a 6.0% policy rate, each sale of dollars to maintain an anchor at 200 against the US dollar is also followed by an episode of money printing to keep the money base from contracting and rates to increase (a sterilized intervention).

Sterilization of dollar sales routinely depletes the reserves of a weakly anchored central bank, even when the budget deficit is fully funded by the bond markets.

Most Latin American countries, including those with budget surpluses, are defaulting due to sterilized interventions, analysts have shown.

Analysts said the bogus commercialism that it was possible to sterilize outputs and maintain a fixed exchange rate (the so-called impossible trinity) has been propagated

The central bank has also imposed a surrender rule, although the peg is weak, which further undermines the peg, analysts say.

In most East Asian countries and GCC central banks and Singapore, interventions are not sterilized or are partially sterilized, allowing short-term rates to rise.

Higher interest rates and a float in the currency (a total suspension of convertibility) will also end the injections, matching the inflows of dollars with the outflows.

However, in December the demand for liquidity is also higher and the central bank usually injects liquidity. The remainder usually comes from increased dollar sales by exporters to pay advances to workers and additional year-end remittances sent by wokres overseas.

The central bank also halted its repo auctions to free up liquidity.

Compared to the previous so-called modern monetary theory, when excess liquidity was maintained, monetary policy was generally stricter, but not enough to stop sales of sterilized currencies.

The central bank also injected 100 billion rupees over two months at 7.2% on December 24, continuing a previous injection of 103.5 billion rupees.
(Colombo / December 28/2021)


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