Import friendly budget to weaken Rupee

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By 2017-11-14

By Paneetha Ameresekere

The benchmark 'spot' closed virtually unchanged at the Rs 153.60-65 levels to the US dollar on moderate volumes yesterday, compared to Friday's close at the Rs 153.60-70 levels, market sources told this reporter.
'However, with Thursday's (9 November) budget being importer friendly, the 'spot' may end the year down at the Rs 154 levels, or even weaker due to Christmas import demand', they said.

A year ago on Friday, 11 November, 2016, due to exiting foreigners from the government securities market (GSM), the market's then exchange rate (ER), namely the one week's forwards, on 11 November, 2016, over 10 November, 2016, fell by between 30 and 60 cents to close the day at Rs 148.20/50 to the dollar on thin volumes, this newspaper's archives showed.
This was caused by exiting foreigners from the government securities market (GSM), with the rupee however, declining on thin volumes.

The market then was dealing in one week's forwards to find the true value of the dollar, due to CBSL's controls over the 'spot,' to minimize Government of Sri Lanka's (GoSL's) rupee debt costs, when it pays in rupees to buy from Central Bank of Sri Lanka (CBSL) the required dollars to meet its foreign debt servicing commitments. The foreign exchange market is avoided to meet these commitments, for fear that, that would cause further depreciative pressure on the rupee. CBSL deals in 'spot'. 'Spot' trades are settled after two market days from the date of transaction.

Year-on-year (YoY) as at yesterday, the market ER has depreciated by between Rs 5.40-5.15 (3.64-3.47%), thereby causing cost push inflation. However, currently the 'spot' is unfettered from any controls.
CBSL, yesterday over Friday (10 November), retired face value (FV) Treasury (T)-Bills directly related to money printing (MP), by an amount of Rs 1,273 million (2.47%) to Rs 50,310.04 million, equivalent to 0.4% of GDP.
However, a year ago, CBSL's FVMP holdings increased by Rs 9,083.05 million (7.29%) to Rs 133,662.69 million as CBSL printed money to aid GoSL to meet its monetary commitments in the absence of adequate revenue, on 11 November, 2016 over 10 November, 2016.

Rs 133,662.69 million is equivalent to 1.1% of GDP. Nonetheless, YoY, CBSL's FVMP holdings have declined by Rs 0.7% of GDP, thereby alleviating demand pull inflation.
GoSL's FVMP borrowing costs (BCs), yesterday over Friday, declined by Rs 29.7 million (4.16%) to Rs 683.58 million. A year ago GoSL's MPBCs was Rs 2,818.77 million, a YoY fall of Rs 2,135.19 million (75.75%).
The market, yesterday enjoyed a net foreign inflow of US$ 30.49 million (Rs 4,685 million) led by exporter conversions, thereby strengthening the country's foreign reserves by an equivalent amount. Conversions are based on the middle rate of the 'spot' as at Thursday which was Rs 153.65 to the dollar or thereabouts.

As a result, net excess liquidity increased by Rs 3,412 million (18.08%) to Rs 22,283 million yesterday, whereas a year ago the market was net short by Rs 41,357 million, an increase of Rs 63,640 million (153.88%) or by 0.5% of GDP since.
A year ago on Friday, 11 November, 2016, $ 16.34 million (Rs 2,414.75 million) was drained off from the country's/CBSL's foreign reserves, led by CBSL paying off exiting foreigners from the GSM (T-Bill and T-Bond market), from the country's foreign reserves.
Conversions are based on the then administered price of the benchmark 'spot' which data showed was being controlled at Rs 147.75 to the dollar.

But the disadvantage in this controlled arrangement is that foreigners exiting from the GSM can also buy their dollars at the discounted 'spot' price (from the country's foreign reserves) plus Rs 0.03 bank commission as per the arrangement which the then Mahinda Rajapaksa regime, starved of foreign currency, entered into with such foreign investors when the GSM was partially opened up in 2006.

However, data showed that locals seeking to buy dollars for various needs on 11 November, 2016 would have had to pay a higher price of Rs 149.61 for each dollar, giving an exiting foreigner from the GSM a price advantage of Rs 1.83 (1.24%) over each dollar unit purchased, compared to what a local would have had paid. Rs 149.61 was the average selling price of the dollar by commercial banks for telegraphic transfer as at Friday, 11 November, 2016, according to official data.

Data also showed that the GSM in the week ended 16 November, 2016 suffered a net foreign outflow of $ 16.34 million (Rs 2,414.21 million). Due to MP, the market's net shortfall, 11 November, 2016 over 10 November, 2016 fell by Rs 5,798 million (13%) to Rs 41,357 million.

A year ago on Friday, 11 November, 2016, GoSL's MPBCs, over 10 November, 2016, increased sharply by Rs 323.51 million (12.96%) to Rs 2,818.77 million, interpretation of official data showed.

This increase was buttressed by FVMP increasing Rs 9,083.05 million (7.29%) to Rs 133,662.69 million as CBSL printed money to aid GoSL to meet its monetary commitments. in the absence of adequate revenue, on 11 November, 2016 over 10 November, 2016. Rs 133,662.69 million is equivalent to 1.1% of GDP.

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