CBSL prints Rs 12.5B, depletes Reserves by $59.8M

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By 2017-12-08

By Paneetha Ameresekere

Central Bank of Sri Lanka (CBSL) printed Rs 12,526 million yesterday to aid Government of Sri Lanka (GoSL) to meet its monetary commitments, thereby increasing the latter's face value money printing (FVMP) liabilities by 32.66 per cent to Rs 50,884.06 million (0.4 per cent of GDP) over its Wednesday's figure.

MP aided the drain of US$ 59.84 million (Rs 9,173 million) from the country's foreign reserves to meet GoSL's foreign debt servicing commitments and/or the settlement of maturing swaps of CBSL's. Conversions are based on the closing value of the middle rate 'spot' which was Rs 153.30 to the US dollar on Tuesday.

Due to the sharp falling weighted average yield of the 'benchmark' 91-day (three month) Treasury (T)-Bill at Wednesday's auction by 23 basis points, despite the increase in MP, GoSL's MP borrowing costs (BCs) yesterday over Wednesday declined by Rs 7.44 million (1.75 per cent) to Rs 416.65 million.

As a result of MP, net excess liquidity (NEL), yesterday over Wednesday increased by 9.17 per cent (Rs 3,353 million) to Rs 39,899 million yesterday.

Rupee continues to strengthen
The benchmark 'spot' continued to strengthen amidst thin volumes backed by exporter conversions yesterday as well, having had got stronger by five cents to close the day at Rs 153.20/30 to the dollar in two way quotes, market sources told this reporter.
Nonetheless, the market exchange rate (MER) in the calendar year to date has had depreciated by between Rs 2.95-3.05 (1.96-2.03 per cent), having had closed last year at Rs 150.25 to the dollar in one week's forwards.
The market then was dealing in one week's forwards to find the true value of the dollar amidst moral suasion exerted on the 'spot' and 'spot next' then, by CBSL.

A year ago on Wednesday, 7 December, 2016, the country's foreign reserves were boosted by $ 16.34 million (Rs 2,417 million) due to exporter conversions. Conversions are based on the then 'spot', albeit its controlled value, which was Rs 147.95 to the US dollar as at 5 December, 2016.

Further, CBSL on 7 December, 2016, retired a part of its FVMP stock numbering Rs 7,248 million, thereby seeing this value decline by 3.96 per cent to Rs 175,942.45 million (1.5 per cent of GDP) over its 6 December, 2016 value.
As a result, market's net shortfall increased by Rs 4,831 million (73.78 per cent) to Rs 11,379 million on 7 December, 2016, while GoSL's MPBCs fell by Rs 60.34 million (2.08 per cent) to Rs 2,846.7 million, due to the retirement of this stock of T-Bills, related to MP, by CBSL on that day.

'Spot' trades are settled after two market days from the date of transaction and in the case of 'spot next' it's three. CBSL deals in 'spot.' The 'spot' at times is controlled to minimize Sri Lanka's rupee debt costs. Usually the Treasury is bereft of dollars unless it has raised dollars by a syndicated loan or by a sovereign bond or by a similar such vehicle. Nonetheless, more often than not, such costs are met from CBSL's foreign reserves after buying the required greenbacks by paying CBSL it rupee value in 'spot' equivalents. Therefore, a weak 'spot' will only inflate GoSL's rupee debt stock. To prevent such a scenario GoSL exerts moral suasion on the 'spot', like what happened on 7 December, 2016.

However, currently, the 'spot' is not controlled.
The foreign exchange (FX) market is avoided to meet GoSL's foreign debt servicing commitments for fear that that would cause depreciative pressure on the rupee. CBSL is the sole issuer of rupees to the market and sometimes prints money, equivalent to the direct holdings of its FV T-Bill holdings to aid GoSL to meet its monetary obligations in the absence of adequate revenue. But MP may cause demand side inflationary pressure while increasing GoSL's debt liabilities.

Further, CBSL enters into swap arrangements with foreign banks, the usual instruments which are awashed with FX. Such arrangements are entered into, to provide rupee liquidity to the market.

However, due to the strain such arrangements may cause on the rupee, CBSL, under an agreement with the IMF, has given an undertaking to retire its swap holdings upon maturity/maturities, without reissuing the same.

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