$ 462.47M drawdown led by swap settlements

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By 2018-01-12

By Paneetha Ameresekere

US$ 462.47 million (Rs 71,121 million) was spirited away from the country's foreign reserves yesterday due to a combination of Central Bank of Sri Lanka's (CBSL's) swap settlements and Government of Sri Lanka's (GoSL's) foreign debt servicing commitments.
CBSL has given an undertaking to the IMF to reduce their swap liabilities. The interbank foreign exchange (FX) market is avoided to meet GoSL's foreign debt servicing commitments, because that will cause further depreciative pressure on the rupee as Sri Lanka is an import dependent economy. Conversions are based on the closing value of the benchmark 'spot's' middle rate value as at Tuesday which was Rs 153.785 to the US dollar.

To help GoSL to meet its foreign debt servicing commitments, CBSL also printed Rs 35,917 million yesterday, thereby increasing its face value money printing (FVMP) holdings vis-à-vis its open market operations (OMO) to Rs 9,505.24 million.
However, due to a net excess liquidity (NEL) drawdown because of the authorities' external liabilities commitments yesterday, NEL fell by Rs 35,204 million (63.26 per cent) to Rs 20,449 million.

Rupee holds
The benchmark 'spot' tenuously held on to its previous day's (Wednesday's) close, to finish yesterday at Rs 153.75/85 to the dollar on thin trades, market sources told this reporter.

On Wednesday it closed at Rs 153.77/80 to the dollar in two way quotes. A wider corridor between the 'buy', 'sell' quotes of the 'spot' is an indication of uncertainty in the interbank FX market. A year ago on 11 January, 2017, the then market exchange rate (MER), one week's forwards, fell by between 20 and 13 cents to close at Rs 150.65/68 to the dollar in two way quotes, this newspaper's archives showed.

The 'spot' then was bridled at Rs 150 to the dollar or thereabouts to minimize GoSL's rupee debt. To circumvent such controls, the market then was dealing in one week's forwards to find the true value of the greenback.
Year on year (YoY) as at yesterday the MER has declined by between Rs 3.10-3.17 (2.06-2.10 per cent); thereby giving a pull to demand push inflation as Sri Lanka is an import dependent economy.

The reason behind the MER being on a razor's edge currently is due to the new FX Act effective from this month, which makes it mandatory in respect of derivatives trading in the inter-bank FX market, to first have prior board and interbank approvals before being engaged in such trades.

However, bank boards' meet towards the end of the month and also only once a month. Banks have made an appeal against this requirement to the Central Bank of Sri Lanka (CBSL) and the Monetary Board (MB). Nonetheless, the MB too meets not more than once at the most, per month.

'Till then there will be pressure on the MER', they said. And that's also the reason why volumes are small, they added. 'Smaller volumes in general are an harbinger that there is pressure on the exchange rate.

$ 78.86M swap
A year ago on 11 January, 2017, CBSL, in order to uplift the market's excess liquidity position, entered into a swap of $ 78.86 million (Rs 11,829 million) with local banks, which settlement took place on 11 January, 2017. Conversions are based on the then administered 'spot' value which was Rs 150 to the dollar.
As a result, NEL on 11 January, 2017, increased by 5.42 per cent (Rs 3,883 million) to Rs 75,564 million. A sharp increase in NEL was however blunted due to the retirement of FVMP vis-à-vis CBSL's Treasury (T)-Bill holdings in respect of its OMO by an amount of Rs 7,946 million (3.17 per cent) to Rs 242,370.65 million on 11 January, 2017, over that of the 10 January, 2017 numbers.
As a result, GoSL's MP borrowing costs, vis-à-vis 11 January, 2017 OMO, over that of 11 January, 2017 OMO, declined by 1.04 per cent (Rs 100.52 million) to Rs 9,609.54 million.

Thursday, 12 January, 2017 was a holiday to the market on account of Poya.
'Spot' trades are settled after two market days from the date of transaction. 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 11 January, 2017, making the market to deal in longer tenures devoid of such controls to find the true value of the dollar.

CBSL is the sole issuer of rupees to the market and sometimes prints money, equivalent to its holdings of its FV T-Bill holdings vis-à-vis its OMO to aid GoSL to meet its monetary obligations in the absence of adequate revenue. But MP may cause demand pull inflationary pressure while increasing GoSL's rupee debt liabilities.

Further, CBSL enters into swap arrangements with local banks with the dual purpose of fuelling excess liquidity in the market, while at the same time in a bid to reduce its T-bill holdings.

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