Swaps boost liquidity by over 1,000%

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By 2018-01-22

By Paneetha Ameresekere

Net excess rupee liquidity, Friday (19 January) over Thursday was uplifted by 1,007.07 per cent (Rs 19,235 million) to Rs 21,145 million boosted by net foreign inflows (NFIs) of Rs 19,723 million (US$ 128.09 million), led by Central Bank of Sri Lanka (CBSL's) swaps with domestic Banks.

Conversions are based on the closing value of the middle rate of the benchmark 'spot' as at Wednesday (17 January) which was Rs 153.975 to the dollar.To mitigate inflationary pressure, CBSL retired Rs 488 million worth of its face value (FV) Treasury (T) Bill holdings ( FV money printing (MP)), thereby bringing down its FVMP holdings by 1.56 per cent to Rs 30,837.87 million by the weekend.However, also due to the weekend (Friday), where interest costs are calculated for three days as opposed to one on weekdays, Government of Sri Lanka's (GoSL's) FVMP borrowing costs (BCs) increased by two per cent (Rs 9.63 million) to Rs 491.21 million. Meanwhile, GoSL raised US$ 470.57 million last week by issuing Sri Lanka Development Bonds (SLDBs), which settlement takes place on Monday, 22 January.

$181.14M haemorrhage
A year ago on 19 January, 2017, the country's foreign reserves were poorer by
$ 181.14 million (Rs 27,198.01 million) due to GoSL's foreign debt servicing commitments and/or CBSL's swap settlements with domestic banks. Conversions are based on the then administered, but benchmark 'spot' which was Rs 150.15 to the dollar.Further, to meet GoSL's foreign debt servicing commitments, CBSL printed and lent to GoSL money of FV Rs 22,601.01 million, thereby increasing GoSL's FVMP liabilities by 11 per cent to Rs 228,050.31 million by 19 January, 2017.

As a result, GoSL's FV MPBCs, 19 January, 2017 over 18 January, 2017 increased by a massive Rs 3,808.32 million (42.16 per cent) to Rs 228,050.31 million, while net excess liquidity in the review
period declined by Rs 4,597 million (4.77 per cent) to Rs 91,854 million, led by GoSL's foreign debt servicing obligations.'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 issuing SLDBs and such like. Nonetheless, more often than not, such costs are met from CBSL's foreign reserves after buying the required greenbacks by paying CBSL its 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 19 January, 2017.The interbank FX market is avoided to meet GoSL's foreign debt servicing commitments for fear that that would cause further depreciative pressure on the rupee as Sri Lanka is an import dependent economy.

However, nowadays, the rupee is allowed to free float.
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 pull inflationary pressure while increasing GoSL's debt liabilities.

CBSL enters into swap arrangements with domestic banks to provide rupee liquidity to the market. However, CBSL/GoSL, under a recent agreement with the IMF, has given an undertaking to downsize its swap holdings.

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