CBSL prints Rs 582 M Reserves suffer US$ 105.06 M drain

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By 2018-02-13

By Paneetha Ameresekere

The Central Bank printed Rs 582 million and paid out US$ 105.06 million (16,221.97 million) from its foreign reserves yesterday (12), interpretation of official data showed.

The Central Bank prints money and lends to the Government of Sri Lanka (GoSL) to help the latter to meet its monetary commitments in the absence of adequate revenue. Yesterday's depletion of foreign reserves was led by the Central Bank settling some of its short-term swap commitments with domestic banks.

The GoSL and the Central Bank recently gave......a commitment to the International Monetary Fund to downsize their short term swap commitments with domestic banks. Conversions are based on the closing price of the middle rate of Thursday's (8) 'spot' value which was Rs 154.40 to the dollar. The Central Bank deals in 'spot,' the settlements of which take place after two market days from the date of transaction.

As a result of these actions, Net Excess Liquidity (NEL) fell by Rs 15,639.97 million (73.07 per cent) to Rs 5,765.03 million yesterday. Due to money printing (MP), the GoSL's MP commitments increased by 11.23 per cent to Rs 5,765.03 million yesterday, thereby, creating inflationary pressure.

Meanwhile, the GoSL's MP Borrowing Costs (BCs) registered a figure of Rs 256.26 million yesterday.

In a similar operation, a year ago on Thursday, 9 February 2017, the country's foreign reserves were drained by an amount of US$ 200.72 million (Rs 30,258.38 million), interpretation of the then open market operations data showed. Friday, 10 February 2017 was a Poya holiday for the markets.

This haemorrhage was due to a combination of foreign exits from the Government Securities Market (GSM) and/or the GoSL's foreign debt servicing commitments and the CBSL's swap settlements with domestic banks.

In the week ended Wednesday 15 February 2017, the GSM suffered a Net Foreign outflow (NFO) of US$ 117.46 million (Rs 17,707.18 million). Conversions are based on the then administered 'spot' which was Rs 150.75 to the dollar. However, currently, the 'spot' operates in a liberalized environment.

Also, to aid the GoSL in its monetary commitments in the absence of adequate revenue, the CBSL printed Rs 13,502.38 million, thereby increasing its Face Value (FV) MP liabilities by 6.11 per cent to Rs 234,612.45 million on 9 February 2017.

Due to the aforesaid drawdown in foreign reserves, the NEL on 9 February 2017 over 8 February 2017, fell by Rs 16,756 million (65.03 per cent) to Rs 9,010 million. Meanwhile, due to MP, the GoSL's MPBCs increased by Rs 61.54 million (0.79 per cent) to Rs 7,881.28 million on 9 February 2017.

Also, a year ago, on 9 February 2017, the Central Bank's FVMP holdings registered a figure of Rs 234,612.45 million.

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 way of a syndicated loan or by a sovereign bond or by a similar vehicle. Nonetheless, more often than not, such costs are met from the Central Bank's foreign reserves after buying the required greenbacks by paying the Central Bank its rupee value in 'spot' equivalents. Therefore, a weak 'spot' will only inflate the GoSL's rupee debt stock. To prevent such a scenario, the GoSL exerts moral suasion on the 'spot,' like what happened on 9 February 2017.

The interbank foreign exchange market is avoided to meet the GoSL's foreign debt servicing commitments for fear that such would cause depreciative pressure on the rupee.

Further, in an administered 'spot' environment, where, however, the market is allowed the liberty to deal in other tenures to find the true value of the dollar, nonetheless, with regard to foreign transactions in the GSM, such transactions are also dealt in 'spot,' as per the arrangement, when the GoSL/Central Bank, for the first time, partially opened the GSM for foreign investments in 2006.

Otherwise, such foreign investors would not have come to the market. Therefore, in a controlled 'spot' environment, the required dollars to feed foreign exits from the GSM too, are also bought from the country's/the Central Bank's foreign reserves after paying for them in 'spot,' resulting in the depletion of the country's foreign reserves as well as rupee liquidity from the market.
The CBSL is the sole issuer of rupees to the market and sometimes prints money equivalent to the direct holdings of its FV Treasury Bill holdings to aid the GoSL to meet its monetary obligations in the absence of adequate revenue. Activities such as those are referred to as MP. But MP may cause demand-pull inflationary pressure, while increasing the GoSL's rupee debt liabilities.

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