Banks Continue to Prefer Treasuries Over Pvt. Sector Lending

Secondary market buying pressure of Treasury (T)-Bonds and T-Bills continued for the third consecutive market day to today led by banks due to perennial uncertainty saw Government of Sri Lanka’s (GoSL’s) direct money printing borrowing costs (MPBCs) sharply decrease for the third consecutive market day, this time by 3.24 per cent (Rs 1,902.49 million) to Rs 56,759.08 million. However, sustained investor appetite for T-Bills and T-Bonds is at the expense of denying lending to the private sector, the engine of growth.

But in the obverse, the country’s foreign reserves were uplift by USD 77.56 million (Rs 22,671 million) today (Wednesday 7 June), led by the settlement of net foreign inflows due to the receipt of remittances and tourism inflows. Conversions are based on Monday’s (5 June) administered ‘spot’ value which was Rs 292.31 to the US dollar.

In other positive developments, market’s net shortfall sharply decreased by 5.48 per cent (Rs 12,024 million) to Rs 207,276 million to today, while GoSL’s face value (FV) MP debt fell by 0.38 per cent (Rs 10,647 million) to Rs 2,810,823.12 million (Rs 2.8108 trillion), thereby partially deflating demand-pull inflationary pressure.

MP, coupled with being the steward of the country’s foreign reserves and of its debt is the exclusive prerogative of the CBSL. GoSL’s FVMP debt is equivalent to the totality of CBSL’s T-Bill and T-Bond holdings. Swap settlements between the GoSL and Central Bank of Sri Lanka (CBSL) are foreign reserves neutral. CBSL’s daily open market operations (OMO) statistics from where the above figures are extrapolated; lacks transparency.

GoSL’s MPBCs are prorated to the outcome in secondary market trading of T-Bills and T-Bonds on the reference day. ‘Spot’ trades are settled after two market days from the date of transaction. CBSL, the steward of GoSL debt and its foreign reserves deals in ‘spot.’ The ‘spot’ is administered to minimize GoSL’s foreign debt repayments and foreign debt as a whole in rupee terms. Issuing of T-Bills and T-Bonds is a popular way GoSL raises money domestically to meet its local commitments. Investing in T Bills and T-Bonds is generally considered as being riskless, because, in the event GoSL is unable to repay such debt, CBSL is normally mandated to print demand pull inflationary money and repay such creditors.