Swaps Drain Liquidity By Rs 163.16 Billion

Led by swap settlements between the Government of Sri Lanka (GoSL) and Central Bank of Sri Lanka (CBSL), that saw a liquidity drain of Rs 163,164.54 million (USD 549.95 million) during today’s trading. Conversions are based on Tuesday’s administered ‘spot’ value which was Rs 296.69 to the US dollar. Swaps between the GoSL and CBSL are foreign reserves neutral. Subsequently, market’s net shortfall sharply increased for the second consecutive market day to today, this time by 39.15 per cent (Rs 68,891 million) to Rs 244,854 million.

GoSL’s and CBSL’s efforts to boost private sector credit growth by reducing policy rates by 250 basis points (bps) today, didn’t work, with, investors continuing to seek refuge in yet, high yielding Treasury (T) Bills and T-Bonds in secondary market trading due to sustained uncertainty, resulting in the GoSL’s direct money printing borrowing costs (MPBCs) sharply falling for the fourth consecutive market day, this time by 2.57 per cent (Rs 2,845.15 million) to Rs 65,739.55 million. Investor appetite for T-Bills and T-Bonds is at the expense of denying lending to the private sector, the engine of growth.

Meanwhile, GoSL’s non-demand-pull inflationary money increased by Rs 94,273.54 million on Thursday due to GoSL’s almost perennial lack of revenue to meet its monetary needs. Consequently GoSL’s total face value money printing (FVMP) debt increased for the fourth consecutive market day to today, this time by 3.32 per cent to Rs 2,938,055.21 million (Rs 2.9381 trillion).

CBSL’s open market operations (OMO) statistics from where the above figures are extrapolated; lacks transparency. 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.

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.