Sri Lanka CB says efforts to reverse trend of more dollar debt

ECONOMYNEXT – Sri Lanka’s central bank is aware that its net foreign assets are negative and is working to turn the situation around, officials said, as the banknote-issuing bank has grown more indebted with cash. money printed to keep rates low or pay civil servants’ salaries.

In August, the central bank’s foreign-denominated debt exceeded its assets by around US $ 400 million, as money was printed to keep rates low and push currency outflows above inflows.

“Net foreign assets may be slightly lower than what you would expect or wish it had been,” Central Bank Governor Nivard Cabraal told reporters earlier this month.

“But at the same time, it’s not just a cutoff point that we should be looking at. We have made it clear throughout. “

The central bank still had gross reserves and an unused swap, with which payments can be made.

“Even after that, we still have about $ 2.6 billion in cash and an additional $ 1.5 billion in exchange that we have with the People’s Bank of China. Totaling up to approximately US $ 4.1 billion.

“Now that would mean we would have to constantly think about this dynamic process where there is, funds coming in, funds going out and you have to manage that. Now, if you look at the roadmap, which we released on October 1, we take all of these situations into consideration.

Governor Cabraal had authorized market rates to rise, to limit the printing of money and reduce currency losses in the process of maintaining a peg at 203 against the US dollar.

However, last week the debt office invoked a so-called Phase II measure to undermine bond auctions, raising fears that the rate obsession that has plagued the country in trouble is still present at the institutional level.

The so-called Stage II and Stage III were part of a series of tools of financial repression deployed during the ousted Yahapalana administration and helped to break the anchor, discrediting its economic agenda and its ultimate ouster according to critics.

The Phase II rule has been invoked for bonds without a credible interest rate set for 6- or 12-month bills, raising concerns about the agency’s ability to restore market confidence. market in government bonds, which were shattered by price controls and liquidity injections.

The central bank and the government lined up a series of dollar inflows to help repay maturing debt.

Such inflows could help keep rates lower than if the current inflows were used to pay off the debt.

Any influx of foreigners into the central bank – other than buying in the market – will not help solve the problem of rising dollar liabilities.

“This is not the first time that foreign assets have depreciated. This had happened on several occasions and there were times when it continued to have negative balances, ”added Deputy Governor Mahinda Siriwardene, without naming the specific case where NFA went negative.

“And it’s temporary. Now we are working to bring foreign currency into the country.

“As the governor said, with just one transaction, the situation can change. No need to worry as this is a temporary situation. CBSL is working on it.

To build up net foreign assets, domestic assets must be sold for cash generated by foreign assets within the rupee credit system, which cannot be done effectively without restoring the credibility of the anchor.

Right now, any net sale of domestic assets through successful bond sales is again sterilized by overnight injections.

The central bank also engages in repo operations by sucking liquidity from certain banks and effectively re-sterilizing it in the day-to-day market by injecting money into other banks at 6.00%.

The central bank has tightened the redemption requirement on exports, which may generate dollars as excess liquidity is no longer in the system, but it could also lead to a drop in reported export inflows within the rupee credit system, analysts warn.

Already a significant part of remittances is cleared outside the rupee credit system, due to the loss of credibility of the anchor. (Colombo / October 31/2021)

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