ECONOMYNEXT – Sri Lanka’s central bank bought 45.9 billion rupees in treasury bills on Friday, bringing its total stock of treasury bills to 1,330.3 billion rupees, official data showed, as reserve losses of foreign exchange continues amid non-market interest rates.
Soft-pegged central banks lose foreign exchange reserves when liquidity is injected to maintain a rigid interest rate structure, as convertibility is provided to the new national currency, triggering imports after cascading credit.
The anchor breaks as soon as convertibility is suspended by the soft-peg or “flexible exchange rate” central bank running out of reserves, more money is printed.
In Sri Lanka, de facto reserve credits are also made against the direct acquisition of treasury bills to meet the external repayments of the state without a change in liquidity (reserve transfer) in back-to-back transactions.
In heavily mercantilist countries, it is the peg of the exchange rate (providing convertibility) rather than liquidity injections that are responsible for the eventual collapse of the currency or suspension of convertibility.
Parliamentary approval is not sought to suspend convertibility (break the peg) and effectively fail holders of zero coupon paper or rupee notes from the bank.
In Sri Lanka, most of the money in 2021 was printed to apply a series of rigid interest rates on government securities that discouraged investment in government securities and would finance a budget deficit without crowding out consumption and investment. private sector to balance the external sector.
The biggest item in the budget are state salaries, which have been increased as part of “income-based fiscal consolidation”, a somewhat naive and unusually extreme “anti-austerity” attempt to close a deficit. by increasing the burden of the state on the private sector.
As a result of “revenue-based fiscal consolidation,” government spending as a percentage of gross domestic product has increased from 17 percent to almost 20 percent. Today, taxes have been reduced, compounding the impact of “income-based fiscal consolidation”.
Analysts say that when new rupees issued against treasury bills are in fact checks issued by the central bank with no dollars in its reserves, they “bounce back”.
“A suspension of convertibility is like a stop payment order,” explains EN Bellwether’s business columnist. “It makes the reserve money non-convertible.”
The central bank last week abolished price controls on treasury bill auctions, providing an opportunity for the private sector, which is a net saver who typically finances the deficit, to buy bonds and redirect money. savings to the budget using existing money.
However, it also requires interest rates to rise and find a level.
Analysts had warned that with the depletion of reserves, the central bank was on the way to declaring very large quasi-fiscal losses. (Colombo / Sept20 / 2021)