Sri Lanka's finance ministry runs large overdrafts at state commercial banks and uses foreign loans to pay down the debt, creating excess liquidity in the banking system.
Analysts have warned earlier that such actions had tended to weaken Sri Lanka's rupee peg in the past and also push inflation up as the newly created loans increase credit volumes in the economy.
To keep the exchange rate from depreciating, the Central Bank has to either sell down its newly collected foreign reserves in unsterilized transactions or sell down its Treasury bill stock outright to mop up the liquidity.
The International Monetary Fund has also expressed concern at large liquidity volumes that mushroom in the banking system from unsterilized foreign exchange purchases.
The spot US dollar was quoted at 130.90/131.10 on Thursday, dealers said.
From this article it appears that we have allowed more than 400M USD worth of LKR to be created. Of the 1B USD Bond, this leaves a little over 500M USD = just adequate for the repayment of the maturing sovereign bond along with interest. Splurge, splurge, and get back to the begging bowl! Hey, borrowing IS begging around, however we may justify it, right?
And from 25th to date, the rate has gone back up to 131.86/132.18 level as this is written. Since volume data are not available, we are unable to arrive at the average sell rate; therefore unable to assess how much of a loss the CB will make in LKR terms once the rate moves back up. It will not be peanuts, for sure! More on the earlier comments at http://www.lbo.lk/fullstory.php?nid=915349874
Regarding the effectiveness of CB bond buying, may be this article might shed some light… http://www.zerohedge.com/news/quick-reminder-effectiveness-ecbs-bond-buying Some proposals that merit consideration, though by now it would be too late to act on it are at http://www.lbo.lk/fullstory.php?nid=1957283041.
Let’s get our feet on ground mates…