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Sri Lanka's central bank slashes Treasuries holding with profit transfer: Governor
31 Dec, 2012 10:22:17
Dec 31, 2012 (LBO) - Sri Lanka's central bank has cut its Treasury bill holding with a year-end transfer of profits Governor Nivard Cabraal said, in a move that will help avoid any negative effect on inflation, the exchange rate and foreign reserves.
"We knocked off Treasury bills with it (profit transfer)," Cabraal said.

A cash transfer of profits (printed money) to the state, when spent, increases demand in the economy, pressuring inflation and pushing up imports, which in turn triggers a weakening of the exchange rate unless the Central Bank intervenes in the forex market.

Any intervention in forex markets then generates a foreign reserve loss. By off-setting Treasury bills in it stock, with profits due to the Treasury, the potential cycle of negative effects had been avoided altogether.

"We will probably end the year with the neutral credit to government," Cabraal said.

By December 28 the Central Bank's Treasury bill stock was 176 billion rupees around the 167 billion rupee mark at the end of 2011. The Central Bank however also makes provisional advances which have been accumulating over the years.

The Central Bank acquired the 167 billion rupees of bills by sterilizing foreign exchange sales in a balance of payments crisis during the second half of 2011.

Under Sri Lanka's monetary law, a part of the Central Bank profits (seniorage) have to be transferred to the state.

During a balance of payments crisis, when the exchange rate falls, a central bank makes unusually large amounts profits from currency depreciation and returns on domestic assets (T-bills) it acquires as the crisis progresses.

Foreign reserve income usually falls as reserves dwindle. Interest on foreign assets is usually much lower than domestic assets.

But Cabraal said foreign reserve income has been strong this year.

"We have had strong income from foreign reserve management," Cabraal said.

Sri Lanka has also upped it gold holdings in recent years and is among the most active traders in gold among global central banks. In 2011 the Central Bank made profits of 46 billion rupees.

Cabraal said nominal profits made on currency depreciation are not transferred to the Treasury under Sri Lanka's monetary law but held in reserve.

When the exchange rate appreciates, Central Bank profits can decline.

In 2010 the Central Bank made profits of only 11.7 billion rupees in when it 'lost' 8.5 billion rupees on rupee appreciation.

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