Dec 26, 2007 (LBO) – Sri Lanka’s 3-month treasury bill yield soared 116 basis points to 21.30 percent amid a year-end cash crunch as the Central Bank refrained from printing money to intervene in the bill auction Wednesday. During the past four weeks, 3-month yields have shot up 523 basis points, 6-month 220 basis points and 12-month yields 189 basis points.
The government’s debt office, which is a unit of the Central Bank, said it raised 6,421 million in 3-month money and 512 million in 6-month money and retired 7,000 million in maturing bids.
The 6-month yield remained the same as last week at 19.99 percent, while all bids for 12-month bills were rejected. Last week the average 12-month yield was 19.96 percent.
The cut off – the highest rate at which bills are accepted – is estimated to be 22.00 percent for 3-month bills and 20.20 percent for 6-month bills.
The central bank has tended to issue bills on tap in between auctions during the past few weeks to raise money for the government.
The monetary authority is also struggling to meet a quarterly reserve money target and has been more willing to let rates go up, though the quantity targeting framework has now largely become an academic exercise amidst raging 20 percent inflation.
Last week reserve money was slightly above the year end target of 267.6 billion rupees at 270.4 bullion rupees.
However critics say reserve money targeting has now become an academic exercise, though central bank’s tighter stance may help control future inflation.
Sri Lanka’s inflation shot up in the last two quarters as the Central Bank printed 45.2 billion rupees to finance a hole in the budget sending country-wide inflation careening to 24.1 percent by October and inflation in the capital to 19.6 percent.
Rates were at these levels last during the 1999/2001 economic crisis when a record fiscal deficit and an intensifying conflict drove the country into one of the worst balance of payments crises in its history, which was followed by a recession.
However inflation was lower than current levels as monetary and fiscal policy was swiftly tightened under an IMF emergency adjustment program.
Analysts point out that to compare the yields with the last big economic crisis, about another 200 basis points has to be added as the rate are now quoted net of a 10 percent withholding tax.
Critics have pointed out that Sri Lanka has got into a series of economic crises and chronic high inflation and balance of payments crises since the creation of a central bank with money printing powers in 1951.
To stabilize the economy and protect the poor, increasingly calls are being made to start inflation targeting in Sri Lanka with full independence for the Central Bank or its abolition and a return to a currency board regime. .