Sri Lanka credit crunch drives rates up, foreign names sell bonds

August 21, 2007 (LBO) – Sri Lanka’s Central Bank eased access to its discount window with overnight rupee rates hitting 40 percent, while the spot dollar hit an intra-day high of 112.10 rupees Tuesday, dealers said. Interbank money markets are facing liquidity shortages stemming from an outflow of foreign exchange.

The monetary authority has been trying to hold the rupee up with moral suasion and heavy intervention through state banks.

However analysts have warned that the intervention in the forex market and sterilization of the ensuing liquidity shortage will add demand to the economy, increasing pressure on the currency.

Such practices have been blamed for collapses of currency pegs in other countries.

Meanwhile some rupee-denominated treasury bonds held by foreign investors were also sold, adding to the cash crunch.

Around 250 million rupees worth bonds maturing in 2012 were sold by foreign names at around 16.75 percent levels, dealers said. Meanwhile 2009 bonds trade around 17.30 percent.

Foreign bond holders had been getting restive since the turmoil in international markets. Many foreign investment funds had been cutting positions in the riskier end of the market in a flight to quality.

Sri Lanka is also trying to raise 500 million dollars in foreign markets, but the current turmoil has made conditions tougher than a month ago, when the process started, dealers said.