Sri Lanka monetary authority in offbeat IMF-style deal with US fund

Aug 22, 2009 (LBO) – Sri Lanka’s Central Bank has acquired 875 million US dollars from a large US fund in an offbeat deal effectively by-passing the domestic money system that boosts forex reserves without creating domestic inflationary or exchange rate pressure. But the by-pass also meant that the money is not available for Sri Lanka’s cash-strapped finance ministry which has posted record deficits in the current account of the national budget never seen in the island’s history.

From September 2008 to April 2009 Sri Lanka’s central bank bought more than 200 billion rupees worth Treasury bills to pump new money into the monetary system to offset a capital flight, triggering a balance of payments crisis in the process.

“The money has already been used,” said Central Bank governor Nivard Cabraal.

“What will happen is that our Treasury bill portfolio will reduce and longer term bonds will be issued to the investor.”

IMF style deal

Following a float of the rupee in March which ended the balance of payments crisis the Central Bank has steadily sold down its Treasury bill stock, to ‘sterilize’ or withdraw rupees generated from forex purchases.

The bill stock which peaked at over 220 billion rupees in April has since come down to