Oct 29, 2010 (LBO) – Sri Lanka has settled high cost overdrafts from commercial banks and central bank credit taken to bridge the budget deficit with proceeds of a Euro bond which had contributed to excess reserves in the banking system, officials said. Record excess liquidity in the banking system which topped 80 billion rupees or over 20 percent of the country’s 350 billion rupee monetary base came from external inflows.
“It is mainly coming from the foreign exchange coming to the country which the central bank has taken in and then given rupees,” Central Bank Governor Nivard Cabraal said.
“We believe it is necessary to manage that liquidity and reduce that liquidity.”
Deputy Governor Dharma Dheerasinghe said a billion rupee Euro bond sale had yielded about a 114 billion rupees for the government which had been used mostly to settle domestic short term liabilities.
The bond was sold at 6.25 percent, and local borrowing rates are close to or higher than double digits.
“We retired the central bank holdings of Treasury Bills,” Dheerasinghe said.
“We retired the high cost short term domestic debt. We also paid in the entire Bank of Ceylon and People’s Bank overdrafts taken by the government.”