Sri Lanka to keep limit on foreign owned rupee debt for now

Feb 24, 2010 (LBO) – Sri Lanka will hold a 10 percent limit of foreign holdings of rupee Treasuries for the time being, Central Bank Governor Nivard Cabraal said, despite a widening fiscal deficit putting pressure on financial markets. Foreign investors were allowed to buy into bonds to the tune of about 30 million US dollars in February, according the debt market participants, but Cabraal said there were no immediate plans to raise the existing limit of 10 percent.

“In the last two bond auctions foreign investors were given some bonds,” Cabraal said.

“There is a little leeway of about 1.5 percent so we said to take in a little to about 9.5 percent.”

Sri Lanka’s rupee hit the upper band of a peg around 114.70 rupees to the US dollar in the spot market earlier in the month until some money came into the market through government bonds.

Over the past four months the Central Bank has monetized about 43 billion rupees worth of debt, which has resulted in about 200 million US dollars of foreign reserve losses by December.

Sri Lanka has a peg to the US dollar and any monetization of debt increases the nominal incomes of economic agents triggering imports and reserve losses or inflation.

The central bank sold the entire maturing Treasury bills volume of 12.5 billion rupees to real buyers at this Wednesday’s auction.

Officials are hoping that the current pressure on the monetary system will ease after April when parliamentary elections are due.