Sri Lanka central bank domestic assets fall

Aug 25, 2009 (LBO) – Treasury bills, a key domestic asset component at Sri Lanka’s central bank, plummeted following an unusual deal with a US fund manager which effectively swapped them for hard currency. According to official data released Monday the Central Bank’s Treasury bills stock which represented money printed for the government during a balance of payments crisis, fell to 75 billion rupees from 131 billion Friday or a fall of about 490 million US dollars.

Sri Lanka central bank Governor Nivard Cabraal said last week that the country was issuing 4 to 6 year government bonds to a US fund manager converting bills in the monetary authority’s balance sheet.

He said the fund manager brought in about 875 million US dollars to the country.

The unusual deal effectively swaps a domestic asset (T-bills) to a foreign asset (a dollar inflow which will be re-invested in dollar assets) to cover the country’s monetary base.

Sri Lanka’s monetary base is about 270 billion rupees.

Sri Lanka’s central bank also has provisional advances (a form of direct monetizing of the government deficit or printing money) which are outstanding from the government.

In a pegged exchange rate environment such financing causes high inflation or exchange rate pressure.

The Central Bank said following the deal, its gross official reserves would top three billion US dollars, indicating that foreign reserve cover would overtake the monetary base. The rupee is now pegged at around 114.80 to the US dollar.

Sri Lanka also has a 2.6 billion US dollar standby loan with the International Monetary Fund. A first tranche of 322 million US dollars has already been disbursed.