Nov 02, 2008 (LBO) – Sri Lanka central bank’s Treasury bills stock rose to 77 billion rupees two days after the monetary authority broke a peg with the US dollar but failed to establish a clean float of the currency, the latest data shows. On Thursday a peg at 108.00 rupees to the US dollar was broken and the rupee floated briefly after 4.00 pm that day with trades at 111.35 rupees to the greenback, after a state bank that usually acts for the central bank withdrew from the market.
But the float was killed by authorities Friday morning with intervention resuming at a much lower 110.00 rupees, effectively establishing a new peg.
On Friday the central bank’s Treasury bill stock, which is an indicator of the amount of money that is printed to make up for foreign reserve losses, rose to 77.5 billion, from 68.1 billion two days earlier, showing a loss of more than 100 million US dollars over the two days, the latest data showed.
Central Bank then cut overnight dollar positions of banks, restricted forward trades and slapped new trade controls last imposed during the balance of payments crisis in 2000/2001.
Exporters were also hit with a 1000 basis point penal interest rate on packing credit that is not settled for over three months and 200 basis points for every 30 days thereafter.
Importers will now also have to keep a 200 percent deposit when opening a letter of credit to cars, and a 100 percent margin on most imports ranging from electronic goods to confectionery.
But the pressure on the currency comes from the liquidity injections or money printed to make up from lost reserves, and a float of the rupee is needed to break the cycle of intervention and money printing.
Over the last two weeks the central bank has pumped 20 billion rupees daily to the market through its 12.0 percent discount window further de-stabilizing the rupee.
Analysts say the central bank should close the window immediately and start giving money at Sri Lanka Interbank Offered Rate (SLIBOR) plus 1.0 percent as is done in Singapore.
A week ago the Central Bank said its foreign reserves were down to 2.6 billion dollars, enough to barely cover two and a half months of imports.
The International Monetary Fund also urged Sri Lanka not to keep a ‘de facto peg’ with the US dollar and move towards comprehensive reforms starting with the budget.
In 2000/2001 Sri Lanka was brought back from the brink of total collapse with the help of an IMF-backed reform package but it was jettisoned under pressure from the Marxist Janatha Vimukthi Peramuna and the country returned to deficit spending and money printing in 2004.
The country spurned ‘conditional’ cheap multilateral loans for budgetary support, which are known as program loans, and heavily criticized the World Bank and IMF.
Sri Lanka then went into expensive foreign commercial debt ostensibly for ‘infrastructure’ whose only ‘conditions’ were high interest and the right to withdraw their money when the going got tough.
So far at least 200 million dollars of a total estimated 600 million dollars, that came to buy rupee government securities have left the country.
Meanwhile, a sovereign dollar bond which was issued at 8.25 percent is now trading 22.0 percent or higher, dealers said.
Foreigners are also offering rupee securities for sale at rates of 20.50 and 21.50 in the market, dealers said.
IMF estimated Sri Lanka’s commercial dollar debt to be 3.5 billion dollars, which is much higher than the remaining foreign reserves.
The lender said “comprehensive” economic reforms were needed and “front-loaded” corrections to the budget. The budget is due on November 06.
In 2004 Sri Lanka also scrapped a fuel pricing formula under a process called ‘removing the plug; and re-politicized fuel pricing. The formula was originally devised by policymakers during the 2000/2001 economic crisis.
The state run Ceylon Petroleum Corporation is now saddled with around 500 million dollars of short term debt to Iran and an un-quantified volume of hedging contracts that went against it.
It was forced to hedge to avoid losses caused by politicians who kept fuel prices low to buy votes.
Another retailer, a unit of India’s IOC also followed as it would have been heavily exposed when CPC held down prices if the hedging contracts went in its favour.