Sri Lanka interest rates up on heavy government borrowing

June 13, 2007 (LBO) – Sri Lanka’s 3-month risk free yields gained 15 basis points at the latest treasuries auction, while a ministerial decision to fix electricity and fuel prices announced this week threatens to send rates higher. . The average bids accepted for the 3-month bill rose to 17.09 percent, while 6-month bills edged up 15 basis points to 16.84 percent and 12-month bills, also a widely watched benchmark rate, moved up 15 basis points to 16.75 percent, the government debt office said.

The highest rates at which bids were accepted by the government for the 3-month maturity, the cut-off, has topped 17.30 percent, dealers said.

Tight Money

Sri Lanka’s central bank no longer operates a policy rate environment and open market operations have largely been limited to sterilizing excess liquidity as it is now pursuing a tight monetary targeting framework.

The bank has been limiting its interventions in Treasury bill auction, the principal mechanism for printing money to finance the budget deficit, since the beginning of the year, with inflation falling sharply.

However fiscal policy has not been complementary, leading to high interest rates.

This year’s budget deficit is projected at 9.2 per