ECONOMYNEXT – The Treasury bill stock of Sri Lanka’s central bank has reached 1.9 trillion with overnight liquidity injections reaching 451 billion rupees, data shows amid a festival drawdown and continued sterilization of reserve losses.
At the end of November 2021 the estimated Treasury bill stock of the central bank topped 1.8 trillion rupees with 310 million dollars of interventions sterilized by injecting around 60 billion rupees of new money.
The central bank’s disclosed Treasury bill stock (held outright) started to fall after Central Bank Governor Nivard Cabraal lifted price controls on bonds and bill yields, allowing the crippled market to function and the deficit to be financed by private savings instead of printed money.
However the central bank re-injects the same money through its standing deposit facility overnight as forex markets are still dysfunctional and it cannot buy dollars to inject liquidity and re-build forex reserves at current interest rates.
With the the loss of credibility of the Sri Lanka’s rupee peg to the US dollar, the central bank also has to sell dollars to maintain the peg.
However to maintain a 6.0 percent policy rate, each sales of dollars to maintain a 200 to the US dollar peg is also followed by a bout of money printing to stop the monetary base from contracting and rates from going up (a sterilized intervention).
Sterilization of dollar sales steadily drains reserves in a soft-pegged central bank even when the budget deficit is fully financed by bond markets.
Most Latin American countries including those running budget surpluses default due to sterilized interventions, analysts have shown.
Analysts have said that false Mercantilism that it was possible to sterilize outflows and maintain a pegged exchange rate (the impossible trinity so-called) was pspred
The central bank has also imposed a surrender rule, despite the peg being on its weak side, further undermining the peg, analysts have said.
In most East Asian nations and GCC central banks and Singapore, interventions are not sterilized or are partially sterilized allowing short term rates to move up.
Higher interest rates and a float of the currency (a full suspension of convertibility) will also end injections, limiting outflow of dollars to inflows.
In December however there is also a higher demand for cash and the central bank generally injects some liquidity. The rest usually comes from enhanced exporter dollar sales to pay advances to workers and year end extra remmittances send by overseas wokers.
The central bank also stopped its repo auctions releasing liquidity in late December.
The central bank also injected 100 billion rupees for two months at 7.2 percent on December 24, rolling over an earlier 103.5 billion rupees injection.
Compared to earlier so-called modern monetary theory when excess liquidity was maintained, monetary policy is broadly tighter, though not enough to stop sterilized forex sales.
Sri Lanka overnight injections top Rs400bn amid sterilized interventions
Sterilized interventions to maintain a policy rate when the peg is under pressure (sterilized dollars sales) is the key tool through which Latin America central banks destroy currencies and end up in debt default even when budgets are in surplus.
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