The benchmark administered ‘spot’ was ipso facto unchanged at Rs199.75/200.25 to the dollar in two way quotes for the 25th consecutive market day to yesterday in the interbank foreign exchange (FX) market with no trades done, led by moral suasion. Yesterday was also the 37th consecutive market day than no trades were executed in the interbank FX market.
Shades of 1970-77
An administratively created ‘dead’ FX market for the sake of artificially inflating the value of the rupee vis-à-vis the dollar, however, impinges on the stability of dollar starved smaller banks and also leads to a scenario of shortages, queues, corruption and a black market, reminiscent to that which beset the economy during the period 1970-1977.
Nonetheless, the unsaid market exchange rate (MER) has theoretically depreciated by between Rs 12.25-11.75 (6.53- 6.23 per cent) in two way quotes in the calendar year to yesterday and year on year by between Rs13.15-13.55 (7.05-7.26 per cent), thereby causing cost-push inflationary pressure in the event trades were executed even at those administered prices as Sri Lanka is an import dependent economy.
GoSL’s money printing borrowing costs (MPBCs) sharply decreased for the second consecutive market day to yesterday, this time by 0.56 per cent (Rs 125.3million) to Rs 22,303.35million led by sustained uncertainty with the market preferring to invest in low cost, riskless Treasury T-Bills and T-Bonds rather than lend to the lucrative private sector, the engine of growth.
Liquidity decreased by Rs1,429million (US $7.15million) led by the settlement/s ofGoSL’s foreign debt servicing commitments and/or Central Bank of Sri Lanka’s (CBSL’s) swaps with the market and/or CBSL’s US dollar sales to and/or swaps with GoSL during yesterday’s trading. Net excess liquidity increased by 2.85 per cent (Rs 2,490million) to Rs 89,781million at the end of yesterday’s trading. As at 4:00 p.m. on 31 December 2020, the MER, which, up to one week’s forwards, was trading in a superimposed fashion at Rs187.50/188.50 to the dollar in two way quotes because of CBSL’s/GoSL’s moral suasion. On Friday, 22 June 2020, the MER which then was the ‘spot,’ was trading at Rs186.60/70 to the dollar in two way quotes. Transactions between GoSL and CBSL are foreign reserves neutral.
Conversions are based on CBSL’s administered ‘spot’ on Friday which was Rs 199.83 to the dollar. ‘Spot’ trades are settled after two market days from the date of transaction, CBSL deal in ‘spot.’ CBSL is the steward of GoSL debt and its foreign reserves.GoSL’s Investments in T-Bills and T-Bonds are risk free, because in the event GoSL is unable to repay such debt, CBSL is mandated to print demand-pull inflationary money and repay such creditors.
CBSL is the mandated body to print rupees. MPBCs are prorated to secondary market trading in T-Bills and T-Bonds. CBSL lacks transparency in its daily ‘open market operations’ statements.