Accumulating loss to public on T bill issuances - Let us investigate.

My article issued to this blog presented how a loss of at least Rs. 5 bn to the public occurred on the T bill auction held on 31 May 2023 https://www.blogger.com/blog/post/edit/1750758681943837098/3764734156067582644. The reason is the implunged decision of the T bill Tender Board not reducing the auction yield rates in line with the policy rate cut of 2.5% by the Monetary Board awaited in the afternoon.

This article shows how the loss to the public accumulates from subsequent auctions due to the above error in policy decision.  

How the loss is accumulating

As T bill yield rates at the auction held on 31 May 2023 were not reduced at least by 2.5% parallel to the policy rate cut, the loss to the public by way of higher yields (or discounts) paid on T bills issued at each auction from 31 May 2023 is accumulating because effects of the policy rate cut transmit to T bill yield rates at several subsequent auctions. Accordingly, the accumulating loss is as follows. Relevant CB press releases are presented at the end of the article.

• The loss on the auction held on 31 May 2023

The loss is 2.44%, 3.39% and 3.81% across the three maturities on the auctioned amount of Rs.160 bn and private placement of Rs. 40 bn. This is the reduction in yield rates at the auction held on 7 June 2023 being the first auction after the policy rate cut on 31 May 2023. In fact, this reduction would have been effected at the auction held on 31 May 2023 itself as the Governor and four Tender Board members (out of 7) had the prior knowledge of the policy rate cut well in advance.

• The loss on the auction held on 7 June 2023

The loss is 0.05%, 1.29 and 1.03% across the three maturities on the auctioned amount of Rs. 140 bn and private placement of Rs. 35 bn. This is the reduction in yield rates at the auction held on 14 June 2023. This reduction would have been realized at the auction held on 7 June 2023 if the yields had been reduced first at the auction held on 31 May 2023 as presented above.

• The loss on the auction held on 14 June 2023

The loss is 0.16%, 1.12% and 1.09% on the auctioned amount of Rs.180 bn and private placement of Rs. 45 bn. This is the reduction in yield rates at the auction held on 21 June 2023. This reduction would have been realized at the auction held on 14 June 2023 if the yields had been reduced first at the auction held on 31 May 2023.

Concluding Remarks

• Likewise, the loss would be accumulating further as long as the transmission of the policy rate cut of 2.50% effected on 31 May 2023 takes place on the future auctions. This is how impugned decisions of the state regulatory authorities affect the public. The non-use of information on prevailing circumstances in regulatory decisions in a transparent and accountable manner is a serious policy governance issue that should be investigated by the law enforcement authorities in the context of the loss to the public funds, especially at the current status of the state bankruptcy.

• The loss would be much higher as T bill yields on bids accepted at auctions and post-auction private placements are much higher than the secondary market yields while ample funding and liquidity were available for subscription to T bill issuances.

• Holding yield rates almost unchanged by the T bill Tender Board at the auction held on 31 May 2023 could be due to an insider act to facilitate bond dealers expecting a significant reduction in the yield rates from the next day due to the policy rate cut. Significant policy rate cuts were speculated from recent CB's economic comments and the last IMF staff visit's press briefing held on 16 May 2023.

• Foreign investments also saw a speculative inflow based on the continuing reduction in yield rates and significant appreciation of the Rupee. Insider facilitation to foreign investments given the chronic shortage of the country's foreign currency position could also be a possibility.

• However, policy rates and T bill yield rates are the monetary policy rates that are regulated to drive credit and financial markets and, therefore, they should be used for long-term macroeconomic stabilization purposes, given the inactive Treasury bond market and thereby the yield curve, pending bond restructuring.

• The acceptance of post-auction private placements at weighted average auction yield rates after raising the total funding requirement announced from the auction bids is a serious governance issue in T bill issuances.

• The huge concentration risk in funding the government on a weekly basis through T bill issuances is a grave systemic risk to the financial system and macroeconomy.

Auction held on 31 May 2023

Private Placement

Next Auction held on 7 June 2023

Private Placement

Next Auction held on 14 June 2023

Private Placement

Next Auction held on 21 June 2023

Private Placement

(The loss from this auction should be identified from the results of the next auction.)

(This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures.)

P Samarasiri

Former Deputy Governor, Central Bank of Sri Lanka

(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 10 Economics and Banking Books and a large number of articles published. 

The author holds BA Hons in Economics from University of Colombo, MA in Economics from University of Kansas, USA, and international training exposures in economic management and financial system regulation)