Economy Forward

At the first auction held on 12 July after the second policy rate cut of 2% on 5 July, the CB raised T bill yield rates by about 1%. This is a contradiction to the monetary policy easing cycle that commenced on 31 May. However, only Rs. 99.7 bn out of Rs. 160 bn sought was raised from the auction. This article shows how T bill rates increase continued on the next auction too, raising public concerns over the CB's present interest rates policy and resulting cost to public funds that suffer bankruptcy due to the CB mismanagement of national debt stock. 19 July T bill auction The CB at the auction held on 19 July also raised T bill rates by 0.31%-0.91%. At such higher rates, Rs. 75.5 bn against the funding requirement of Rs. 160 bn was raised (see CB's press releases below). As a result, the cumulative increase in T bill rates at the last two auctions is about 1.5%. This an undisputed loss to public funds as against significant monetary easing cycle on the table with the advice of...

  This article sheds some light on the monetary myth of inflation control power of the monetary policy pursued at present in Sri Lanka and how it helps business of government and money dealers. The present CB Governor blames the previous regime for historically high inflation in 2022 as a result of printing of Rs. 250 bn for refinance credit by following modern monetary theory and home grown economic model. However, he also has been effectively pursuing same modern monetary theory, but with a foreign grown economic model prescribed by the IMF. This article shows that the monetary policy model presently pursued in Sri Lanka has got no inflation control power in the real economy. Instead, the CB uses it for monetary financing of the government and money dealers without any trace over its impact on prices. However, the CB like a parrot talks on price stability and control of inflation at mid-single digit in the medium to long-term. At the beginning, the CB Governor claimed that inflat...

  This article raises public concerns as to why T bill yields rose by more than 1% at the auction held on 12 July immediately after the policy rates cut of 2% on 5 July. T bill Auction on 12 July At this first T bill issuance after the policy rate cut of 2% on 5 July, T bill yields were raised by 1.26% for 91D, 1.02% for 182D and 0.18% for 364D. Even though yields were raised, only Rs. 99.66 bn was accepted against the offered Rs. 160 bn. A mere Rs. 30 mn was accepted from the post-auction private placement window as compared to funding shortfall of Rs. 60.34 bn (37.7%). This is the first auction conducted after the second policy rates cut of 2% on 5 July (first rate cut of 2.5% on 31 May). It is usual to see the transmission of a policy rates cut to T bill rates at least at 2-3 subsequent auctions. However, it is bizarre that T bill yield rates rose by more than 1% at this auction. This has happened just after policymaking authorities expressed sentiments over continuous redu...

  This short article is to highlight basic legal, conceptual and governance issues relating to Domestic Debt Optimization (DDO) as announced hitherto. The article highlights few fundamental concerns over the implementability of the DDO and predicts severe repercussions on political and socio-economic fronts.  Gazette issued under RSSO On 3rd July, the President in the capacity of the Minister of Finance issued regulations under section 34 and 55 of the Registered Stocks and Securities Ordinance (RSSO) authorizing the Secretary to the Ministry of Finance and Registrar of Public Debt to carry out powers vested with the Minister under section 34 of the RSSO. The gazette is as follows. The section 34 of the RSSO is as follows. Major legal concerns The exercise of powers and authorities under section 34 of the RSSO does not require an issuance of Regulations. Subjects that require Regulations under section 55 of the RSSO do not cover the subject of "Conversion of Loans" under sect...

  This article is to reveal the documentary proof of the policy irregularity in the Treasury bill issuance on 31 May. Irregularity in T bill issuances on 31 May In my blog article on June 7, I revealed a policy irregularity in issuance of T bills worth Rs. 200 bn at the auction held on 31 May and a resulting loss of at least 2.5% on the issuance to public funds.  A total of Rs. 200 bn against the offered Rs. 160 bn was accepted. The loss occurred as the Tender Board determined to keep the weighted average yield rates on all three maturities of T bills at same levels of the previous week's issuance . The loss occurred as the Tender Board did not reduce yield rates although information was available with members of the Tender Board that policy interest rates would be cut by 2.5% (from 16.5% to 14%) by the Monetary Board in the same day after noon consequent to drastic disinflation trend reported. As a result, the loss was accumulated at several subsequent issuances although...

  The CB carries out monetary operations to maintain monetary and financial conditions of the economy in line with the prevailing monetary policy stance to achieve the target of inflation. Therefore, monetary operations primarily target the inter-bank market liquidity and overnight inter-bank interest rates within the policy interest rates corridor as decided by the Monetary Board from time to time.  Accordingly, key instruments of monetary operations are policy interest rates, standing deposits and standing lending facilities, reverse repo lending, overnight inter-bank loans and repos, inter-bank liquidity, inter-bank interest rates, Treasury bill yields, private issuances of Treasury bills and CB's direct purchase of Treasury bills. These instruments are managed though money printing affecting the CB's balance sheet which transmit the monetary policy to affect the monetary and financial conditions of the economy with unidentified lags.   Accordingly, t he purpose o...