Central Bank stops money printing, expects Chinese credit swap
A letter sent by leading businessmen a few weeks ago to the Minister of Finance, Basil Rajapaksa calling to negotiate with the International Monetary Fund (IMF) for financial aid in the wake of multiple international rating downgrades and rising fears on potential nonpayment on the country’s external debt, hasn’t seen a response.
At least 20 businessmen had signed the letter that was a clarion call to stop the crisis from intensifying, a businessman told the Business Times on Tuesday.
For the last 20 months, the Central Bank (CB) has printed Rs. 2.9 trillion which is about a 37 per cent increase since the president took office. Economists say that it will take some 12 to 18 months to get back to normal.
However, during the past two weeks, the CB hasn’t printed money and has allowed Treasury Bill rates to increase from 5 percent to 8.5 percent in the market. The CB is trying to maintain the interest rate at moderate levels and defend the currency. After the budget, it is likely to not continue, an economist added, saying: “Tightening the monetary policy by raising interest rates and avoiding as far as possible money printing for the government seems like a good strategy in the short term.”
But the bids by banks are only for three months, for these rates. “This means the banks don’t trust the long-term strategy of the government,” the economist pointed out.
Also, commercial banks are arbitraging on the interest rates which is borrowing from the CB at 6 percent and investing in Treasury Bills at 8.5 percent. The CB is out of alignment and the regulator will have to increase policy interest rates if this continues, an analyst said.
Another economist pointed out that the CB is exhausting all available options.
The recent rating downgrade has put the country on a worse footing. Moody’s lowered Sri Lanka’s local currency bond and bank deposit ceilings to B1 from Ba2, lowered its long-term foreign currency bond ceiling to B3 from Ba3, and lowered its foreign currency bank deposit ceiling to Caa1 from B3. “Below this is highly vulnerable. One more notch down and the country is further shutting down from the international markets,” a banker pointed out. By not approaching the lending agencies the country is displaying a lack of credibility, he added. Analysts pointed out the rating agencies don’t seem to be convinced that Sri Lanka has a plan to overcome the crisis. Moody’s rating on Sri Lanka shows that the country’s governance is questionable, a second analyst noted adding that internationally regulated funds are prohibited from investing in countries with such ratings.
The silver lining is the $ 1.5 billion (Chinese yuan 10 billion) credit swap that is supposed to come within the year.