ECONOMYNEXT – The net assets of Sri Lanka’s central bank fell to 11.1 billion rupees in December 2023 from 25 billion rupees a month earlier, according to the valuation method used, official data show.
The reason for the December fall, whether it was due to administration expenses being charged or valuation losses is not clear.
In January equity increased to 59 billion rupees with more profits being made.
In the first three quarters of 2023 Sri Lanka’s central bank made large profits from high yielding domestic assets it had acquired in the course of triggering a record balance of payments deficit and a sovereign default.
In September, bills were turned into bonds with coupons below market, resulting in large valuation losses.
So-called provisional advances, devised by macro-economists under an earlier law and found in several ‘age of inflation’ central banks which were supposed to be liquidated in 180 days, were also turned into securities, adding about 300 billion rupees to gross financing needs.
Provisional advances had turned perpetual with macro-economists rolling them over every six months.
However, the practice of automatic rollover prevented shocks to reserve money, and also eliminated any impact on the gross financing need, analysts have said.
Before the ‘age of inflation’ central banks made forex shortages exchange controls commonplace from the last century and inflation permanent, after they came under the control of macro-economists using econometrics, money was printed only against 90-95 day bills, under a so-called bills only policy, analysts say.
The conversion of bills to bonds led to large valuation losses from September 2023.
By restructuring central bank held debt and avoiding a broader bond market default, confidence has been retained in government securities markets, and interest rates have come down to low double digits.
Government securities valued at 2,535 billion rupees and provisional advances of 344 billion rupees were disclosed in August 2024.
The basis of valuation has not yet been disclosed.
In September government securities valued at 2,169 billion rupees were disclosed with retained earnings turning into a negative 312 billion rupees, from a positive 464 billion rupees.
By end January government securities were carried in the balance sheet at 2,063 billion rupees.
The basis of valuation is not clear.
The face value of the central bank’s securities portfolio was disclosed as 2,743 billion rupees in December 2024, and its marked-to-market value at 1,622 billion rupees.
The International Monetary Fund has asked for the central bank to be recapitalized if it lacks capital.
The central bank continues to make profits from coupons it earns from government securities, essentially a result of monetary instability it had created in the past.
However, coupons in the current period (unless accommodated by overnight injections) paid from money collected by the government from the public, can have a deflationary effect.
Sri Lanka’s central bank has negative foreign reserves, having borrowed dollars from India and the International Monetary Fund and busted them to suppress interest rates.
A reserve collecting central bank which creates the monetary base from foreign assets, makes profits from foreign assets without harming the poor through inflation and currency depreciation.
In 2022 the negative foreign assets also led to losses.
However the central bank has recently started to borrow dollars again through swap, official data show. (Colombo/Mar12/2024)
