Dollar Supply

JUN 24 2018

Foreign investments in the Government Securities Market (GSM) plunged to a 34-week low of Rs 298,858.48 million in the week ended Wednesday, thereby keeping up depreciative pressure on the rupee.

A figure lower than this was last achieved in the week ended 10 October 2017, when investments in the GSM totalled Rs 298,765.33 million. Such low investments are due to continuous foreign exits from the GSM, which in the eight weeks to Wednesday alone amounted to Rs 25,168.60 million, equivalent to US$ 158.96 million, thereby keeping up pressure on the rupee.

Those exits are caused due to the recovery of the US economy signified by rising rates in the world’s largest economy, therewith attracting such investments back to the USA, where such investments are generally US-based, finding comfort in investing in US-based assets rather than on Sri Lankan-based assets.

A depreciated rupee causes pressure on the cost of living and inflation leading to politico-socio-economic instability in the country, reflected by the rout the Government suffered under the hands of former President Mahinda Rajapaksa’s fledgling political party the Sri Lanka Podujana Peramuna, which, only after 15 months of its founding, swept the 10 February Local Government polls.

Matters have been compounded by exporters holding on to their US dollar proceeds without converting them to rupees on expectations that because of this uncertainty there is room for the rupee to depreciate further.

As it’s, islandwide inflation which had been on a decelerating trend since November, reversed gear last month, accelerating to 2.1 per cent, from 1.6 per cent in April, on a year-on-year (YoY) basis.

The reasons behind the acceleration in inflation were the recent increases in the administered prices of milk food, gas and petroleum fuels, all of which are imports, suffering under the impact of a depreciated rupee, coupled with the direct and cascading effects of such price increases in other relevant sectors of the economy.

On a month-on-month basis, the increase in inflation was sharper, increasing from 0.1 per cent in April to 1.1 per cent last month.

Further, the monthly change in all items in the inflation measurement basket shot up from a low of Rs 6.93 in April, to Rs 454.05 last month, with the sharpest change seen in the food and non-alcoholic beverages basket which price changes increased from a negative of Rs 41.62 in April to a positive of Rs 215.28 last month.

Meanwhile, the price changes of non-food items in the inflation measurement basket such as bus fares, included under the transport category increased sharply from Rs 48.54 in April to Rs 239.57 last month.

In a desperate measure to shore up the rupee, the Central Bank of Sri Lanka and the Government of Sri Lanka are using instruments such as moral suasion and selling dollars from the country’s foreign reserves. The latest ploy it used was by getting a private bank to sell dollars at discounted prices to the market on Friday.

As a result, the benchmark ‘spot’ which closed Thursday stronger at Rs 159.60/70 to the US dollar in two-way quotes in the interbank foreign exchange market sank to the Rs 159.80 level in the morning on Friday.
However, further depreciative pressure was reined in, after this private bank intervened in the market, offering the greenback at a discounted price of Rs 158.80/90 levels to the dollar, at which price the ‘spot’ closed yesterday, a strengthening of 80 cents over its previous day’s close, but at the expense of the foreign reserves holdings of that private bank in question.

Despite these measures, YoY as at yesterday the ‘spot’ has fallen by Rs 5.70 (3.72 per cent) and the country’s foreign reserves, last month over April by $ 1,166.76 million (11.74 per cent) to $ 8,769.01 million, in part due to the rupee protection, according to latest data.

What the Government needs to do is to get dollars to the market to get over this morass. Simple things like making the bureaucracy exporter friendly and the truth of former President J. R. Jayewardene’s statement, ‘Let the robber barons come,’ make sense in these desperate times to ensure politico-socio-economic stability in the country.