Why Govt. Debt Markets Fluctuate?
Development of Government Debt Markets:
Wednesday, February 27, 2019
In last three articles, I covered pricing and issuance of govt. securities in open market, major policy initiatives taken to develop govt. securities market in the past 80 years and macroeconomic benefits of debt market development. This 4th article is intended to outline major factors behind fluctuations in govt. securities markets.
Market Fluctuations
In any market, fluctuations are caused by changes in demand and supply although certain govt. interventions may have some control on markets. Such fluctuations are often seen in market prices. In the case of financial products/securities, movements of interest rates are reflective of price changes (securities prices and interest rates/yield rates are negatively related, i.e., higher the prices, lower the interest rates).
Issuance and trading infrastructure, regulation on market participants and systems and transparency are the cornerstones of financial market development that will bring price discovery and liquidity to the market. The liquidity means the availability of funds or wider demand in the market. The price discovery means that the market price/interest rate is determined by interaction of a wider set of market participants based on their information and perceptions. Prices determined administratively by few persons covertly are considered as inefficient and biased in modern market economies as their set of information is narrow.
* Commodity Markets
The market price of a commodity is the cost of production plus a profit margin to producers and traders. Suppliers/traders will compete through improvement in productivity to reduce cost and profit margin which will end up in discovering a lower price. The competition among both buyers and sellers will help better price discovery. Markets have developed to determine even future prices of products today based on relevant information. For example, countries place orders to import crude oil in three months at prices determined today for three months-oil. All major commodities in international markets are traded on such future prices. Similarly, investors can buy and sell financial products such as foreign exchange and contracts today for future delivery. Such future prices help investors to plan future businesses without being affected by risks of unanticipated price changes in the future.
* Financial/Bond Markets
In financial markets, there is no accounting cost of production involved in financial products. Instead, the cost is the opportunity cost and risks underlying the funds which are valued differently by individuals. Therefore, a wider market mechanism is the most economic way of price discovery in financial/debt markets, provided that regulations are effectively in place to prevent undesirable market imperfections such as rouge trades and insider price-fixings.
Factors causing Debt Market Fluctuation
* Monetary Policy
The monetary policy along with bank credit supply determine the monetary liquidity and interest rates in the economy. In general, all financial markets and commodity markets are expected to respond to changes in the monetary policy with different time lags, depending on their dependence on credit and interest rates.
As the present monetary policy framework of the Central Bank (CB) is the policy rates corridor-based money dealings to regulate interest rates and credit/liquidity in the overnight inter-bank market, any monetary policy changes immediately affect the inter-bank market and money market. In certain instances, market speculations on the forthcoming monetary policy changes also affect the money market in advance of the monetary policy decisions.
As trade in govt. securities (Treasury bills and bonds) is dominant in the money market, monetary policy changes and speculations immediately affect the prices and yield rates in govt. securities market. All other factors add pressures to govt. securities market above the prevailing monetary policy (see the chart below).
* Supply of Govt. Securities/Govt. Funding Requirements
As in other markets, increase in supply of securities/high funding requirements faster than the demand/supply of funds in the market will raise yield/interest rates (reduce securities prices). In normal funding periods, interest rates will not fluctuate much.
The govt. funding requirements change daily. The overdraft facility of the two state banks is used on daily basis to fill cash flow mismatches. In addition, govt. securities and commercial borrowings are raised to finance planned spending/cash deficits. Treasury bills are issued weekly (generally on each Wednesday). Treasury bonds and other securities are issued to raise medium and longer-term funds periodically.
Debt servicing (i.e., interest payment and debt repayment) is a major source of funding requirements. On certain days, debt servicing is excessive as compared to liquidity/funds available in the market. The incidence known as debt-bunching, i.e., large volumes of debt falling due in certain months or on certain dates, due to poorly managed debt profiles adversely affect the money and financial markets due to their high volumes.
It is natural that market interest rates rise when finding requirements are high. Dealers/active investors maintain information on debt servicing and other funding requirements and price govt. securities accordingly. In the case of roll-overs of debts, i.e., re-issuance of securities/debt to repay maturing stock of securities, dealers/investors reinvest funds that have been invested in maturing securities. Therefore, the market does not need new funds. However, if the maturing amounts are large, dealers will push up interest rates. In the first half of each year, govt. funding requirements are generally high causing noticeable increases in interest rates above the monetary policy levels.
* Market Liquidity or Supply of Funds
The market liquidity or availability of funds for investments depends primarily on the liquidity control/money printing by the CB and inflow of foreign funds to the market. The changes in statutory reserve requirement (SRR) (the portion of customer deposit liabilities of commercial banks held at the CB) and inter-bank liquidity levels managed by the CB (Open Market Operations-OMO) to drive overnight inter-bank interest rates within levels the CB project are the major causes of changes in market liquidity. For example, the increase in SRR by 1.5% in January 2016 moped up nearly Rs. 52 bn of liquidity resulting a liquidity deficit in the markets that pushed interest rates immediately where OMO auctions were stopped.
In opposite, the reduction in SRR by 1.5% in November 2018 and 1% in last week amounts to release of nearly Rs. 150 bn of liquidity to commercial banks which will help control the pressures on market interest rates. Further, the daily average liquidity injected by the CB’s OMO stood at nearly Rs. 124 bn from Jan. 1 to Feb. 22, 2019as compared to Rs. 117 bn for the last 4 months of 2018. The total turnover of daily liquidity injected has increased to Rs. 3.6 trillion from Jan. 1 to Feb. 22, 2019 as compared to Rs. 3.9 trillion for the last four months of 2018. The CB’s Treasury bills holdings have increased to Rs. 179 bn as on Feb 22, 2019 from the level of Rs. 32 bn at the beginning of Sep 2018.
In addition, the CB provides liquidity/credit to banks and primary dealers repayable with same day free of interest charge under payment system rules. Therefore, huge monetary liquidity injected by the CB since September 2018 has helped dealers to manage their money market dealings inclusive of govt. securities and to control pressures on money market interest rates to some extent.
The inflow of foreign investments to govt. securities market raises the liquidity/demand for government securities and pushes down pressure on interest rates. The large-scale outflow of foreign investments was a major factor in pushing up market interest rates from the middle of the last year and several occasions since 2008.In addition, liquidity levels of state captive funds such as EPF, ETF, Insurance Corporation and National Savings Bank also affect the liquidity in govt. securities market as those are the major investors.
* Movements of International Interest Rates/Monetary Policies
Due to international mobility of capital and funds, changes in interest rates and monetary policies of peer countries and reserve currency countries, especially the US, also affect domestic interest rates. International investors move funds across the global markets to look for better returns/interest rates, given the risk-return appetites. As most foreign investments are globally attracted to govt. securities markets as part of wealth management, spillovers of global interest rates are immediately seen on govt. securities markets. Up to the middle of January 2019, 10% of outstanding Treasury bills and bonds was open to foreigners and it has now been reduced to 5%. Such curtailment of foreign investments will tighten/reduce the liquidity in govt. securities market.
Even if foreign capital is controlled, funds under trade flows are responsive to international interest rates. Higher foreign interest rates over the expected rate of domestic currency depreciation will reduce inflow of foreign exchange/export proceeds and cause shortage of liquidity in the market as import financing/expenditure will continue.
In general, as the US dollar is the major global reserve currency, monetary policies and interest rates of many countries will adjust to the US monetary/interest rate policies with or without time-lags. This was amply seen in 2018 where many countries including Sri Lanka ended up in excessive shortage of liquidity, increase in market interest rates and excessive currency depreciation as a direct result of the increase in the US policy interest rate by 1% in 2018. This caused significant capital outflow to the US and increases in interest rates in many countries to fight capital outflow. In general, interest rates in many countries including Sri Lanka adjust before and after monetary policy decisions of the US Fed/Central Bank.
Inflation Expectations
Inflation is a major factor that determines market interest rates. Dealers/investors generally look for stable real interest rates (interest rate less expected inflation rate, i.e., to offset the loss of value of money during the investment period) on their investments. As govt. securities are generally credit risk free investments, investors frequently adjust interest rates to cover the inflation as they speculate. Such inflation expectations are not what the CB projects based on the consumer price index. As a result, rising inflation expectations will push interest rates up and vice versa.
* Collusive Behaviour of Dealers/Investors
Dealers generally attempt to move interest rates always up when govt. funding requirements are high. In times of market pressures, they bid in several pockets to push yield rates at both auctions and secondary market. In certain times, some dealers are engaged in unlawfully driving interest rates through own trading exercises (i.e., pumping and dumping). Insider dealings, i.e., dealings based on unpublic information gathered from relevant institutions, also restrict the fair competition and price discovery.
Effective implementation of financial market regulations is intended to control such collusions and to promote fair markets. It is well known that Sri Lankan govt. securities market lacks standard market regulations. The poor regulation has caused not only market collusions but also securities fraud by primary dealers with the blessings of some officials of the CB being the monetary authority, the securities issuer and the regulator. The regulatory environment has not been fixed yet and, therefore, market fluctuations due to collusive market behaviours and securities fraud will continue.
Sri Lankan experience
* Allegation on Public Auctions to raise interest rates
Above stated factors are not rocket sciences, but general facts observed in any country. However, some financial experts and CB’s international economists allege that introduction of regular auctions for Treasury bond issuances since February 2015 has caused significant rise in interest rates in the whole economy as compared to interest rates that were controlled at low levels through a decade-long system of privately placed/issued bonds by the CB on regular basis. Those who administered private issuances and pricing also claim that the CB lost a powerful policy instrument (i.e., bond-private placements) to control interest rates due to the stoppage of the system at the end of February 2015. This shows the use of debt management to support the unlawful and deceitful monetary policy.
* Official calculation of Cost to Govt.
Some including the present Monetary Board estimated the cost to government of auctioned bonds whereas some attribute such costs to the country’s all present economic ills. The Monetary Board which lives at the mercy of those few international economists of the CB decided to accept the cost to the government due to auction system as estimated by the Auditor General in his report to the COPE. The loss here (others have different loss estimates of own fantasy) is the discount involved in acceptance of bids for bonds at auctions above the amounts announced for the auctions.
In making such estimates, the CB’s long habit of announcing a lower amount to auctions than the actual funding requirement and the specific public duty assigned to the Tender Board were not recognized. Instead, the CB’s long habit of unlawful and questionable issuances of privately placed bonds of several trillions on regular basis against global market standards was recognized as low cost-low risk without any empirical research. In this manner, even debt that could have been privately raised through money launders could be justified on low cost-low risk as the CB/govt. is interested in only money, and not a disciplined debt market. Similar costs involved in huge amounts of Treasury bills presently accepted at auctions in excess of announced amounts by the Monetary Board even with CB’s direct subscriptions outside auctions is not recognized as costs.
* Recommencement of Administrative Bond Issuances
Further, in the CB Annual Report 2016 issued on April 19, 2017, the Monetary Board reported that auction alone system of issuing Treasury bills and bonds contributed to increase in interest rates on government securities and some distortions in the monetary policy transmission without any economic research. It also proposed to revamp the purely auction-based system and develop instruments to influence the long end of the yield curve. The Monetary Board did not have any knowledge of economics on the market impact of sudden and fast increase in CB’s policy interest rates by 1.25% between February 2016 to March 2017 and increase in SRR by 1.5% in December 2015 by the Monetary Board itself. Nobody knew any yield curve (even today) to be controlled, other than irresponsible and ad-hoc quotes given by some primary dealers to the CB.
Two months later, the Monetary Board re-commenced administrative bond issuances (so-called direct issuances/placements to control interest rates) to primary dealers and EPF outside competitive auctions with the leadership of dealer-representative members of the Monetary Board. However, the Monetary Board has failed to control or reduce interest rates as advocated. Now, Monetary Board has communicated of its plan to implement similar issuances of Treasury bills in addition to unlawful underwriting of Treasury bill issuances by the CB. It is hard to understand economics of how money that does not come to transparent and competitive public auctions comes to private issuances at lower interest rates unless such money is black money arranged to be laundered through privately arranged govt. securities.
Some may wonder why the Monetary Board does not propose similar system for injection of liquidity to banks and same dealers to lower the country’s interest rate structure in place of present OMO auction system as the Monetary Board has failed to control market interest rates even with trillions of money printing and reduction of SRR by 2.5% (a permanent injection of Rs. 150 bn.) during the past few months.
Problem Resolution
Therefore, it is now necessary to do empirical research on;
* factors that have caused significant movements of Sri Lankan govt. securities market in the past decade,
* what went wrong in the market, despite the long list of historic policy initiatives and rising market debt numbers,
* who are responsible for suppression of market development, and
* whether the govt. is taking policies to fix the fundamental problems in the debt market as it is finally accountable to the public.
Unless the govt. takes the control over debt market development based on such research carried out independently (unlike so-called forensic audits) and its finance, an anticipation of a debt crisis causing public bankruptcy in the next decade is not unrealistic, given the levels of current difficulties in raising and servicing debt. International economists of the CB and their network of dealers who managed the debt market for the monetary policy will soon return to their foreign residencies.
The new set of politicians will have no option but blaming the past politicians as usual for not solving the debt problem. The world has some bail-out programmes in the event of bankruptcy. The economy can find unlawful/unpublic businesses for survival. If a smart finance minister appears in the future, there is a possibility that he may direct the CB to pay the debt unlawfully raised by the CB without due approval.
(The writer is a former Deputy Governor of the CB and chairman and member of 6 Public Boards with nearly 35 years of public service. He authored 5 economics and financial/banking books and more than 50 published articles.)
Market Fluctuations
In any market, fluctuations are caused by changes in demand and supply although certain govt. interventions may have some control on markets. Such fluctuations are often seen in market prices. In the case of financial products/securities, movements of interest rates are reflective of price changes (securities prices and interest rates/yield rates are negatively related, i.e., higher the prices, lower the interest rates).
Issuance and trading infrastructure, regulation on market participants and systems and transparency are the cornerstones of financial market development that will bring price discovery and liquidity to the market. The liquidity means the availability of funds or wider demand in the market. The price discovery means that the market price/interest rate is determined by interaction of a wider set of market participants based on their information and perceptions. Prices determined administratively by few persons covertly are considered as inefficient and biased in modern market economies as their set of information is narrow.* Commodity Markets
The market price of a commodity is the cost of production plus a profit margin to producers and traders. Suppliers/traders will compete through improvement in productivity to reduce cost and profit margin which will end up in discovering a lower price. The competition among both buyers and sellers will help better price discovery. Markets have developed to determine even future prices of products today based on relevant information. For example, countries place orders to import crude oil in three months at prices determined today for three months-oil. All major commodities in international markets are traded on such future prices. Similarly, investors can buy and sell financial products such as foreign exchange and contracts today for future delivery. Such future prices help investors to plan future businesses without being affected by risks of unanticipated price changes in the future.
* Financial/Bond Markets
In financial markets, there is no accounting cost of production involved in financial products. Instead, the cost is the opportunity cost and risks underlying the funds which are valued differently by individuals. Therefore, a wider market mechanism is the most economic way of price discovery in financial/debt markets, provided that regulations are effectively in place to prevent undesirable market imperfections such as rouge trades and insider price-fixings.
Factors causing Debt Market Fluctuation
* Monetary Policy
The monetary policy along with bank credit supply determine the monetary liquidity and interest rates in the economy. In general, all financial markets and commodity markets are expected to respond to changes in the monetary policy with different time lags, depending on their dependence on credit and interest rates.
As the present monetary policy framework of the Central Bank (CB) is the policy rates corridor-based money dealings to regulate interest rates and credit/liquidity in the overnight inter-bank market, any monetary policy changes immediately affect the inter-bank market and money market. In certain instances, market speculations on the forthcoming monetary policy changes also affect the money market in advance of the monetary policy decisions.
As trade in govt. securities (Treasury bills and bonds) is dominant in the money market, monetary policy changes and speculations immediately affect the prices and yield rates in govt. securities market. All other factors add pressures to govt. securities market above the prevailing monetary policy (see the chart below).
* Supply of Govt. Securities/Govt. Funding Requirements
As in other markets, increase in supply of securities/high funding requirements faster than the demand/supply of funds in the market will raise yield/interest rates (reduce securities prices). In normal funding periods, interest rates will not fluctuate much.
The govt. funding requirements change daily. The overdraft facility of the two state banks is used on daily basis to fill cash flow mismatches. In addition, govt. securities and commercial borrowings are raised to finance planned spending/cash deficits. Treasury bills are issued weekly (generally on each Wednesday). Treasury bonds and other securities are issued to raise medium and longer-term funds periodically.
Debt servicing (i.e., interest payment and debt repayment) is a major source of funding requirements. On certain days, debt servicing is excessive as compared to liquidity/funds available in the market. The incidence known as debt-bunching, i.e., large volumes of debt falling due in certain months or on certain dates, due to poorly managed debt profiles adversely affect the money and financial markets due to their high volumes.
It is natural that market interest rates rise when finding requirements are high. Dealers/active investors maintain information on debt servicing and other funding requirements and price govt. securities accordingly. In the case of roll-overs of debts, i.e., re-issuance of securities/debt to repay maturing stock of securities, dealers/investors reinvest funds that have been invested in maturing securities. Therefore, the market does not need new funds. However, if the maturing amounts are large, dealers will push up interest rates. In the first half of each year, govt. funding requirements are generally high causing noticeable increases in interest rates above the monetary policy levels.
* Market Liquidity or Supply of Funds
The market liquidity or availability of funds for investments depends primarily on the liquidity control/money printing by the CB and inflow of foreign funds to the market. The changes in statutory reserve requirement (SRR) (the portion of customer deposit liabilities of commercial banks held at the CB) and inter-bank liquidity levels managed by the CB (Open Market Operations-OMO) to drive overnight inter-bank interest rates within levels the CB project are the major causes of changes in market liquidity. For example, the increase in SRR by 1.5% in January 2016 moped up nearly Rs. 52 bn of liquidity resulting a liquidity deficit in the markets that pushed interest rates immediately where OMO auctions were stopped.
In opposite, the reduction in SRR by 1.5% in November 2018 and 1% in last week amounts to release of nearly Rs. 150 bn of liquidity to commercial banks which will help control the pressures on market interest rates. Further, the daily average liquidity injected by the CB’s OMO stood at nearly Rs. 124 bn from Jan. 1 to Feb. 22, 2019as compared to Rs. 117 bn for the last 4 months of 2018. The total turnover of daily liquidity injected has increased to Rs. 3.6 trillion from Jan. 1 to Feb. 22, 2019 as compared to Rs. 3.9 trillion for the last four months of 2018. The CB’s Treasury bills holdings have increased to Rs. 179 bn as on Feb 22, 2019 from the level of Rs. 32 bn at the beginning of Sep 2018.
In addition, the CB provides liquidity/credit to banks and primary dealers repayable with same day free of interest charge under payment system rules. Therefore, huge monetary liquidity injected by the CB since September 2018 has helped dealers to manage their money market dealings inclusive of govt. securities and to control pressures on money market interest rates to some extent.
The inflow of foreign investments to govt. securities market raises the liquidity/demand for government securities and pushes down pressure on interest rates. The large-scale outflow of foreign investments was a major factor in pushing up market interest rates from the middle of the last year and several occasions since 2008.In addition, liquidity levels of state captive funds such as EPF, ETF, Insurance Corporation and National Savings Bank also affect the liquidity in govt. securities market as those are the major investors.* Movements of International Interest Rates/Monetary Policies
Due to international mobility of capital and funds, changes in interest rates and monetary policies of peer countries and reserve currency countries, especially the US, also affect domestic interest rates. International investors move funds across the global markets to look for better returns/interest rates, given the risk-return appetites. As most foreign investments are globally attracted to govt. securities markets as part of wealth management, spillovers of global interest rates are immediately seen on govt. securities markets. Up to the middle of January 2019, 10% of outstanding Treasury bills and bonds was open to foreigners and it has now been reduced to 5%. Such curtailment of foreign investments will tighten/reduce the liquidity in govt. securities market.
Even if foreign capital is controlled, funds under trade flows are responsive to international interest rates. Higher foreign interest rates over the expected rate of domestic currency depreciation will reduce inflow of foreign exchange/export proceeds and cause shortage of liquidity in the market as import financing/expenditure will continue.
In general, as the US dollar is the major global reserve currency, monetary policies and interest rates of many countries will adjust to the US monetary/interest rate policies with or without time-lags. This was amply seen in 2018 where many countries including Sri Lanka ended up in excessive shortage of liquidity, increase in market interest rates and excessive currency depreciation as a direct result of the increase in the US policy interest rate by 1% in 2018. This caused significant capital outflow to the US and increases in interest rates in many countries to fight capital outflow. In general, interest rates in many countries including Sri Lanka adjust before and after monetary policy decisions of the US Fed/Central Bank.
Inflation Expectations
Inflation is a major factor that determines market interest rates. Dealers/investors generally look for stable real interest rates (interest rate less expected inflation rate, i.e., to offset the loss of value of money during the investment period) on their investments. As govt. securities are generally credit risk free investments, investors frequently adjust interest rates to cover the inflation as they speculate. Such inflation expectations are not what the CB projects based on the consumer price index. As a result, rising inflation expectations will push interest rates up and vice versa.
* Collusive Behaviour of Dealers/Investors
Dealers generally attempt to move interest rates always up when govt. funding requirements are high. In times of market pressures, they bid in several pockets to push yield rates at both auctions and secondary market. In certain times, some dealers are engaged in unlawfully driving interest rates through own trading exercises (i.e., pumping and dumping). Insider dealings, i.e., dealings based on unpublic information gathered from relevant institutions, also restrict the fair competition and price discovery.
Effective implementation of financial market regulations is intended to control such collusions and to promote fair markets. It is well known that Sri Lankan govt. securities market lacks standard market regulations. The poor regulation has caused not only market collusions but also securities fraud by primary dealers with the blessings of some officials of the CB being the monetary authority, the securities issuer and the regulator. The regulatory environment has not been fixed yet and, therefore, market fluctuations due to collusive market behaviours and securities fraud will continue.
Sri Lankan experience
* Allegation on Public Auctions to raise interest rates
Above stated factors are not rocket sciences, but general facts observed in any country. However, some financial experts and CB’s international economists allege that introduction of regular auctions for Treasury bond issuances since February 2015 has caused significant rise in interest rates in the whole economy as compared to interest rates that were controlled at low levels through a decade-long system of privately placed/issued bonds by the CB on regular basis. Those who administered private issuances and pricing also claim that the CB lost a powerful policy instrument (i.e., bond-private placements) to control interest rates due to the stoppage of the system at the end of February 2015. This shows the use of debt management to support the unlawful and deceitful monetary policy.
* Official calculation of Cost to Govt.
Some including the present Monetary Board estimated the cost to government of auctioned bonds whereas some attribute such costs to the country’s all present economic ills. The Monetary Board which lives at the mercy of those few international economists of the CB decided to accept the cost to the government due to auction system as estimated by the Auditor General in his report to the COPE. The loss here (others have different loss estimates of own fantasy) is the discount involved in acceptance of bids for bonds at auctions above the amounts announced for the auctions.
In making such estimates, the CB’s long habit of announcing a lower amount to auctions than the actual funding requirement and the specific public duty assigned to the Tender Board were not recognized. Instead, the CB’s long habit of unlawful and questionable issuances of privately placed bonds of several trillions on regular basis against global market standards was recognized as low cost-low risk without any empirical research. In this manner, even debt that could have been privately raised through money launders could be justified on low cost-low risk as the CB/govt. is interested in only money, and not a disciplined debt market. Similar costs involved in huge amounts of Treasury bills presently accepted at auctions in excess of announced amounts by the Monetary Board even with CB’s direct subscriptions outside auctions is not recognized as costs.
* Recommencement of Administrative Bond Issuances
Further, in the CB Annual Report 2016 issued on April 19, 2017, the Monetary Board reported that auction alone system of issuing Treasury bills and bonds contributed to increase in interest rates on government securities and some distortions in the monetary policy transmission without any economic research. It also proposed to revamp the purely auction-based system and develop instruments to influence the long end of the yield curve. The Monetary Board did not have any knowledge of economics on the market impact of sudden and fast increase in CB’s policy interest rates by 1.25% between February 2016 to March 2017 and increase in SRR by 1.5% in December 2015 by the Monetary Board itself. Nobody knew any yield curve (even today) to be controlled, other than irresponsible and ad-hoc quotes given by some primary dealers to the CB.
Two months later, the Monetary Board re-commenced administrative bond issuances (so-called direct issuances/placements to control interest rates) to primary dealers and EPF outside competitive auctions with the leadership of dealer-representative members of the Monetary Board. However, the Monetary Board has failed to control or reduce interest rates as advocated. Now, Monetary Board has communicated of its plan to implement similar issuances of Treasury bills in addition to unlawful underwriting of Treasury bill issuances by the CB. It is hard to understand economics of how money that does not come to transparent and competitive public auctions comes to private issuances at lower interest rates unless such money is black money arranged to be laundered through privately arranged govt. securities.Some may wonder why the Monetary Board does not propose similar system for injection of liquidity to banks and same dealers to lower the country’s interest rate structure in place of present OMO auction system as the Monetary Board has failed to control market interest rates even with trillions of money printing and reduction of SRR by 2.5% (a permanent injection of Rs. 150 bn.) during the past few months.
Problem Resolution
Therefore, it is now necessary to do empirical research on;
* factors that have caused significant movements of Sri Lankan govt. securities market in the past decade,
* what went wrong in the market, despite the long list of historic policy initiatives and rising market debt numbers,
* who are responsible for suppression of market development, and
* whether the govt. is taking policies to fix the fundamental problems in the debt market as it is finally accountable to the public.
Unless the govt. takes the control over debt market development based on such research carried out independently (unlike so-called forensic audits) and its finance, an anticipation of a debt crisis causing public bankruptcy in the next decade is not unrealistic, given the levels of current difficulties in raising and servicing debt. International economists of the CB and their network of dealers who managed the debt market for the monetary policy will soon return to their foreign residencies.
The new set of politicians will have no option but blaming the past politicians as usual for not solving the debt problem. The world has some bail-out programmes in the event of bankruptcy. The economy can find unlawful/unpublic businesses for survival. If a smart finance minister appears in the future, there is a possibility that he may direct the CB to pay the debt unlawfully raised by the CB without due approval.
(The writer is a former Deputy Governor of the CB and chairman and member of 6 Public Boards with nearly 35 years of public service. He authored 5 economics and financial/banking books and more than 50 published articles.)