The currency symbol for the Sri Lankan rupee (LKR), the currency for the Democratic Socialist Republic of Sri Lanka (Ceylon prior to 1972), an island nation off the southern coast of India. The Sri Lankan rupee is made up of 100 cents and is often presented with the symbol Rp. or Rs., in the form Rp. 50 for 50 rupees.
The rupee can also be presented with SLRp. or SLRs., rather than Rp. or Rs., to differentiate it from other currencies denominated in rupee
The Sri Lankan rupee was first established in 1869, replacing the British pound at an amount equal to the Indian rupee (1 rupee to 2 shillings, 3 pence), and was a decimal currency from 1871. As inflation devalues the currency, new banknotes are released (for example, in 2006 a 2000 rupee note was issued), and although older Sri Lankan (and Ceylon) banknotes and coins remain legal tender, older and smaller notes and coins are rarely seen in circulation.
Monday, December 1, 2008
LBO
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Foreign Asset Decreases
The latest numbers which showed that by October 15 the central bank had lost a further 150 million dollars in foreign reserves, either in peg defence or reserve appropriations.
Unlike in the past, Sri Lanka is now vulnerable because the government is exposed to foreign short term debt, with government rupee securities being sold to foreign buyers since 2006.
Dealers say foreign bill and bond buyers have been pulling out money in the wake of the international turmoil as predicted by independent analysts earlier.
Over the past four weeks, the Treasury bill stock held by foreign players had fallen to about 14 billion rupees from about 17 billion and the bond portfolio to 48.5 billion from about 53 billion, debt market players say.
By holding the peg, the central bank effectively underwrites the foreign currency risks of speculative bond buyers at the expense of the national economy and by injecting fresh liquidity the monetary authority also 'accommodates' resource outflows.
The current bout of 'sterilized intervention' can undermine the central bank's own program of controlling inflation.
Analysts have warned that maintaining a peg and targeting reserve money at the same time was incompatible, and would either lead to a currency crisis as now or unnecessarily high inflation and excess foreign reserve accumulation at other times when net flows were positive.
Sri Lanka's central bank has a weak record of monetary management.
Analysts say its level of competence in managing price stability is amply indicated by the country's inflation index, which has topped 20 percent in the past two years.
Sri Lanka has experienced high inflation and its currency has been in free fall for much of the existence of the central bank since it was created in 1950 by abolishing a currency board that had kept the country stable and inflation low under colonial rule.
There have been growing calls to abolish the central bank or bring in legislated inflation targeting to protect the poor and the national economy. -->
Unlike in the past, Sri Lanka is now vulnerable because the government is exposed to foreign short term debt, with government rupee securities being sold to foreign buyers since 2006.
Dealers say foreign bill and bond buyers have been pulling out money in the wake of the international turmoil as predicted by independent analysts earlier.
Over the past four weeks, the Treasury bill stock held by foreign players had fallen to about 14 billion rupees from about 17 billion and the bond portfolio to 48.5 billion from about 53 billion, debt market players say.
By holding the peg, the central bank effectively underwrites the foreign currency risks of speculative bond buyers at the expense of the national economy and by injecting fresh liquidity the monetary authority also 'accommodates' resource outflows.
The current bout of 'sterilized intervention' can undermine the central bank's own program of controlling inflation.
Analysts have warned that maintaining a peg and targeting reserve money at the same time was incompatible, and would either lead to a currency crisis as now or unnecessarily high inflation and excess foreign reserve accumulation at other times when net flows were positive.
Sri Lanka's central bank has a weak record of monetary management.
Analysts say its level of competence in managing price stability is amply indicated by the country's inflation index, which has topped 20 percent in the past two years.
Sri Lanka has experienced high inflation and its currency has been in free fall for much of the existence of the central bank since it was created in 1950 by abolishing a currency board that had kept the country stable and inflation low under colonial rule.
There have been growing calls to abolish the central bank or bring in legislated inflation targeting to protect the poor and the national economy. -->
Impossible Trinity
The central bank says its purchases of Treasury bills in the primary market was within "the leeway available in the reserve money programme."
"The above indicates that the continuous monitoring, precautionary actions and timely interventions by the Central Bank of Sri Lanka to ensure stability in the Sri Lankan financial markets has ensured that the Sri Lankan economy maintains stability and is able to withstand the current turbulent global financial markets, with confidence," the Central Bank said.
"Even in the future, the Central Bank would continue to monitor the conditions carefully and respond to the needs of the economy with suitable interventions, if and when any further interventions are required."
But analysts have warned the central bank several times that there is no 'leeway' in a reserve money targeting program if a peg is maintained.
Any sterilization (sales or purchases of T-bills) would either 'crowd out' the private sector (sales of t-bills) or create inflationary and exchange rate pressure (purchases of bills).
In 2007 the central bank's reserve money program was undermined by similar actions resulting in 20 percent plus inflation and a foreign exchange crisis in the middle of the year.
To effectively run any type of independent monetary policy, a floating exchange rate is needed and a peg has to be abandoned.
This is a well understood monetary phenomenon associated with pegged exchange rates, known as the impossible or 'unholy' trinity which says that independent monetary policy (in the current instance liquidity injections to prevent interest rates from skyrocketing) is impossible while maintaining a peg and permitting the free flow of foreign exchange.
"The above indicates that the continuous monitoring, precautionary actions and timely interventions by the Central Bank of Sri Lanka to ensure stability in the Sri Lankan financial markets has ensured that the Sri Lankan economy maintains stability and is able to withstand the current turbulent global financial markets, with confidence," the Central Bank said.
"Even in the future, the Central Bank would continue to monitor the conditions carefully and respond to the needs of the economy with suitable interventions, if and when any further interventions are required."
But analysts have warned the central bank several times that there is no 'leeway' in a reserve money targeting program if a peg is maintained.
Any sterilization (sales or purchases of T-bills) would either 'crowd out' the private sector (sales of t-bills) or create inflationary and exchange rate pressure (purchases of bills).
In 2007 the central bank's reserve money program was undermined by similar actions resulting in 20 percent plus inflation and a foreign exchange crisis in the middle of the year.
To effectively run any type of independent monetary policy, a floating exchange rate is needed and a peg has to be abandoned.
This is a well understood monetary phenomenon associated with pegged exchange rates, known as the impossible or 'unholy' trinity which says that independent monetary policy (in the current instance liquidity injections to prevent interest rates from skyrocketing) is impossible while maintaining a peg and permitting the free flow of foreign exchange.
Commodity Easing
The central bank says the current falling oil and commodity prices is expected to ease pressure on outflows in the next two months and an increase in remittances in November and December is expected to reverse an "overall dip in foreign currency reserves" that has taken place in October.
Meanwhile petroleum bill payments had also been postponed through an Iranian government credit from four to seven months, which the central bank says is expected "ease the pressure on the foreign exchange market during the next couple of months."
"These favourable trends are expected to result in continued stability in the foreign exchange markets," the Central Bank said.
However economic analysts have warned that trade transactions have little to do with foreign exchange pressure, which is a monetary phenomenon arising from central bank liquidity injections or 'printed money' which exceed dollar inflows in a given period.
Recent forex market interventions, to defend a peg at 108.00 rupees to the dollar have caused a severe cash crunch in the monetary system.
The shortage of rupees caused by its forex market interventions have been filled by printing money to purchase treasury bills, relaxing access to the reverse repo window so that market participants can access more printed money more easily than before and cutting the reserve ratio and releasing money tied up inside the central bank.
Meanwhile petroleum bill payments had also been postponed through an Iranian government credit from four to seven months, which the central bank says is expected "ease the pressure on the foreign exchange market during the next couple of months."
"These favourable trends are expected to result in continued stability in the foreign exchange markets," the Central Bank said.
However economic analysts have warned that trade transactions have little to do with foreign exchange pressure, which is a monetary phenomenon arising from central bank liquidity injections or 'printed money' which exceed dollar inflows in a given period.
Recent forex market interventions, to defend a peg at 108.00 rupees to the dollar have caused a severe cash crunch in the monetary system.
The shortage of rupees caused by its forex market interventions have been filled by printing money to purchase treasury bills, relaxing access to the reverse repo window so that market participants can access more printed money more easily than before and cutting the reserve ratio and releasing money tied up inside the central bank.
Soft-peg problem
Analysts had warned at the time that sterilizing the rupee liquidity arising from dollar inflows (resisting an increase in the monetary base) and taking dollars out of the country as central bank foreign reserves cancelled out any potential benefit to the economy from capital inflows generated from bond sales.
At that interest rate the government could have raised the same amount of money from the domestic market, with the same 'crowding out' effect on the private sector with no foreign exchange debt liability and consequently no increase in foreign reserves.
This is a common problem associated with sterilizing soft-pegged central banks that try to control money supply while maintaining a managed (dirty) float or peg, and has been documented by economists in a wide range of pegged-exchange rate central banks ranging from Mexico to China.
The central bank says foreign investors who bought bonds were liquidating "a certain part" of the foreign investments in government securities due to the financial crisis in their own economies.
"While these demands have been comfortably accommodated so far, the Central Bank also stands ready to accommodate any further outflows, if such outflows arise at any time in the future," the Central Bank said.
While the Central Bank could 'accommodate' any dollar outflows arising from maturing bills directly from its reserves without affecting the domestic monetary system, analysts warn that 'accommodating' any sales of unexpired securities to the local market would result in further inflationary and foreign exchange pressures on the monetary system.
Currency crises usually arise from such central bank actions.
At that interest rate the government could have raised the same amount of money from the domestic market, with the same 'crowding out' effect on the private sector with no foreign exchange debt liability and consequently no increase in foreign reserves.
This is a common problem associated with sterilizing soft-pegged central banks that try to control money supply while maintaining a managed (dirty) float or peg, and has been documented by economists in a wide range of pegged-exchange rate central banks ranging from Mexico to China.
The central bank says foreign investors who bought bonds were liquidating "a certain part" of the foreign investments in government securities due to the financial crisis in their own economies.
"While these demands have been comfortably accommodated so far, the Central Bank also stands ready to accommodate any further outflows, if such outflows arise at any time in the future," the Central Bank said.
While the Central Bank could 'accommodate' any dollar outflows arising from maturing bills directly from its reserves without affecting the domestic monetary system, analysts warn that 'accommodating' any sales of unexpired securities to the local market would result in further inflationary and foreign exchange pressures on the monetary system.
Currency crises usually arise from such central bank actions.
Sri Lanka central bank calms forex markets as treasuries stock rockets to Rs59bn
Oct 24, 2008 (LBO) – Sri Lanka's central bank says it is ready to accommodate additional foreign currency outflows from foreign bond holders even as snowballing T-bill purchases showed pressure building up in the monetary system.
By Thursday the treasury bill stock held by the central bank, which is an indication of new money 'printed' to accommodate dollar outflows arising from central bank foreign exchange market interventions, had shot up to 59 billion rupees.
By Thursday the treasury bill stock held by the central bank, which is an indication of new money 'printed' to accommodate dollar outflows arising from central bank foreign exchange market interventions, had shot up to 59 billion rupees.
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