CB extends suspension on buying ISBs by banks until further notice

• Ends suspension as to what CB’s next action would be after stop-gap instructions 
• Five largest private sector banks alone hold nearly Rs.500bn worth of SLISBs

The Central Bank issued fresh instructions to the banks preventing them from purchasing Sri Lanka-issued International Sovereign Bonds (SLISBs) “until further notice”, ending the month-long stop-gap instructions issued thus far.  

The instructions effectively prevent licensed commercial banks and National Savings Bank (NSB) from investing in SLISBs, which were seen accumulating billions of rupees worth of dollar bonds during last year, before the Central Bank struck on the practice by issuing a three-month suspension, effective from December 23, 2020. 

As the three-month suspension expired, the Central Bank issued fresh instructions on April 9, extending the suspension through April 23. But the fresh direction issued last Friday, effectively ended the uncertainty surrounding as to what the Central Bank could do next. 

This is among a string of measures brought in by the Central Bank since last year to minimise the pressure on the rupee, as banks accumulating dollar bonds add pressure on the currency as that entails large-scale outflows. 

Mirror Business last week showed that the five largest private sector commercial banks alone are holding nearly Rs.500 billion worth of dollar bonds, as of the end of last year. This is barring any amounts being held by the two largest state commercial banks and NSB, which may also have some sizeable holdings in their balance sheets. 
They did so through last year to take refuge against the subdued growth in private sector credit amid a record build up of excess liquidity in the banking system. 

The rupee/dollar exchange rate, which hit Rs.200 a fortnight ago, touching a fresh low, recovered to Rs.191 no sooner the country took the receipt of US $ 500 million term loan facility from China Development Bank. 

The yields of the SLISBs further fell last week, as investors grew more confident after the country took receipts of the dollar loan, which was added to its foreign reserves.  

As a result, the yield of the sovereign bond coming due in July fell to 14.76 percent last week, from 16.10 percent a fortnight ago, improving its prices further as bond prices and yields are inversely related.