Foreigners unload Sri Lankan gilts at a faster clip

The foreign holdings of government securities fell the most seen in a single week last week, as they sold the treasury bills and bond stock they held amid the worsening external and economic conditions here and due to the indications by the United States Federal Reserve that it would raise its interest rates earlier than desired, to tame the inflation there. 

According to the data, foreigners unloaded Sri Lankan treasuries worth of Rs.1,069.89 million during last week, which works out to a steeper 30.2 percent slump, the most recorded in a single week. 

With last week’s sell off, foreigners held only Rs.2,472.63 million in government securities, which is equivalent to just over US $ 12.36 million at the current exchange rate. 

At its peak in January 2015, foreign holdings in the Sri Lankan treasury bills and bonds amounted to Rs.453.3 billion or US $ 3.5 billion, accounting for a share of 11.36 percent of the total outstanding treasury bills and bond stock. 

However, post the most recent sell off, foreigners account for just under 0.032 percent. 

Sri Lanka started offering a two-year currency swap for foreigners who invest in Sri Lankan treasuries since last October, in a measure to woo back investments into the gilts while providing a safeguard against the currency volatility but that didn’t work too well. 

Meanwhile, foreigners could also be taking back their money into other safe havens such as the United States treasuries, after the Federal Reserve indicated that it would raise its benchmark rate easier than it anticipated, as the US saw its consumer prices rising by 5.0 percent in May, the highest in 13 years, after continuous injection of liquidity by the Fed since the onset of the pandemic. 

In Sri Lanka, there is also pressure on consumer prices as well as the rates, as seen from the yields of the government securities but the market largely expects that the pressure on rates to ease, due to continuous liquidity support required by the Central Bank to finance the budget as well as the broader economy beset by the fresh restrictions in effects for the last two months.

However, the prices could remain elevated, due to the disruptions caused to the supply chains by the lockdowns, distortions repeatedly created by the government in the market, import controls and higher cost of imports.