Partial acceptance of T-bills at auctions intentional: ICRA Lanka

• Says move appears to have stemmed form key tenets of MMT

Amid certain quarters finding fault with the Central Bank and the overall economy for not being able to sell the entire stock of Treasury bills at weekly auctions in recent times, a rating agency said the move was intentional and appeared to be in line with the key doctrines of the Modern Monetary Theory (MMT), what is now being followed by the monetary authority to manage the economy. 

All primary auctions for Treasury bills during December 2020 were left partially sold despite being oversubscribed, weekly auction data showed. 

“...policy recently adopted by the CBSL, (which) appears to have stemmed from the key tenets of the Modern Monetary Theory”, ICRA Lanka said in their latest update on the Sri Lankan economy. There were media reports, which tried to portray the auctions as a failure of the Public Debt Department of the Central Bank for not being able to sell the entire stock of the bills that they offer, despite them being oversubscribed by several times of the issued amount. 

However, the Central Bank increased the yield caps gradually and allowed the Treasury bill yields in the primary market to go up by 5 basis points during December, ICRA Lanka observed. 

The rating agency is therefore of the belief that there is an upward pressure on the three- month yields to further rise as seen from the significantly low quantity of bids accepted, amounting Rs.510 million during the last auction in December 2020. 

However, at the primary bill auction held on January 12, 2021, the Central Bank sold the entire stock of bills valued Rs.40 billion, at l
esser yields than in the previous week. 

 The three- month yields slipped by 1 basis point to 4.70 percent, six- month yields by 2 basis points to 4.78 percent and the one- year yields fell by 3 basis points to 5.02 percent.
The auction was oversubscribed by 2.7 times. 

MMT prescribes the financing of fiscal deficit by Central Bank liquidity for sovereign nations. Even before MMT became a quasi-economic theory, this was and is practiced all over the world. But questions have been raised about the ability of continuing with this practice, for countries whose currencies are pegged to some other currencies, which they have no control of.