Narrow Sri Lankan Rupee dollar swap discounts, positive short durations

ECONOMYNEXT – Sri Lanka’s one-year swap haircuts narrowed further this week, with a 12-month swap haircut falling to -300 / -500 as parallel markets widened, market participants said.

There have been a few isolated deals in the cash market to help smaller banks, brokers said.

Exporters are paid as much as 207 to the US dollar in some cases, by some banks, which are sold to urgent customers and outflows, according to market participants.

In general, import customers are expected to receive 203 dollars to the US dollar.

The swap rates from dollar to rupees are as follows.

Spot / 12 months -300 / -500

Spot / 6 -months -300 / -200

Spot / 3- months -30 / + 30

Spot / 2 – month 0/50

Spot / 1 – month 0/30

Swap discounts have narrowed since demand from state-owned banks declined, and banks also secured dollars of maturing sovereign and Sri Lankan development bonds.

Dollar funding in Sri Lanka’s interbank market had tightened after a credit downgrade to CAA + in late 2020 and money printing.

Some banks find it difficult to serve customers who have goods stuck at the port purchased on DA / DP conditions.

Demurrage and delays amount to around Rs 50,000 per day for containers stuck at the port, making their customs clearance more cost effective.

However, some banks still give dollars at around $ 203 to importers and buy from exporters also at the same rate.

With the increase in parallel markets, foreign workers have a greater incentive to send money through the havala and undiyal systems, banking sources said.

Sri Lanka refused the convertibility of the dollar into printed rupees in the trade account, which led to rationing of dollars to importers by banks. The printed rupees are, however, redeemed by unsterilized interventions for the repayment of the debt.

Sri Lanka has been steadily losing currency reserves since August 2019, when money printing began for “targeting the output gap”.

By 2020, the money had been printed primarily to target gilt yields, turning inherited debt into reserve currency in some cases, to fund government spending, to create a fuel stabilization account, and also to refinance. overdue government payments through a credit program.

However, some of the money printed has also been absorbed by a surge in demand for banknotes among the public (also known as the internal drain) which does not cause any harm to the economy.

Most of the money injected left the country in the form of lost foreign exchange reserves or an “external leak”.

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