Improvement in CBSL’s ability to mobilize funds for government – Jonas

Capital Alliance Chief Strategist Udeeshan Jonas observed a significant improvement in the Central Bank’s ability to mobilize funds for the government. With new regulations in place, the practice of printing money has been halted, leading to increased financial stability. Through the adoption of counter-cyclical reserving practices by the Central Bank there was less rate volatility.

Jonas remarked on the progress made, highlighting the advances in debt management and the shift away from money printing, a practice curtailed by IMF policies. He emphasized the government’s success in fund-raising efforts and the Central Bank’s strategic use of buffers to manage interest rate fluctuations, leading to a notable enhancement in overall debt management.Jonas said, “If rates move up they use a buffer to bring the rates down. Overall debt management has substantially improved from the Central Bank perspective.”

These insights were shared by Jonas at the Spike Community’s ‘Tin and Tonic’ event at Barefoot Café on February 6. Furthermore, Jonas addressed the Central Bank’s communication strategy regarding debt restructuring, noting the absence of explicit statements on domestic debt restructuring, which led to speculative fear and a rise in interest rates. He refuted claims of insider knowledge within the industry about debt restructuring terms, explaining that banks, as industry participants, remained cautious in bond investments.

Jonas said, “The Central Bank never spoke about it. The Central Bank never said there was going to be a domestic debt restructuring. They said there would be some kind of restructuring. They never indicated that everyone was going to take a hit.”Jonas attributed the high-interest rates seen over the crisis period to statements made internationally to placate foreign lenders in the restructuring process.Jonas denied insinuations that there was insider knowledge of the terms of the debt restructuring by the entire industry. He said, “Not really, banks were also part of the industry and they stood away from investing in bonds.”

Discussing the highly risky strategy of primary dealers given public sentiment, Jonas explained their approach as informed by historical precedents and IMF data, which typically showed foreign bondholders bearing the brunt of restructuring impacts. He detailed the prioritization in debt restructuring, emphasizing the minimal impact on domestic entities, including pension funds, which are a major component in other contexts but less so in Sri Lanka.

Jonas said, “Primary dealers took a calculated guess and that was based on past experience. If you look at other countries and how restructurings were done in the past, the IMF figures published show that the largest hit was taken by foreign bondholders. Based on the gross financing needs if you take the breakdown the domestic debt was a very small part.”Jonas added, “There’s a sequence in which they normally go at which institutions they target. In whatever case it’s normally the pension funds because that’s a larger domain. In Sri Lanka, because it’s a smaller part that was going to be done by domestic, even when you include a smaller component on the superannuation fund the requirement was met.”Jonas concluded by mentioning the lifting of restrictions on outward foreign investments and encouraged the public to explore unit trust funds as a means to benefit from higher interest rates. TP

( Source : Daily Mirror)