Sri Lanka's central bank witnessed a significant decline in its net assets, dropping to 11.1 billion rupees in December 2023 from 25 billion rupees in the previous month, as per official data obtained.
The method of valuation used was not explicitly stated, leaving uncertainty regarding the cause of the December downturn, whether it resulted from administrative expenses or valuation losses.
In January, equity rebounded, reaching 59 billion rupees, attributed to increased profitability. Throughout the first three quarters of 2023, the central bank generated substantial profits from high-yielding domestic assets acquired while managing a record balance of payments deficit and a sovereign default.
Notably, in September, bills were converted into bonds with coupons below market rates, leading to significant valuation losses. Additionally, provisional advances, originally intended to be liquidated within 180 days but extended perpetually through automatic rollovers, were transformed into securities, adding approximately 300 billion rupees to gross financing needs.
Analysts suggested that while the automatic rollover practice prevented shocks to reserve money, it also masked the true impact on gross financing needs.
The central bank's restructuring of held debt aimed to prevent a broader bond market default, consequently maintaining confidence in government securities markets and reducing interest rates to low double digits.
In August 2024, government securities valued at 2,535 billion rupees and provisional advances of 344 billion rupees were disclosed, though the valuation basis remained undisclosed.
By September, government securities valued at 2,169 billion rupees were revealed, accompanied by retained earnings shifting from a positive 464 billion rupees to a negative 312 billion rupees.
Furthermore, the central bank's securities portfolio, with a face value of 2,743 billion rupees in December 2024, was marked-to-market at 1,622 billion rupees.
The International Monetary Fund has urged the recapitalization of the central bank if it lacks capital. Despite continuing profits from government securities coupons, the central bank's negative foreign reserves have necessitated borrowing dollars from India and the International Monetary Fund to suppress interest rates.
While the central bank's foreign assets once led to losses in 2022, recent data indicates a resurgence in borrowing dollars through swaps. The current situation highlights the complex financial challenges facing Sri Lanka's central bank and the imperative for sustainable financial management practices amidst economic turbulence.
