Sri Lanka’s foreign reserves increased to USD 4.5 billion in April 2021 supported by the USD 500 million loan from China Development Bank improving reserves from USD 4.1 billion in March 2021(lowest since Aug 2009).
Depleting foreign reserve position, high foreign currency debt repayment (USD 4 bn outstanding debt payment from Apr-Dec 2021) requirement and limited funding sources available in the market are expected to further increase pressure on yields in 2H-2021.
However, due to the continuous under-subscription of bill and bond auctions, the budget deficit was financed mainly via quantitative easing leading to a sharp rise in CBSL Holdings (Rs 884billion as at May 6, 2021) which creates aggregate money supply and high liquidity.
Considering the surge in market liquidity, rate pressure may subside in the short term, but brace for bond tantrums in 2H-2021.
The inflation in April marginally dipped to 3.9% driven by decrease of prices in the food category.
Meanwhile private credit expanded by Rs. 112.2 billion in March 2021.
The Foreign exchange market remains volatile; YTD USD/LKR has depreciated by 6.5%.
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