The Sri Lankan rupee, which shed nearly 80 percent of its value, has sent the rupee value of the foreign currency-denominated debt of the government spiralling by significant proportions, even with no fresh borrowings, as the rupee weakness is sending ripple effects across markets.
According to the outstanding public debt data available through April this year, the cumulative debt, comprising both domestic and foreign, surged to Rs.23,310.1 billion, from Rs.17,589.4 billion at the end of 2021.
While the domestic component of the total debt rose by Rs.1,345.1 billion in the four months to Rs.12,442.3 billion, the debt held by non-residents added the biggest jolt to the total outstanding debt.
The domestic debt component also consists of Sri Lanka Development Bonds and International Sovereign Bonds held by the resident Sri Lankans and the non-resident holdings of the two types of instruments are classified under foreign debt.
The total foreign debt stock added a massive Rs.4,375.6 billion in the four months through April, coming entirely from the translation effects of the foreign debt component at the weaker rupee
Sri Lanka has seen a resumption of interest on rupee denominated foreign bonds, as interest rates went up, and domestic credit slowed, reducing outflow of foreign exchange.
Foreign investor’s holdings of rupee bonds went up from 4.01 billion rupees on August 31, 2022 to 22.5 billion rupees on October 05.
The bonds were bought despite a threat of a second hair cut or restructuring of rupee bonds.
Rupee bonds have already been subjected to a high inflation and financial repression (IFR) haircut with their real value almost halving as the rupee’s soft-peg with the US dollar collapsed from 180 to 360 to the US dollar.
Domestic inflation has hit 70 percent in the 12-months to August.Foreign holdings of Sri Lanka’s rupee bonds are now at levels last seen in June 2020.
Foreign investors held large volumes of rupee bonds before the rupee started to collapse rapidly under ‘flexible inflation targeting’ perhaps the most deadly ‘impossible trinity’ style monetary regime ever cooked up by Washington-based Mercantilists.
Flexible inflation targeting involves applying aggressive open market operations to suppress interest rates with printed money to a reserve collecting peg, triggering currency crises.
Critics have said that such regimes, which are an extreme example of the impossible trinity of monetary policy objectives, are easily peddled to third world nations without a strong doctrinal foundation in either sound money or classical monetary theory.
A World Bank survey showed that there was no such doctrinal foundation in the entire South Asia region, and only 2 percent of ‘experts’ were aware that balance of payments deficits were caused by central banks, indicating that the region would continue to be dogged by monetary instability for year to come.
Washington based Mercantilists including Harry Dexter White and John H Williams first cooked up the Bretton Woods system promising ‘independent monetary policy’ to central banks that pegged the US dollar.
To be fair however Bretton Woods central banks were also pegged to gold independently and were free to pursue policies to maintain the gold peg, which was done by countries like Germany and Japan who successfully kept their pegs and Germany appreciated once.
