The Central Bank of Sri Lanka (CBSL) on Friday denied Opposition claims that it was pledging US Treasury Securities worth USD 4.5 billion to obtain a credit facility of USD one billion.
“The CBSL wishes to reiterate that this facility is not extraordinary by any measure and constitutes an independent financial instrument available for use when required by Central Banks around the world,” the Central Bank in a release stated adding that the claims circulated in the media were ‘totally false’.
The CBSL said,”The Central Bank of Sri Lanka has recently entered into an agreement with the Federal Reserve Bank, New York (FED) as a temporary source of US dollar liquidity to be used when required.” The facility, in technical jargon, is an overnight Repurchase (Repo) facility available for “Foreign and International Monetary Authorities” (FIMA). Many Central Banks in the world have resorted to this facility to meet their short-term US dollar liquidity requirements. It added,”This facility enables a Central Bank to secure short-term funding when needed, without having to make any sudden structural adjustments to its long-term investment portfolios in foreign exchange.” As part of the contingency plans to meet Covid-19 related difficulties, the CBSL has decided to pledge USD one billion worth of US Treasury Bonds held in the CBSL reserve and enter into the above type of Repo facility with the FED. This would permit the CBSL to raise USD one billion in cash form when required.
When this Repo facility is settled by the CBSL, there will be no change in the CBSL Reserve position as the FED would release the pledged bonds back to the CBSL.
The cost to the CBSL would be the applicable Repo fee, which is about 0.35 per cent per annum. The release stated, ‘The CBSL has entered into this agreement with the FED, but no borrowings have yet been made and withdrawing from the facility at any point is at the discretion of the CBSL.’