The cost of maintaining a domestic cash buffer through overborrowing, which reached approximately 1.2 trillion rupees by November, results in an additional expense of about 2 percent, the Committee on Public Finance was informed.
“There is a margin of about 2 percent between the borrowing and the return we get,” said Damitha Rathnayake, Additional Director General of Treasury Operations. “So we are downsizing it.”
It was not specified whether the 2 percent represented an average or marginal cost associated with over-issuing longer-term bonds and underutilizing cheaper Treasury options.
In Sri Lanka, interest rate volatility stemming from currency crises has discouraged the holding of long-term bonds, resulting in greater availability of short-term funds. By the end of the year, excess borrowings are expected to be around one trillion rupees, according to Rathnayake. President Anura Kumara Dissanayake stated in parliament last week that by the end of November, excess borrowings stood at around 1.2 trillion rupees.
Approximately 500 billion rupees of these funds are allocated for hurricane relief and recovery efforts. Plans are in place to maintain excess borrowings equivalent to about three months of debt service, estimated at 500 to 600 billion rupees. These excess borrowings are deposited in state commercial banks.
Rathnayake explained to the Committee on Public Finance that Sri Lanka has been maintaining this buffer to replace the practice of money printing. However, analysts have cautioned that domestic reserves cannot be effectively held in local banks for future contingencies, as commercial banks may lend the cash in the interbank market, extend credit, or purchase short-term government securities in a circular process.
Analysts warn that sudden withdrawals of state cash deposits from banks could disrupt interbank credit and bank deposits, or reduce subscriptions to new Treasury bills in the short term. They emphasize that true ‘rainy day’ funds need to be held externally, which is why countries establish sovereign wealth funds abroad.
Cash held in the central bank’s deposit window over time would have a deflationary impact, resulting in an increase in monetary foreign exchange reserves. These reserves would then be depleted if liquidity is withdrawn at a fixed exchange rate.
Treasury bills, originally created in Britain as Exchequer Bills, are designed to address the government’s short-term cash needs. They allow market pricing of interest rates at the short end and can crowd out private credit, helping to prevent external crises or currency depreciation.
Government cash requirements may increase during times of war or crisis, particularly when vulnerable sections of the population are already under stress. Analysts note that any depreciation resulting from interest rate manipulation—especially through inflationary open market operations—can drive up food and energy prices, exacerbating hardship for affected groups.
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