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Sri lanka News – Sri Lanka’s primary dealers have collectively lost 1.5 billion rupees up to August 2022 as interest rates spiked and they were hit by mark-to-market losses, a central bank report said.
Sri Lanka had seven non-bank primary dealers but only five were in operation now.

“The sector recorded a net loss of Rs. 1.5 billion for the eight months period, compared to a loss of Rs. 0.1 billion recorded in the corresponding period of 2021, mainly due to the mark-to-market losses incurred by the PDCs as a result of the surge in the interest rates,” the report said.

The total asset base of primary dealers had increased by 40.3 percent to 110.4 billion rupees as at end August 2022.

The government securities portfolio had increased by 41.3 percent and stood at 108.2 billion by end August 2022.

All active primary dealers ahd maintained their core capital above the minimum requirements of 2 billion rupees and risk weighted capital at 10 percent, by end August 2022.

Sri Lanka primary dealers make thin or no profits in the latter stages of a currency crisis or credit cycle triggered by money printed to suppress interest rates. As the credibility of the exchange rate peg is lost very high rates are required to stop the currency crisis.

The rates spike and the currency collapses in what analysts call ‘rawuluth ne kendeth ne’ a pithy Sinhala saying to denote that the intermediate regime central bank ultimately loses control of both the interest rates and exchange rate by mis-targeting rates as private credit picked up.

However after external stability is restored – usually with an IMF program – rates starts to collapse bringing large profits to bond holders and primary dealers.

This time however the soft-peggers went too far and the country defaulted. Due to a flaw in the IMFs default resolution framework where domestic bond buyers who suffered an IFR hair cut are not informed early whether they will suffer a second nominal default and re-structuring there is reluctance to buy bonds.

IMF has tried out different types of default resolution frameworks following Latin America defaults and currency crises but most have failed to stem repeated crises, due to encouragement of soft-pegging with flexible of discretionary policy involving conflicting domestic and external anchors.

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