Benchmark government security interest rates came down further at this week’s Treasury bill auction which attracted bids amounting to over Rs. 28 billion with primary dealers showing a preference to hold six-month and one-year bills.

The three-month Treasury bill attracted Rs. 5.1 billion of which the Central accepted Rs. 2.7 billion with the yield falling to 8.14 percent from 8.5 percent a week ago.

The six-month Treasury bill rate came down to 9.02 percent from 9.35 percent after attracting Rs. 12.3 billion of which Rs. 3.8 billion was accepted.

The one-year Treasury bill saw rates fall this week as well to 9.68 percent from 9.88 percent. Bids amounted to Rs. 11.3 billion of which Rs. 5.6 billion was accepted.

Benchmark Treasury bill rates have been falling since the Central Bank began to relax its monetary policy stance with the rate inflation decelerating reaching 0.7 percent in September after peaking at 28.2 percent in June 2008 and as banks began to hold excess rupee liquidity positions with the Central Bank purchasing dollars in the domestic foreign exchange market.

The excess rupees were used by commercial banks to invest in government securities which drove down Treasury bill and bond rates, rather than engage in risky lending.

This prompted the President Mahinda Rajapaksa to issue a directive calling for sweeping lending rate cuts in the state-bank sector hoping market forces would force private commercial banks to soon follow suit.

The Treasury bond auction did not take place this week. At last week’s auction the four-year bond rate came down to 9.78 percent while the five year bond reached down to 9.92 percent. The two-year bond yield settled at 9.55 percent.

While the Central Bank has been giving commercial banks policy signals for lending rates to come down so that economic activities could pick up, lower rates of interest also helps government meet its domestic debt obligations and borrow to bridge the budget deficit.

The budget deficit for the first nine-months of 2009 expanded 30 percent year-on-year to Rs. 322.6 billion, the Central Bank said in its report ‘Recent Economic Developments: Highlights of 2009 and Prospects for 2010’ (see Island Financial Review of Wednesday, November 05, 2009).

Net domestic financing of the deficit amounted to Rs. 166.5 billion.

"Domestic borrowings mainly comprised of debt instruments, especially Treasury bills and bonds. Net borrowings by way of Treasury bills and bonds increased from Rs. 15.5 billion and Rs. 105.2 billion to Rs. 17.5 billion and Rs. 153.4 billion respectively,"the Central Bank said.

The Central Bank said the original budgeted estimate for net domestic borrowings were Rs. 183.1 billion later revised in June to Rs. 331.8 billion, "which is significantly higher."

Net foreign financing of the deficit amounted to Rs. 156.1 billion, 48 percent of the government’s borrowing requirement.

Government recurrent expenditure for the first nine months of this year amounted to Rs. 661.5 billion, a 26.2 percent increase from Rs. 524.1 billion for the corresponding period last year.

"This increase was mainly due to the increases in interest payments (an increase of 63 percent to Rs. 253 billion from the corresponding period of 2008), salaries and wages (20 percent increase to Rs. 204 billion) and pension payments (17 percent to Rs. 62.6 billion).