In March severe cashflow strains usually emerge in government finances as state employees are paid two salaries ahead of a national festival in April.
In recent weeks monetization of domestic rupee debt has gathered pace and last week bids for a 10.5 billion rupee Treasuries auction was rejected raising a red flag to markets about the state of government finances and actual underlying pressure on interest rates.
In the past, rejected bill auctions have been usually repaid with central bank credit, undermining monetary policy, pushing inflation up, triggering currency pressure or both. Sri Lanka called bids to sell 50 million US dollars each of two and three year bonds last week targeting mainly resident buyers and the debt office, which is a unit of the central bank said the responses totalled 134 million US dollars.
The government had sold 55 million US dollars of 3-year bonds at a weighted average rate of 6-month London interbank offered rate (LIBOR) plus 395 basis points with the March 18 LIBOR rate at 0.40 percent.
Another 37 million US dollars of 2-year bonds had been sold at 6-month LIBOR plus 380 basis points.
The debt office said in September 2009 the government had sold 3-year bonds at a weighted average yield of 425 basis points above LIBOR.
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In August 2009 2-year bonds had been sold at an average risk premium of 450 basis points above LIBOR.
The bonds, called 'Sri Lanka Development Bonds' are tradable and their interest is tax free.
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The debt office said the bond was within the limits allowed by a temporary budget, or 'vote on account' that the country is operating till April 2010 when a new parliament is due to be elected.