The large deviation between the interest rate corridor, market interest rates, and government securities has allowed the profits of the Primary Dealers to balloon. Capital Alliance Treasury, being the first listed Primary Dealer to announce 2022 December results posted a Rs 1.2 billion quarterly profit against a loss of Rs 145 million in the last quarter. These results come on an asset base of Rs 27 billion which again is largely leveraged.
An interest rate corridor (IRC) is a system for guiding short-term market interest rates towards the central bank (CB) target/policy rate. It consists of a rate at which the CB lends to banks (typically an overnight lending rate) and a rate at which it takes deposits from them (deposit rate).
Of this Rs 1.2 billion in profits, Rs 1.01 billion can be attributed to remeasurement gains on government securities, with Rs 64 million attributable to trading gains on government securities. The Primary Dealer market in Sri Lanka also restricts true access for potential market participants to lend to the government. Capital Alliance was able to make an interest income on its government securities by receiving interest of Rs 1.2 billion on its securities while only incurring an Rs 818 million outflow on the securities it sold under repurchase agreements.
Given recent movements in government securities it is likely that the 31 March 2023 figures for the listed Primary Dealers should show large rises in profitability. The Central Bank has acknowledged the large conflict of interest in managing both the issuance of government securities, the management of public debt, and the stability of the banking system.
By design, there is limited liquidity in the government securities market and the Central Bank has acted to prevent the trading of government securities and even corporate debt on the Colombo Stock Exchange. Due to the lack of trading opportunities despite clear mark demand, there is a lack of price discovery and no reflection in the recent risk reduction of default to the cost of government financing. TP
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