DDR, budget support loans to accelerate yield and interest rate decline

• CB says govt. would require less money from domestic market going forward to bridge fiscal deficit

The recently concluded domestic debt restructuring (DDR) and anticipated budget support loans from multilateral lenders are expected to contribute to further reductions in bond yields and market interest rates in the coming months. 
This comes as the Central Bank temporarily halts any additional 
rate cuts.
The Central Bank said it believes that the government would require less funding than before the DDR, potentially resulting in a reduced need for raising funds through bills and bonds in the future.
Further, it expects the direct budget support loans, potentially available to the government after the anticipated conclusion of the first programme review by the International Monetary Fund (IMF) in December, will further reduce the Treasury’s reliance on the domestic market for funding.
Both of these developments are anticipated to expedite the ongoing decline in treasury yields and market lending rates. This is expected to create a favourable environment for businesses to secure funding from the banks, thereby contributing to the support of economic recovery.
“We have completed the domestic debt restructuring. With that, the amount of treasury bill and bond issuances should come down,” said Central Bank Governor 
Dr. Nandalal Weerasinghe. 
Sri Lanka is optimistic about securing budget support loans directly from agencies such as the IMF, World Bank and Asian Development Bank. This would assist in managing the budget deficit without relying extensively on domestic 
market borrowings.
As a result, Dr. Weerasinghe believes the need for money from the domestic market should come down. 

 “Therefore, we expect a faster normalisation in treasury bill and bond yields than it is happening now and would return to the level of the policy rates. 
With that easing in yields, we expect the market lending rates for businesses and particularly the small and medium industries to come down much faster,” 
he said. 
“So, we will be watchful and will work very closely with the banks to ensure that the benefit of these overall easing in the lending rates would translate into more lending towards businesses and other borrowers and thereby helping the economy to return to normality soon,” he added.
The Central Bank last week slashed the key policy rates by 100 basis points, bringing the total cuts in the policy rates for the year to 650 basis points. 
The Central Bank also said it would pause on any more rate cuts, as it sees more room for the yields and market rates to ease, prior to any more policy relaxation.