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Sunday March 26th, 2023

In Sri Lanka reserve money expansion is ‘proper’ money printing: CB Governor

ECONOMYNEXT – In Sri Lanka a rise in reserve money (as calculated officially) is considered ‘proper money printing’, which had slowed in recent periods, Central Bank Governor Nandalal Weerasinghe said.

“When we look at the recent data, in terms of the amount of reserve money expansion by the central bank which is in proper terms is what is called money printing, in fact has been decelerating,” Governor Weerasinghe said told reporters in Colombo.

“Also our subscriptions to auctions, as you all know over the last several weeks we have been raising full amounts from the markets, without the central bank subscribing.

“That is one way of increasing reserve money. We have curtailed that part as well.”

Governor Weerasinghe allowed rates to go up and effectively stopped money printing bringing back external stability and allowed inflation to fall, possibly ending hyper-inflation and market dollarization that generally follow.

In Sri Lanka, excess liquidity (excess reserves above what is required by the statutory reserve ratio), which is available for final clearing of transactions is not considered reserve money.

The excess liquidity available for final clearing of transactions is also directly exchangeable for dollars and can be used for imports if loaned out.

The money, which is a domestic liability of the central bank, then trigger forex shortages gradually disappearing as a foreign reserve depletion at the given flexible exchange rate as they are redeemed against fx reserves, which is a foreign asset.

In the current crisis, large volumes of excess reserves have been deposited in the central bank overnight window by a few risk averse banks.

During the time bond auctions were rejected in 2020 and 2021, the cash was deposited the overnigh window pending loaning to customers or government and the fx reserve losses that follow.

In Sri Lanka ‘reserve money’ or reserve money (as defined), also collapses like a stone in a single day when the SRR cut cut though the money is available for final transactions in the same day and had disappeared later as foreign reserve losses.

When the SRR is hiked amid forex shortages, large overnight liquidity shortages (borrowed reserves) appear in the banking system and reserve money as defined rises.

In Sri Lanka reserve money is defined broadly as the SRR and notes and coins in circulation, and excess reserves (deposits in the SDF window beyond SRR requirement) appear to be effectively excluded. (Colombo/Feb05/2023)

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  1. Tamailrajan says:

    It would be better if you use/explain what the terms SRR and SDF stand for and explain for readers like me who have limited knowledge in the field…

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  1. Tamailrajan says:

    It would be better if you use/explain what the terms SRR and SDF stand for and explain for readers like me who have limited knowledge in the field…

Sri Lanka seeks to settle India ACU debt, credit lines over 5-years

ECONOMYNEXT – Sri Lanka has requested India to settle payments due to the country under the Asian Clearing Union mechanism and credit lines given in 2022 over 5 years, Indrajit Coomaraswamy, an advisor the island’s government said.

Sri Lanka is negotiating with India to settle the money over a 5-year period, Coomaraswamy, a former central bank governor told an online forum hosted by the Central Bank.

“Our request from the Indians is to settle it over five years,” he said. “That I think is still in the early stages of negotiation. The same with the one billion line of credit.”

Sri Lanka’s central bank owed the ACU 2.0 billion US dollars to the Asian Clearing Union according to a year end debt statement, issued by the Finance Ministry.

Sri Lanka owned India, 1,621 million dollars according to ACU data by year end, excluding interest.

India has given a 1 billion US dollar credit line to Sri Lanka as well a credit line for petroleum.

Sri Lanka in March 2024 has paid 121 million US dollar out of a 331 million US dollar IMF tranche to settle an Indian credit line.

Indian credits were given after the country defaulted in April 2022 as budget support/import when most other bilateral lenders halted giving money. (Colombo/Mar26/2023)

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Sri Lanka coconut auction prices up 1.16-pct

ECONOMYNEXT- Sri Lanka’s coconut auction prices went up by 1.16 percent from a week ago at an auction on Thursday, data showed.

The average price for 1,000 nuts grew to 83,219.45 from 82,260.58 a week earlier at the weekly auction conducted by Sri Lanka’s Coconut Development Authority on March 23.

The highest price was 92,500 rupees for 1,000 nuts up from the previous week’s 90,600 rupees, while the lowest was 76,500 also up from 70,000 rupees.

The auction offered 900,010 coconuts and 583,291 nuts were sold. (Colombo/Mar 26/2023)

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Sri Lanka in talks for billion dollar equivalent Indian rupee swap

ECONOMYNEXT – Sri Lanka is in talks with India for a billion US dollar equivalent Indian rupee central bank swap, to facilitate trade, Indrajit Coomaraswamy, ad advisor to the government said.

“The amount is still uncertain it could be up to the equivalent of a billion US dollars,” Coomaraswamy told an online forum hosted by Sri Lanka’s central bank.

The money will be used to facilate India Sri Lanka trade, he said.

India has been trying to popularize the use of Indian rupees for external trade and also encouraged Sri Lanka banks to set up Indian rupee VOSTRO accounts.

However the first step in popularizing a currency for external trade is to get domestic agents, especially exporters, to accept their own currency for trade, like in the case of the US or EU, analysts say.

India’s billion US dollar credit to Sri Lanka given during the 2022 crisis is settled in Indian rupees (transaction need).

However the Indian government itself has chosen to denominate it in US currency for debt purposes (future value).

In most South Asian nations, receivers of remittances are willing to accept domestic currencies, leading to active VOSTRO account transactions.

Sri Lanka is expected to repay a 400 million US dollar swap with the Reserve Bank of India next year under an International Monetary Fund backed program for external stability and debt re-structuring.

Central bank swap proceeds sold to banks, which are then sterilized with inflationary open market operations, can trigger forex shortages and currency crises, analysts warn.

Sri Lanka went to the International Monetary Fund after two years of inflationary monetary operations by the central bank’s issue department (money printed to suppress interest rates) triggered the biggest currency crisis in its history and external sovereign default.

Sri Lanka had gone to the IMF 16 times with similar external troubles except for the April 2003 extended fund facility under Central Bank Governor A S Jayewardene which was a purely reform-oriented program with the World Bank (PRGF/PRSP) program at a time when he was collecting reserves with deflationary monetary policy and perhaps the lowest inflation since the Bretton Woods collapsed. (Colombo/Mar26/2023)

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