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)
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…