ECONOMYNEXT - Sri Lanka's bank credit to private sector, state enterprises and central government had soared to a new historic high of 172.8 billion rupees September 2015 more than doubling from a month earlier heavily re-financed by printed money, official data show.
Sri Lanka's rupee also collapsed from 134 to 141 during September as an attempt was made to 'float' the rupee with reduced interventions, which failed as more money was printed by rejecting bids for weekly Treasury bill auctions and repaying maturing bills with printed money.
Central Bank credit or printed money injected in the system was 79 billion rupees during the month, data showed, taking the total up to 323.5 billion rupees. Central Bank credit was up 138 percent from a year earlier.
Credit to private sector rose to a never before seen high of 87.5 billion rupees in September, up 22.2 percent a year. When the Central Bank reject bids to Treasuries auctions and repay them with printed money, the banking system gets 'deposits' created out of thin air.
During the 2011/2012 balance of payments crisis, the highest private credit creation was only 63.2 billion rupees.
The new cash allows banks to give more credit than the deposits generated, generating excess domestic demand and imports and forcing the excess money to be mopped up by currency defence. If interventions are reduced, the currency will collapse.
Despite a policy rate cut to manipulate interest rates by the monetary authority in April and injecting rupee reserves into the banking system by repaying Treasury bills to enforce it, some banks have raised their deposit rates to get real deposits to finance credit.
Credit to central government also rose 42.4 billion rupees to 1,777 billion rupees, up 28 percent, central bank data showed.
Loans to state enterprises also rose 42.5 billion rupees, 525.3 billion rupees, up 44.4 percent from a year earlier.
During this time the Central Bank kept rates down, injecting cash in the banking system outside the overnight policy rate system through a 'quantity easing' exercise similar to term reverse repo auctions by repaying maturing Treasury bills with printed money.
Analysts have called for the central bank to be abolished in favour a currency board or at least to reform it so that the agency cannot intervene in Treasury bill markets, make profit transfers or give provisional advances to the Treasury when credit growth is positive.
Critics say the Central Bank had destroyed the currency since it was created in 1951 and systematically wages and capital and taking away the incentive and means for private business to invest and boost labour productivity through unsound money. (Colombo/Dec09/2015)