Sri Lanka bank credit fueled by printed money in February

ECONOMYNEXT – Sri Lanka’s banking system disbursed Rs105 billion of credit to the state and private business, including Rs48 billion of printed money or Central Bank credit amid failed Treasury bill auctions, official data show.

Private businesses borrowed Rs53.7 billion from banks in February, up from Rs43.50 billion a month earlier, Central Bank data showed.

State enterprises were a negative Rs1.2 billion, with the total falling to Rs526.4 billion. The financial position of both the Ceylon Petroleum Corporation and Ceylon Electricity Board has been strong with low oil prices.

The central government borrowed Rs52.8 billion from the banking system, of which Rs48 billion came from Central Bank credit or printed money.

There were several failed Treasury bill auctions in the month, with unsold bills taken by the Central Bank, injecting rupee reserves and demand into the economy, which then puts pressure on the currency.

In January, Central Bank credit rocketed to Rs106 billion.

There were also failed Treasury bill auctions in March, putting further pressure on the rupee. However, from late April, money printing has petered off, reducing pressure on the rupee.

When new money is injected, foreign reserves have to be sold to ‘defend the currency’ and mop up excess money, reducing forex reserves. If they are not mopped up, the rupee will fall.

As long as credit is given with real deposits raised from the public (or bonds sold to the public), there is no balance of payments pressure.

Central Bank credit numbers also go up when government loan repayments abroad are made with foreign reserves, but such actions, while lowering forex reserves do not inject additional demand to the economy.

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The Central Bank kept excess liquidity in money markets as around Rs40-60 billion in February, adding fuel to the balance of payments crisis, keeping policy ‘loose’ despite a hike in interest rates.

Policy ‘tightened’ in April and May, with banks forced to borrow overnight from liquidity windows and the interbank market was kept ‘short’.

In the month, total credit given to the state and private sectors was Rs105.3 billion.

Analysts have called for a reform of the Central Bank’s monetary policy or its abolition in favour of a currency board to prevent currency depreciation, destruction of real wages by currency depreciation which makes people seek jobs in the Middle East, where real wages are higher. (Colombo/May23/2016)
 

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