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Sunday June 26th, 2022

Sri Lanka bank credit to state repaid after money printing surge in Sept

ECONOMYNEXT – Sri Lanka’s rupee credit to government from commercial banks fell by 186 billion rupees to 3,961.3 billion rupees in September as 296 billion rupees were printed in September and sterilization of interventions and a statutory reserve hike.

In Sri Lanka state banks give overdrafts to the government and almost all banks buy bonds.

The 186 billion rupee fall in commercial bank credit to government as the Treasury bill bond stock of the central bank (not counting overnight injections) grew by 117 billion rupees.

When maturing bonds are repaid with printed money, paper securities issued to fill budget deficits of past years become liquid cash in the hands of former holders, which are then exchangeable for imports putting pressure on the exchange rate.

Failed bond auctions effectively monetize past deficits. Failed bond auctions with use of yield controls at Treasuries auctions was one of several tools used to print money and shatter external stability over the past year, analysts say.

In September the central bank also raised its reserve ratio, sucking out liquidity, expanding reserve money as calculated in Sri Lanka to 1,296.0 billion rupees from 1,089.3 billion.

Large volumes of liquidity was replaced at 6.0 percent through open market operations amid interventions.

Private credit grew by 66.7 billion rupees in September amid the SRR hike and liqudity injections, down from 104.0 billion rupees. Dollar credits valued in rupees fell to 490.8 billion rupees from 528.4 billion, amid a revaluation of the rupee in the month. (Colombo/Nov10/2021)

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