ECONOMYNEXT – Sri Lanka has recorded a balance of payments deficit of 3,961 million US dollars the highest in the central bank’s history data showed, as record money printing boosted domestic consumption and investment and reserves were lost for debt and imports.
By the end of 2021 Sri Lanka has seen three years of balance of payments deficits without a correction in monetary policy.
After three years of money printing, inflation has surged to 14.2 percent by January 2022.
Sri Lanka was printing money to maintain artificially low fixed interest rates, with yield controls on domestic debt which led to sweeping failures of Treasuries auctions.
Yield controls were removed and Treasuries auctions are mostly successful now.
Since September however money is printed to sterilize reserves given for imports, which has picked up.
Money is also printed to give an extra premium of 8 rupees to expatriate workers who remit money through the banking channels, in a quasi-fiscal activity.
The central bank has also imposed surrender rules forcing banks to sell export dollars to it.
Sri Lanka’s central bank usually tightens monetary policy stop liquidity injections – usually under IMF programs – in the second year of a BOP deficit.
However BOP deficits are now into the third year with reserves continuing to fall in 2022.
Sri Lanka’s BOP went into deficit from around August 2019, when inflationary policy began with the purchases of bonds from commercial banks.
Sri Lanka has been following less rule based and more activist monetary policy involving ‘flexible’ inflation targeting (discretionary domestic anchor) and ‘flexible’ exchange rate (a discretionary external anchor) since the end of a 30-year leading to violently conflicting anchors and currency crises in quick succession. (Colombo/Feb12/2022)