ECONOMYNEXT – Sri Lanka’s central bank has not yet tripled a re-finance (printed money) facility to 150 billion rupees (about 800 million US dollars) to give COVID-19 relief loans as ordered by President Gotabaya Rajapaksa, Information Minister Bandula Gunewardene said.

“I said as cabinet spokesman last week that President had ordered the central bank to give 150 billion rupees of re-finance,” Minister Gunewardene said.

“But it has not happened.”

Quasi-Fiscal

The central bank had already provided 50 billion rupees central bank credit (printed money) re-finance facility for banks to give loans without using real savings (deposits which offsets total consumption).

Minister Gunewardene said there were complaints from borrowers that banks were not giving loans as ordered under a debt moratorium already approved.

“Next week the President will take another action on this,” he said.

When credit is given with printed money, the excess demand from the newly created money puts pressure on the exchange rate and the central bank has to sell dollars to mop up the rupees in forex markets (defend the rupee).

The sale of domestic currency securities to mop up the new rupees will also result in (quasi-fiscal) losses to the central bank. Sri Lanka’s central bank is already giving forward guarantees to banks which results in quasi-fiscal losses when the rupee falls steeply.

Further Reading: Central Bank Quasi-Fiscal Losses and High Inflation in Zimbabwe

A 150 billion rupee facility amounts to about 800 million US dollars in potential forex reserve losses when the rupee is defended against the newly created money. Sri Lanka had forex reserves of about 7.2 billion rupees by the end of April.

Sri Lanka has already placed exchange and import control after printing money in March and April.

Minister Gunewardene said the central bank was an independent financial authority.

Api Nodanner Mudal

“It is like the Elections Commission,” he said. “Money is not a game (Moodhull kiyan-nay sel-ler muck nevei. Api nodun-ner moodull). It is on a paper banknote that the entire economy’s trust is place.

“The monetary board has the monopoly power to issue money. It is not a power that the government has. It is like the Elections Commission.

“To that independent financial authority, the President has given instruction (oopperdes). It has been informed that those instructions have not been carried out.”

“Agencies that issue money – Reserve Banks all over the world operate like that. The President will make the necessary intervention next week.”

Sri Lanka’s high inflation and currency depreciation in the 1980s which blocked people from getting full benefits of a re-opened economy in 1978 was also partly due to central bank re-finance of bank credit.

Then-Governor A S Jayewardene stopped central bank re-finance of bank credit known as quasi-fiscal activities and also halted the direct purchase of Treasury bills at auctions, helping bring back monetary stability, end widespread strikes and keep the economy from collapsing as the war intensified.

However many of his prudential rules have been broken over the past three years, critics have said.

The collapse of the Zimbabwe dollar about 15 years ago and the country’s slide into hyperinflation was also worsened by several re-financed credit schemes.

The Reserve Bank of Zimbabwe set up a Productive Sector Facility (PSF) commercial firms, and Agricultural Sector Enhancement Facility (ASPEF) for farms about 15 years ago triggering severe foreign exchange shortages.

Another fund Parastatals and Local Authorities Reorientation Programme (PLARP) re-financed state enterprise and sub-national agencies. (Colombo/June11/2020-sb)