ECONOMYNEXT – Profits at Sri Lanka’s central bank plunged 60 percent to 55 billion rupees in 2019 from 137 billion rupees in 2018 as the currency stabilized and profits from inflationary financing of the banking system and budget reduced, official data showed.

The central bank earned 32 billion rupees from forex reserves up from 25 billion rupees in 2018, as more reserves were collected by selling down Treasury bills as domestic private credit slowed.

Another 42 billion rupees in unrealized gains were made from gold (27 billion rupees) and currency swaps (14 billion rupees).

The central bank had ‘borrowed’ dollars from domestic banks through swaps which goes against it when money is printed and the rupee falls. In 2018 when the rupee fell the central bank lost 14.8 billion rupees on the swaps.

The rupee appreciated from around 182.7 at the end of December to around 181.6 by end December 2019.

In 2018 as the currency collapsed the central bank made 146 billion rupees in forex gains as people lost purchasing power, companies with dollar borrowings suffered losses and the national debt exploded.

In 2019 there was a 14.5 billion forex loss as the rupee appreciated amid monetary stability.

Income from local currency assets grew to 13.9 billion rupees in 2019 from 6.1 billion in 2018 even as Treasury bills were sold down.

The Treasury bill stock rose sharply after the liquidity injections made in the last quarter of 2018 when the rupee fell fastest.

Under a reversal of prudential rules set by then Governor A S Jayewardene, a classical economist, the central bank also started buying bonds into its balance sheet to manipulate interests rates further down the yield curve.

In the past rate longer term financial repression had to be done through the so-called captive sources.

The central bank also paid 5.4 billion rupees to employees. Another 1.1 billion rupees was transferred to one pension funds, and yet another 1.1 billion rupees was transferred to a second pension fund.

Under Sri Lanka’s monetary law drawn up by John Exter unrealized gains and forex profits from currency collapses cannot be transferred to the Treasury.

The central bank had made 25.3 billion rupees in profits which could be transferred. Out of those 24 billion rupees was transferred in February 2020.

The profits transferred as excess liquidity had been made the first of the 2020 helicopter drops that led to currency pressure in 2020, trade controls and the credit downgrade amid a Coronavirus crisis. (Colombo/May22/2020)