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Sri Lanka excess liquidity spike in Feb from central bank profit transfer

ECONOMYNEXT – A steep jump in excess liquidity in Sri Lanka’s interbank money markets came from a transfer of profits from the central bank to the Treasury, Deputy Governor Nandalal Weerasinghe said.

About 24 billion rupees in central bank profits were transferred to the Treasury, he said.

Excess liquidity in Sri Lanka’s money markets soared in late February with banks depositing 48 billion rupees at the central bank’s excess cash window while another 10 billion rupees were mopped up overnight.

The central bank has since mopped up more cash overnight, but has not permanently sterilized the liquidity generated.

Sri Lanka has no mechanism to transfer central bank profits as US dollar and recognize that unless the cash is permanently sterilized, it will pressure the soft-peg of the rupee, or forex reserves have to be spent to stop the rupee from falling due to the profit transfer.

Similar effects are also seen, when so-called provisional advances are given to the Treasury or any large liquidity injections are made.

Analysts who track the economic problems triggered by the soft–peg have called for profit transfers to be halted to build up forex reserves and the dollar backing of the rupee reserve money stock.

“Central Bank profit transfers to the government in the form of rupee liquidity have to be halted,” EN’s economic columnist has said in proposing to reforms Sri Lanka’s monetary system to take the country closer to high performing East Asian nations with monetary stability.

“Provisional advances have to be converted into Treasury bills and sold down.”

There may be no immediate impact if private credit is weak.

Sri Lanka’s chronic currency depreciation, inflation, trade restrictions, intensified exchange controls started with the creation of a soft-pegged exchange rate regime with help from the US. (Colombo/Mar06/2020)

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