ECONOMYNEXT – The aggregate overnight balance of Sri Lanka’s banking system fell to 0.03 billion rupee from 53.5 billion rupees two days earlier amid reserve outflows on two consecutive days with overnight rates also edging up to the highest level since July 2020, official data shows.
Overnight call rates went up to 5.15 percent, the highest July 08, 2020. On July 09 Sri Lanka’s policy corridor was cut by 100 basis points to 5.50 percent and 4.50 percent.
The rates was part of series of rate cuts, reserve ratio cuts and liquidity injections through outright monetization mimicking what was claimed to be ‘modern monetary theory’.
However rates are still below the 5.50 percent ceiling rate at which liquidity is supposed to be injected.
The central bank has been injecting hundreds of billions of rupees of liquidity through failed Treasury bills auctions to drive credit and trigger forex shortages.
On Friday the central bank’s Treasury bill stock went up to 922 billion rupees from 911 billion rupees following a partially failed bill auction at a ceiling rate of 5.26 percent.
However the reserve outflows sucked up the liquidity, leaving the overnight balance only 0.03 billion rupees plus.
The liquidity injections were made despite two currency crises and growth shocks in 5-years from liquidity injections to target call money rates and an output gap (a milder version of MMT) sending the rupee careening from 131 to 182 to the US dollar and import restrictions.
The liquidity injections in 2020 blew the balance of payments wide open, triggering a 2.3 billion US dollar BOP deficit. Up to May 2021 the BOP deficit has topped a billion US dollars.
Critics have said Sri Lanka’s economic woes started after a Latin America style central bank was set up in 1950 under the tutelage of a Federal Reserve ‘money doctor’.
The country hit the first BOP crisis as the Fed triggered commodity bubble purchasing ‘Liberty bonds’ injecting liquidity into the US banking system. Mercantilists mis-named in the Korean war boom, though Federal Reserve minutes show otherwise.
The Liberty Bonds bubbles also led to what is now called Fed – Treasury accord. (Colombo/July22/2021)