ECONOMYNEXT – Borrowings from Sri Lanka’s banking system after a tax cut at the beginning of the year and a Coronavirus pandemic had reached a historic high of 1.7 trillion rupees or over 11 percent of projected gross domestic product, while over half a trillion rupees had been printed, official data show.
Commercial banks provided 1.26 trillion rupees of credit to the government.
Central Bank credit to government was 505 billion rupees and the equivalent of about 2.5 billion US dollars as budget deteriorated, triggering forex shortages, currency pressure and ultimately forex reserve losses as the liquidity was mopped up though forex.
CB credit was about 3 percent of projected GDP in November. However Sri Lanka’s GDP projection had been lowered since then.
Most of the liquidity was off-set against foreign reserves given to repay debt, amid difficulties in rolling over debt after downgrades that came in the wake of tax cuts and currency falls, which raised fears over forex shortages.
The central bank also cut reserve ratios injecting more liquidity to the banking system. The monetary authority also pressured to give re-finance for Coronavirus relief loans in a quasi-fiscal operation.
Gross official foreign reserves dropped by 1.9 billion dollars to an estimated 5.66 billion rupees, by the end of the year, after being bolstered by a 400 million dollar swap.
About 209 billion rupees of excess liquidity remained in the banking system by end December 2020 which would trigger more forex losses when they are mopped up in through reserve sales to maintain the exchange rate. (Colombo/Feb02/2021)