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Sri Lanka prints money to finance deficits, CB Credit tops Rs700billion

ECONOMYNEXT – Sri Lanka has printed money in 2020 to finance the government as tax revenues fell and foreign financing dried up, officials said as deteriorating balance of payments triggered rating downgrades.

Sri Lanka’s Central Bank has purchased unprecedented volumes of Treasury bills to finance deficits and also target interest rates at various points along the yield curve.

Monetizing Debt

“If you talk about money printing, as the figures I showed in the presentation, the central bank now holds 566 billion rupees of treasury bills or government securities,” Central Bank’s Director of Economic Research Chandranath Amarasekara told reporters on November 26.

“And most of those have been purchased from the primary market.”

The central bank’s Treasury bill stock rose to 568 billion rupees on November 30, as a more Treasury bills were unsold at an auction to real buyers and debt was monetized or money was printed expanding reserve money.

Total central bank credit to government including provisional advances to the Treasury (which are mostly legacy injections which have been sterilized to neutralize their effects in past years) reached 735 billion rupees in October 2020, from 577 billion a month earlier, data shows.

“On money printing the definition differs,” Amarasekara said. “There was a need for the government to find funds, especially because of the reduction in revenue due to lowering tax rates.

“And also because the government did not has the benefit of increasing financing from abroad. So there was necessity for the government to find funds from the domestic market and CBSL was a one source for these funds.”

Sri Lanka’s central bank has a history of printing money – usually pro-cyclically as credit recovers – and creating currency collapses and balance of payments crises which then lead to a collapses in output (low or negative GDP growth).


“And usually when the credit to the central bank from the government increases, there is an argument that inflation can rise,” Amarasekara said.

“What we have to identify is that we are in a different situation particularly in this year. Because aggregate demand is low, economic activity is low and without a pickup in these two there will no demand driven inflation in the economy.”

According to classical economists any liquidity injections in a pegged regime is money printing, which will create balance of payments troubles, mal-investment (asset price bubbles) as well as price increases in consumer goods when a cascading expansion of credit takes place over a longer period.

In the period of the classicals money was pegged to specie (gold or silver) not to another anchor currency like the US dollar, which is backed by foreign reserves.

In a depression or credit collapse, money printing (expansion of reserve or base money) may not immediately result in a cascading expansion of credit though any currency depreciation will also raise the price structure of a country, even as firms cut margins.

However after Keynes’s General Theory, which involved countering a depression, when credit was negative, the definition began to change, allowing central banks to print money and generate monetary instability.

“The term inflation was initially used to describe a change in the proportion of currency in circulation relative to the amount of precious metal that constituted a nation’s money,” explains Michael F. Bryan of the Cleveland Federal Reserve in The Origin and Evolution of the Word Inflation.

“By the late nineteenth century, however, the distinction between ‘currency’ and ‘money’ was becoming blurred. What was once a word that described a monetary cause now describes a price outcome.”

“This shift in meaning has complicated the position of anti-inflation advocates. As a condition of the money stock, an inflating currency has but one origin — the central bank – and one solution, a less expansive money growth rate.”

Classical economists at the Feds in St. Louis, Richmond and Cleveland led the fight back against Mercantilists in New York that helped Paul Volcker to save the US dollar after its collapse in 1971, students of monetary history say.

In Sri Lanka reserve backing of the rupee (the proportion of currency relative to the amount of dollar reserves) has now plunged close to 50 percent with rising central bank credit to government and fall in forex reserves.

In the US, before the Fed was created in 1916 triggering the Great Depression in just over a decade, the 1970s Great Inflation and the 2008/9 Great Recession, money was minted in specie (primarily gold) by Congress and a number of free banks issued their own paper, supposedly fully backed by specie.

“The era between the mid-1830s and the Civil War—a period economists refer to as the “free banking era” — saw a proliferation of banks,” Bryan explains.

“Along with these institutions came “bank notes,” a private paper currency redeemable for a specific amount of metal. That is, if the issuing bank had it,”

“At times, banks did not have enough gold or silver to satisfy all of their claims. Bank notes, like the public notes that preceded them, also tended to depreciate.

“It is during this period that the word inflation begins to emerge in the literature, not in reference to something that happens to prices, but as something that happens to a paper currency.”

A massive banking crises occurred in the US after so-called ‘Greenbacks’ or paper money was printed by the Union, while the South’s Confederate paper dollars or ‘Greybacks’ completely collapsed.

Around 450 million Greenback paper dollars were later mopped up by the US Treasury with gold leading to deflation.

In Sri Lanka also money was issued by free banks and the Oriental Bank Corporation, which acquired Bank of Ceylon in 1849 which had a charter (an authorised bank). The Oriental Bank Corporation collapsed in 1884 around the time of the Shanghai crisis, which was silver related.

Related Colombo to Haldummulla, Sri Lanka’s centres of free banking

The British administrators replaced it with a currency board in 1885 which maintained monetary stability until 1950, when a soft-peg was set up, triggering chronic forex shortages and depreciation.

The Fed triggered the Great Depression in the 1930s after the inflation it created during the 1920s (the Roaring 20 bubble) collapsed, ending in a banking and stock market crisis (mal-investment).

Keynes then came out with a his theory, which was further refined by others, to what critics say is a more nuanced version of John Law’s proposals in the classical Mercantilist era.

In the run up to the Great Recession in this century, the Fed targeted a ‘core’ inflation which ignored the effects of monetary policy on both commodities (a depreciating dollar) and asset prices such as housing, until it was too late. Housing prices were delayed by the use of ‘imputed rents’ critics have said.

“Linking inflation to the price level proved to be another important turning point for the word,” Bryan says. “With the publication of John Maynard Keynes’ General Theory in 1936, an assault on the quantity theory of money commenced, and it dominated macroeconomic thought for the next 40 years.

“By appealing to the belief that resources could be regularly and persistently underemployed — an idea given support by the worldwide depression of the time — Keynesian theory challenged the necessary connection between the quantity of money and the general price level.

“Moreover, it suggested that aggregate price increases could originate from factors other than money.”

Depression Era Keynesian central banks

Analysts have said the 1950 soft-peg was set-up in the style of several depression-era Latin American central banks initiated by the Federal Reserve inspired by Argentina central bank creator Raul Prebisch, which was also an extension of Keynesian ideas.


How Sri Lanka, Latin America was busted by Fed money doctors creating strongmen, anti-Americanism: Bellwether

In theory it was supposed to run counter-cyclical policy with sterilizing powers keeping a firm peg. In pegged systems, the liquidity injections hit the balance of payments quickly as domestic credit picks up.

“The Keynesian system is a closed one, that is, it takes no account of foreign trade,” explained Goh Keng Swee, a classical economist and ex-Finance Minister of Singapore, who set up its Monetary Authority in a firm rejection of Keynesianism.

“This is admissible in theory, but in practice, since all modern states engage in foreign trade, a Keynesian stimulus will lead eventually to balance of payments deficits if governments do not exercise restraint in time.

“In the immediate post-war years, Keynesian economics won widespread acceptance in both academic and government circles in Britain and the United States,” Goh said.

“Confidence increased in the ability of governments to maintain full employment and stable economic growth through Central Bank credit policies and government fiscal (budgetary) polices

“However by the mid 1960s, certain stubborn difficulties appeared and refused to go away. In Britain, this took the form of balance of payment troubles which led to the devaluation of the pound in November 1967.”

RELATED Why Singapore chose a currency board over a central bank

Depression era central banks in Latin America and Asia as well as Keynesian soft-pegs in the Middle East and African countries did enormous damage to their populations as monetary instability ratcheted up and exchange and import controls were imposed.

“Financing budget deficits through Central Bank credit creation appeared to us as an invitation to disaster,” Goh said.

“There was no effective way of exchange control in an open trading economy like ours to deal with the inevitable balance of payments troubles.”

A part of the increase in printed money may disappear from the credit system without causing domestic inflation through the balance of payments as imports come in and the peg is defended.

Though private credit has been weak at least up to August 2020 (which makes a case that the central bank is running counter-cyclical policy), the budget deficit has soared partly due to Coronavirus lockdowns as well as import controls, which is also a consequence of a monetary policy error.

A part of central bank credit extended has been to repay foreign loans, keeping total reserve money stable with foreign asset derived money going down. In October a billion US dollar bond was repaid, supported by central bank reserves.

In Latin America, domestic asset expansion by Depression-era central banks had another outcome, sovereign default, as foreign assets fell and forex shortages emerged.

After 2005 when Sri Lanka got a credit rating and started to tap capital markets, increases in money printing and balance of payments troubles have also been accompanied by rating downgrades as foreign reserves fell.

In 2019, December the sovereign rating outlook was cut on sudden tax cuts, before money printing began and started to pressure the balance of payments.

The tax cuts to ‘stimulate’ growth came after two currency crises were triggered by the central bank with pro-cyclical money printing in 2015/2016 (as the credit system recovered from a 2011/12 crisis) and in 2018 (as the credit system recovered from the 2015/2016 crisis).

In 2018 fiscal policy was tight after tax hikes and the crisis was triggered by a rate cut enforced by liquidity injections in April, and a dollar rupee swaps in July/August apparently made to finally target an output gap and/or the Real Effective Exchange Rate.

Analysts had warned that downgrades were inevitable if rates are kept down with money printing under a ‘flexible inflation targeting regime’ (a discretionary domestic anchor) which conflicts with a ‘flexible exchange rate’ (a discretionary external anchor with a shifting convertibility undertaking).


Sri Lanka needs monetary discipline to avoid further downgrades: Bellwether

Sri Lanka heading for uncertainty with low rate obsession: Bellwether

As money was printed from February 2020 and the rupee fell from around 185 to the US dollar under a shifting convertibility undertaking which was enforced around 200 to the US dollar in March and April amid a Coronavirus crisis, more downgrades followed. (Colombo/Nov30/2020)

Comments (2)

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  1. ToThePoint says:

    Keep your articles to the point. It’s so lengthy – that people just tend to read the first two paragraphs..

  2. K.Wijesuriya says:

    Government has changed the strategy to reduce the foreign debts,
    and increase the domestic debt ratio .
    This is a good safer step.

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  1. ToThePoint says:

    Keep your articles to the point. It’s so lengthy – that people just tend to read the first two paragraphs..

  2. K.Wijesuriya says:

    Government has changed the strategy to reduce the foreign debts,
    and increase the domestic debt ratio .
    This is a good safer step.

Melco’s Nuwa hotel to open in Sri Lanka in mid-2025

ECONOMYNEXT – A Nuwa branded hotel run by Melco Resorts and Entertainment linked to their gaming operation in Colombo will open in mid 2025, its Sri Lanka partner John Keells Holdings said.

The group’s integrated resort is being re-branded as a ‘City of Dreams’, a brand of Melco.

The resort will have a 687-room Cinnamon Life hotel and the Nuwa hotel described as “ultra-high end”.

“The 113-key exclusive hotel, situated on the top five floors of the integrated resort, will be managed by Melco under its ultra high-end luxury-standard hotel brand ‘Nuwa’, which has presence in Macau and the Philippines,” JKH told shareholders in the annual report.

“Melco’s ultra high-end luxury-standard hotel and casino, together with its global brand and footprint, will strongly complement the MICE, entertainment, shopping, dining and leisure offerings in the ‘City of Dreams Sri Lanka’ integrated resort, establishing it as a one-of-a-kind destination in South Asia and the region.”

Melco is investing 125 million dollars in fitting out its casino.

“The collaboration with Melco, including access to the technical, marketing, branding and loyalty programmes, expertise and governance structures, will be a boost for not only the integrated resort of the Group but a strong show of confidence in the tourism potential of the country,” JKH said.

The Cinnamon Life hotel has already started marketing.

Related Sri Lanka’s Cinnamon Life begins marketing, accepts bookings


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Sri Lanka to find investors by ‘competitive system’ after revoking plantations privatizations

ECONOMYNEXT – Sri Lanka will revoke the privatization of plantation companies that do not pay government dictated wages, by cancelling land leases and find new investors under a ‘competitive system’, State Minister for Finance Ranjith Siyambalapitiya has said.

Sri Lanka privatized the ownership of 22 plantations companies in the 1990s through long term leases after initially giving only management to private firms.

Management companies that made profits (mostly those with more rubber) were given the firms under a valuation and those that made losses (mostly ones with more tea) were sold on the stock market.

The privatized firms then made annual lease payments and paid taxes when profits were made.

In 2024 the government decreed a wage hike announced a mandated wage after President Ranil Wickremesinghe made the announcement in the presence of several politicians representing plantations workers.

The land leases of privatized plantations, which do not pay the mandated wages would be cancelled, Minister Siyambalapitiya was quoted as saying at a ceremony in Deraniyagala.

The re-expropriated plantations would be given to new investors through “special transparency”

The new ‘privatization’ will be done in a ‘competitive process’ taking into account export orientation, worker welfare, infrastructure, new technology, Minister Siyambalapitiya said.

It is not clear whether paying government-dictated wages was a clause in the privatization agreement.

Then President J R Jayewardene put constitutional guarantee against expropriation as the original nationalization of foreign and domestic owned companies were blamed for Sri Lanka becoming a backward nation after getting independence with indicators ‘only behind Japan’ according to many commentators.

However, in 2011 a series of companies were expropriation without recourse to judicial review, again delivering a blow to the country’s investment framework.

Ironically plantations that were privatized in the 1990s were in the original wave of nationalizations.

Minister Bandula Gunawardana said the cabinet approval had been given to set up a committee to examine wage and cancel the leases of plantations that were unable to pay the dictated wages.


Sri Lanka state interference in plantation wages escalates into land grab threat

From the time the firms were privatized unions and the companies had bargained through collective agreements, striking in some cases as macro-economists printed money and triggered high inflation.

Under President Gotabaya, mandating wages through gazettes began in January 2020, and the wage bargaining process was put aside.

Sri Lanka’s macro-economists advising President Rajapaksa the printed money and triggered a collapse of the rupee from 184 to 370 to the US dollar from 2020 to 2020 in the course of targeting ‘potential output’ which was taught by the International Monetary Fund.

In 2024, the current central bank governor had allowed the exchange rate to appreciate to 300 to the US dollar, amid deflationary policy, recouping some of the lost wages of plantations workers.

The plantations have not given an official increase to account for what macro-economists did to the unit of account of their wages. With salaries under ‘wages boards’ from the 2020 through gazettes, neither employees not workers have engaged in the traditional wage negotiations.

The threat to re-exproriate plantations is coming as the government is trying to privatize several state enterprises, including SriLankan Airlines.

It is not clear now the impending reversal of plantations privatization will affect the prices of bids by investors for upcoming privatizations.

The firms were privatized to stop monthly transfers from the Treasury to pay salaries under state ownership. (Colombo/May25/2024)

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300 out of 1,200 Sri Lanka central bank staff works on EPF: CB Governor

ECONOMYNEXT – About 300 central bank staff out of 1,200 are employed in the Employees Provident Fund and related work, Governor Nandalal Weerasinghe said, with the function due to be transferred to a separate agency after a revamp of its governing law.

“When it comes to the EPF there is an obvious conflict of interest. We are very happy to take that function out,” Governor Weerasinghe told a forum organized by Colombo-based Advocata Institute.

“We have about 300 staff out of 1,200 including contract staff, almost 150 of permanent staff is employed to run this huge operation. I don’t think the central bank should be doing this business,”

The EPF had come under fire in the past over questionable investments in stocks and also bonds.

In addition, the central bank also faced a conflict of interest because it had another agency function to sell bonds for the Treasury at the lowest possible price, not to mention its monetary policy functions.

“There has been a lot of allegations on the management of this fund. This is the biggest fund of the private sector; about 2.6 million active, I think about 10 million accounts.

“When it comes to EPF, obviously there’s another thing. We obviously have, in terms of resources, on the Central Bank, that has a clear conflict because we are responsible for the members.

“We have to give them a, as a custodian of the fund, we have to give them a maximum return for the members.

“For us to get the maximum return, on one hand, we determine the interest rates as multi-policy. On the other hand, we are managing public debt as a, raising funds for the government.

“And on the third hand, this EPF is investing 90 percent in government securities. And also, interest rates we determine, and they want to get the maximum interest. That’s a clear conflict, obviously, there’s no question.”

A separate agency is to be set up, he said.

“It’s up to the government or the members to determine to establish a new institution that has a trust and credibility and confidence of the members that this institution will be able to manage and secure an interest and give them a reasonable return, good return for their lifetime savings,” Governor Weerasinghe said.

“The question is that how whether we have whether we can develop that institution, whether we have the strong institution with accountability and the proper governance for this thing.

“I don’t think it should be given completely to a private sector business to run that. Because one is that here we have no regulatory institution. Pension funds are not a regulated business.

“First one is we need to establish, government should establish a regulatory agency to regulate not only the EPF business fund, there are several other similar funds are not properly regulated.

“Once we have proper regulations like we regulate banks, then we can have a can ensure proper practices are basically adopted by all these institutions.

“Then you can develop an institution that we who can run this and can be taken back by the Labour Department. I’m not sure Labour Department has the capacity to do all these things.”

While some EPF managers had come under scrutiny during the bondscam and for questionable stock investments, in recent years, it had earned better returns under the central bank management than some private funds that underwent debt restructuring according to capital market analysts with knowledge of he matter. (Colombo/May24/2024)

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