Sri Lanka prints more money in December, rupee falls

ECONOMYNEXT – Sri Lanka has monetized about 40 billion rupees of debt (printed money) in the last week of December, official data showed, generating excess demand, consumption, credit and imports and hurting the currency.

Excess liquidity in money markets (printed money sloshing around in the banking system) climbed from 63 billion rupees to 96 billion rupees Friday, after the settlement of the weekly Treasury bills auction.

On Monday 23 billion rupees were withdrawn through 31 day short term auction at 6.42 percent. The average three month bills yield was 6.38 percent last week.

The rupee fell a new record low of 145.95 Friday.

The rupee falls when the Central Bank fails to ‘redeem’ even pat of money in prints through Treasury bills purchases in money market via foreign sales in the forex markets when the money generates imports.

Sales of Treasury bills held by foreign investors have eased off during the last few weeks.

In most years, the Central Bank is able to buy dollars in December when there are large inflows of remittances which will only be spent in January and beyond. But this year the rupee has come under pressure in December as well.

Sri Lanka’s budgets deteriorated over 2015 due to a large state salary hike without tax revenue to back it and other subsidies doled out.

The central bank also failed to allow interest rates to go up and instead released liquidity, cut rates in April and then printed money outright to generate balance of payments trouble and engineer a currency collapse from 131 to 143 to the US dollar so far this year.

The rupee has collapsed from 4.79 to the US dollar since a currency board was abolished in 1951 to create central bank, giving a license to elected rulers to print money to finance budget deficits.

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A currency board not only instils monetary discipline but also forces rulers to be more fiscally responsible as sovereign default cannot be achieved by currency depreciation but a real haircut.

"It was a big mistake to move from a currency board to a central bank," top international economist Razeen Sally told a business forum in Colombo this month.

"In an ideal world I’d like to see Sri Lanka get back to a currency board, something fixed and rigid with little discretion, at least until policy is put on a sustainable footing for the medium term and credibility restored.

"But that’s not in the offing at the moment."

Sri Lanka’s central bank had pushed up inflation and hurt the currency destroying all debt – state and private bank deposits – and investible savings in the process since independence from British rule.

Last week the Hong Kong which has a true currency board raised its de facto policy rate by 25 basis points after the US raised interest rates, keeping the currency on an even keel, even as the mainland Renminbi came under pressure.

Dubai another financial centre with a stable currency, also raised its policy rates to match the US.

All these countries have far lower interest rates than Sri Lanka. Though Sri Lanka’s interest rates are high, due to period bouts of printing large volumes of money, the currency gets hits despite the higher interest rates.

Sri Lanka’s central bank is to make its December policy decision in December.

Many banks however have raised their deposits rates, despite the rate cut by the Central Bank in April to generate more deposits to meet rising state and private credit demand.

Some analysts say Sri Lanka’s monetary and fiscal policy has deteriorated to levels not seen since the 2004 ‘Rata Perata’ economic framework. (Colombo/December29/2015 – corrected Rs23 billion withdrawn through a term auction)

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