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Thursday June 30th, 2022

Sri Lanka prints Rs23bn outright after price controls fail bill auction

ECONOMYNEXT – Sri Lanka has printed 23 billion rupees outright purchasing Treasury bills into the balance of the central bank after a failed Treasury bill auction last week, while overnight borrowings from a lender of last resort facility was at 45 billion rupees, official data showed.

The Treasury bill stock of the central bank hit a new high of 919 billion rupees on June 25 from 896 billion rupees a week earlier.

In the week to June 18 also the central bank printed 22 billion rupees taking the bill stock up from 874 billion rupees a week earlier.

In both weeks the debt office was unable to sell majority of bills offered for sale due to a price control of 5.21 percent set on one Treasury bills.

The 5.21 percent rate now serves as a de facto policy rate at which large volumes of liquidity is injected to expand reserve money.

The money is then paid to government suppliers or state workers who then spends (or invests) spends the money triggering imports and currency pressure.

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If the money is saved in banks, it is loaned out to others to invest through cascading credit, which is which is now more efficient with reserve ratios lowered (fractional reserve banking), eventually bringing in more imports for which dollars have not been earned.

The Treasury may alternately use the money to buy dollars from the central bank to repay loans and run down foreign reserves.

Sri Lanka is now under the worst import controls since the 1970s when also failed bill auctions were filled with printed money.

“The Treasury had to finance its expenditures increasingly by resort to Treasury bills despite the fact that no significant tenders forthcoming to absorb the successive issues of Treasury bills,” an unknown classical economist in the 25th anniversary publication of the central bank.
“The responsibility of absorbing the unsubscribed portion of the Treasury bill issue fell on the central bank.
“A major drawback in financing of budget deficits with central bank credit is that while the process involves an expansion in the money supply, it is not necessarily accompanied by an expansion by a corresponding increase in national product.

“Consequently, increased demand emanating from central bank financing of budget deficits had to be satisfied by increased recourse to foreign supplies with resulting pressure on the country’s external payments.

“Thus, though the Government fiscal problem and the balance of payments deficits were two distinct problems, they were nevertheless inter-related, in that the balance of payments deficits and loss of external assets arose partly out of the method by which the government sought to finance its deficits.

“With the continued loss of reserves and the accumulation of external liabilities, the ability of the Central Bank to maintain the international value of the rupee was gradually undermined.”

In addition to outright purchases via the 5.21 price ceiling, 45 billion rupees had been drawn out from the central bank’s lender of last resort window at 5.50 percent.

LOLR borrowings of printed money had gone up steadily from just 200 million rupees on June 08 to 50 billion rupees on June 23 just before the outright injection was made through Treasury bill purchase.

Sri Lanka triggered the biggest balance of payments deficit in history of 2.3 billion US dollars in 2020 by printing over 650 billion rupees, some of which was left over at the beginning of the year as excess liquidity.

Sri Lanka built a money printing under Keynesian-Mercantilist interventionist ideology in 1950, ending a currency board that kept the exchange rate fixed from 1885.

In July 1950 a classical economist warned in the London-base The Banker magazine that the new Latin America style central bank could do major harm to the economy.

“The Law has been drawn up under American Tutelage and along the lines that have been the subject of experiment in certain Latin American countries for some time eight years past,” a classical analyst write the July 1950 issue of the magazine.

“…The new Monetary Board is going to be given almost unlimited power of control over the banking system of Ceylon, – a power which, if misused could do irreparable harm to the island’s economy,” the analyst said prophetically.

“The step from an ‘automatic’ currency system (such as that which Ceylon inherited with is old Colonial Currency Board) to an ultra-modern “managed: currency system is necessarily fraught with great dangers and there may be some who will regret that Ceylon has decided to run such risks at this time.” (Colombo/June28/2021)

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