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Thursday September 29th, 2022

Sri Lanka’s central bank buys bonds in new money printing phase

ECONOMYNEXT – Sri Lanka’s central bank has bought bonds up to 2.2 years, going beyond 12 month Treasury bills beginning a new phase of money printing.

The central bank is now paying lip service that  it is ‘not printing money’, but has injecting cash in multiple ways, to trigger several currency crises since 2015, generating instability and spooking foreign investors.

The central bank bought a total of 8.3 billion rupees bonds at an auction conducted on September 25.

About 2.6 billion rupees were printed for around 1 year 7 months at 8.60 percent, another 5.1 billion rupees were printed for over 1 year and 10 months for 8.67 percent.

Another 605 billion rupees were printed at 8.77 percent for around two year and three months.

Under then Governor A S Jayewardene, a classical style economist, the central bank stopped printing money through bond purchases.

Sri Lanka’s monetary policy has deteriorated in recent years with the rupee collapsing from 131 to 182 to the US dollar and currency crises coming in quick succession.

During the 2015/2016 crisis, analysts have also noted ‘operation twist’ style activity by the central bank.

Banks deposited 33 billion rupees of excess liquidity in the overnight window and repo auctions on September 26.

The rupee closed at 181.80/182.00 to the US dollar in the spot market on Thursday.

The central bank operates a highly unstable peg called the ‘flexible exchange rate’ where both money and exchange policies are selectively used to depress the rupee, at its own discretion, critics have pointed out.

Excess liquidity including base money injected through dollar purchases to operate a pegged exchange rate is kept for extended period of time until the rupee falls.

When the rupee falls it is not defended until the fall is ‘disorderly’. However dollars are bought to inject money without a similar ‘disorderly’ gain.

The central bank also injects money through forex swaps in the same way foreign speculator hit East Asian currencies through the offshore swap market. Sri Lanka does not have an off-shore swap market for foreigners to swap dollars for rupees, but the counterparty is the Treasury.

The central bank also buys dollars from the Treasury outright at market rates with no ‘disorderly appreciation’ rule.

Growth has collapsed under monetary instability. The country also has large volumes of foreign debt. Analysts warn that Sri Lanka is running out of room to survive monetary crises. (Colombo/Sept26/2019)

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