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Sri Lanka’s last administration also printed money: Minister Cabraal

ECONOMYNEXT – Sri Lanka’s last administration had also printed money almost from the time they started in 2015, though now charges are being leveled at the current administration, State Minister for Finance Nivard Cabraal said.

“Now some members are saying money was printed. At times money has to be printed. Developed countries are printing money,” Minister Cabraal, a former Governor of the Central Bank said in his inaugural address to the parliament.

“There was no money printing in 2014. But very soon from February 2015 they printed money.”
The central bank’s Treasury bill stock had risen from around 50 billion had risen to over 200 billion rupees in that episode, Cabraal said.

“The central bank was made to purchase excessive amounts of Treasury bills,” he said.

The rupee fell from 131 to the US dollar fell to 150 in the money printing episode, data shows.

The central bank however had started injecting liquidity by terminating term reverse repo deals a little earlier, data shows.

While the central bank printed money in 2015 as the budget deficit as well as private credit was rising, in 2018 money was printed despite the budget deficit being brought down, leading to another currency collapse, due ‘central bank independence’ being given a pro-cyclical monetary authority, critics have said.

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The currency was not allowed to recover, unlike in 2009/2010 after as private credit slowed in both 2017 and also in 2019, while foreign reserves were collected, due to real effective exchange rate targeting (an external monetary anchor), despite claims being made that inflation was being targeted (a domestic anchor), critics have said.

In 2018, the rupee fell to 182 to the US dollar amid another bout of money printing, made to enforce pro-cyclical rate cuts just as the economy was recovering from the 2015/2016 period of monetary instability.

Meanwhile Cabraal said Sri Lanka’s government debt ratio had ballooned due to currency collapses.

The central government debt which was 8,599 billion rupees had ballooned to 13,031 billion by 2019, he said.

At least 1,772 billion was due to currency depreciation.

Cabraal said the rupee had depreciated 12.4 percent a year in the period from 1977 to 1986, and 7.1 percent a year a from 1987 to 96. After that depreciation was about 6 percent.

But from 2006 to 2014 depreciation was only 2.8 percent. But after 2015 average depreciation had jumped to 6.7 percent again.

He said growth had meanwhile fallen, from a high of 6.4 percent to 3.7 percent. The debt to GDP ratio which was brought down from 91 percent in 2005 to 72 percent had again risen to 86 percent amid low growth and currency depreciation.

Analysts however say the some of the debt had been taken off balance sheet and placed with state enterprises during the period, which had since started to mature.

Cabraal said growth had fallen to 2.3 percent in 2019.

“This was the second lowest growth rate since the economy was opened in 1977,” Cabraal said.

The lowest growth rate came after the 1999/2000 balance of payments crisis when the rupee fell from 72 to 90 to the US dollar.

Sri Lanka’s rupee fell close to 200 to the US dollar amid money printing in 2020, but has since been allowed to appreciate back to around 184 amid negative private credit.

Growth usually slows after each currency crisis as domestic consumption collapses due to an impoverished population and slow or negative credit.

The greater monetary instability since 2015 amid REER targeting had also led to capital flight.

Cabraal said at the time there were 3.4 billion US dollars worth foreign investments in Treasury bills despite lower interest rates.

He said a series of measures would be taken to draw capital and overcome the current challenges.

The current administration had controlled the spread of Coronavirus effectively he said. (Colombo/Aug28/2020)