ECONOMYNEXT – Sri Lanka printed 1.2 trillion rupees in 2021, most of which left the country as official balance of payments deficit data shows, in addition to the 505 billion rupees printed in 2019, primarily to keep interest rates low.
Central bank credit to the government rose to 2,093 billion rupees in December 2021 from 868.9 billion rupees a year earlier.
Part of the central bank’s credit to the government, including more than 200 billion in July 2021, relates to foreign exchange reserves allocated to the repayment of bonds, which have not created domestic inflation. However, they prevented the monetary system from tightening and rates from rising.
In 2020, Sri Lanka printed 505.9 billion rupees based on official data, but the cash injected into the banking system was much higher. Money was also injected through a reduction in the legal reserve rate. In a bizarre move, the money was reprinted in September 2021.
In 2020 some of the money was printed to refinance Covid-19.
The way the data is currently calculated in Sri Lanka, printed money remaining as excess liquidity in the system is not captured as central bank credit until it disappears from the country as as a balance of payments deficit. At the beginning of December, 200 billion rupees of excess liquidity remained in the system.
Much of the money printed in the two years came from yield checks imposed on treasury bill auctions, which caused them to fail and injected liquidity.
After August 2021, price controls were lifted and bond auctions were mostly successful.
However, since then money is printed mainly to sterilize the reserves given for imports. The central bank also prints money for remittances.
Silver explodes as import demand as families of expatriate workers spend it and more reserves are lost as their new silver is exchanged for dollars via imports.
In 2021, Sri Lanka was hit with a balance of payments deficit of 2.3 trillion rupees as printed currency was swapped for currency reserves.
In 2021, the BOP deficit was US$3.9 billion.
Sri Lanka’s balance of payments deficit hits record $3.9tn in 2021 amid money printing
In September 2021, a legal reserve ratio was increased and all of the money was printed in a bizarre move.
In two years, the reserve currency has increased by 40%. Broad money had also risen by 40% despite weak economic growth, creating the conditions for a rapid rise in prices.
While the liquidity injections quickly hit the balance of payments (4 to 6 weeks), imported goods coming to meet domestic demand.
Persistent money printing to keep rates low drives credit and broad money growth, triggering domestic inflation.
When rates are kept artificially low, money also flows into long-term assets, fueling a speculative bubble. People can also buy assets fearing inflation or currency depreciation. Capital flight can also take place.
In most countries, broad money growth turns into domestic inflation after 12 to 24 months. Similar problems have been observed in countries like the United States.
In Sri Lanka, the general consumer price index, which also includes slowly rising services, increased by 17% over the two years.
Food prices have increased by 40%.
Goods exported and imported from Sri Lanka also increase when the United States prints money, which drives up commodity prices. Traded goods respond more quickly to lax policy.
US inflation expected to stay high in 2022, 2023 even if Fed tightens now: Steve Hanke
Sri Lanka’s monetary policy deteriorated rapidly after the end of a 30-year war and accelerated after the retirement of Deputy Governor WA Wijewardena, analysts said.
Sri Lanka said it follows ‘flexible’ inflation targeting, a highly discretionary domestic anchor, despite a foreign exchange reserve collecting a highly unstable anchor with the US dollar called a ‘flexible’ exchange rate as an external anchor , which are in conflict with each other.
Although Sri Lanka had a Latin American-style central bank from 1950, set up by an American money specialist, the island’s commercial borrowing was limited.
After 2015, monetary instability increased as peg disputes worsened, leading to a rapid increase in commercial debt.
When money is printed (inflationary policy is followed by a peg), foreign exchange reserves cannot be built up with current inflows and the ability to repay debt and maturing interest with current inflows is also lost.
In 2015, 2016 and 2018, the country was unable to repay maturing debt with current inflows, as inflationary policy (money printing) was followed under associated “flexible” inflation targeting. to injected liquidity to target the overnight money rate.
Under “flexible” inflation targeting with anchored reserves, liquidity injections begin about two years after monetary tightening ended a currency crisis that claimed inflation was low (September 2014, March 2018 and February 2020), which is roughly the time it takes for inflation from the previous episode of money printing to dissipate, triggering a new crisis.
In 2020 and 2021, although sovereign bonds were repaid, the central bank’s reserves were depleted and it became a large net debtor, with fiscal debt effectively transferred to the monetary authority. (Colombo/February 14, 2022)