Government can no more borrow from the Central Bank
It has been a very bad practice for decades where the Central Bank (CB) prints money when buying treasury bills from the government as and when the government is short of money. Now cabinet approval has been obtained to put an end to this practice which causes inflation and hurts the balance of payments.
This was stated by CB Governor Indrajit Coomaraswamy speaking to the Business Times on the sidelines of the inaugural lecture to commemorate the life and work of the late Governor A.S Jayawardena held at the Centre for Banking Studies, Rajagiriya last week.
He said, “The CB is allowed to buy treasury bills from the primary market. When the government is short of money they sell treasury bills to the CB in return for money that is just printing money which causes inflation. While the government has not been disciplined in terms of its fiscal operations, the CB has balanced part of its deficit through purchasing treasury bills which is a very extremely imprudent macroeconomic policy because of the damage it causes in terms of inflation and balance of payments pressures.”
Going forward the CB will not be permitted to buy treasury bills. The government has to manage on its own in terms of its revenue and the borrowing it undertakes. The CB will not print money to finance the government. The proposal has been approved by the cabinet, but it has to be passed in Parliament. “It is a very bad practice; we cannot afford to do it anymore. The situation is too fragile,” noted Mr. Coomaraswamy.
The governor also mentioned that it’s too early to assess the impact of the Easter Sunday attacks on the economy of the country. “There will be some impact on growth. Normalcy has returned and if that is maintained hopefully we can contain the impact. Looking at inflation, balance of payments and the government’s fiscal operations, certainly there will be an impact, but for the moment it seems that it can be managed. And also we are getting a lot of help from a range of partners, all major countries are willing to help Sri Lanka,” he added.