New law limits money printing
Despite President Maithripala Sirisena’s directive to continue money printing with Treasury bill purchases by the Central Bank, the government will go ahead with the process of amending the 70-year old Monetary Law limiting money printing, Finance Ministry sources confirmed.
“The proposed Act prevents the Central Bank from purchasing any government securities from the primary market,” a note sent by the President to the Treasury revealed.
“Given the global economic conditions, coupled with the impending large debt repayment, it could lead the country to defaulting on its debt,” it said, in a note seen by the Business Times.
The proposed amendments aim to prevent direct financing of budget deficits through primary market purchases of government securities while limiting provisional advances that can be obtained by the government from the Central Bank.
The Central Bank will continue to intervene in the secondary markets as and when it is necessary, a Finance Ministry source said adding that this best practice is now being followed by central banks in both developed and emerging countries.
The political echelon should realise the dangers stemming from Central Bank’s facilitating increased government spending through money printing, he warned.
In addition, money printing to finance fiscal deficits would create excess demand unless monetary policy or operational measures are taken to counter increased demand.
Such money printing could increase imports, which in turn would exert pressure on the balance of payments and cause the rupee to depreciate, he said.
The Central Bank has been able to tackle inflation in single digit levels for a sustained period of over 10 years as it has remained increasingly vigilant of monetary financing of fiscal deficits.
The bank’s governance structure is also expected to be strengthened, along with provisions to make it an independent institution with public accountability, a senior official of the Central Bank told the Business Times.
He noted that the International Monetary Fund (IMF) also welcomed the amendments to the Monetary Law saying that it will be a major step in the transition to flexible inflation targeting.