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CB boosts money circulation to support economy
The Central Bank has pumped Rs. 240 billion of new money into the banking system this month, making cash in hand available to the people with a view to reviving the economy which slumped after the COVID-19 crisis.
Of this amount, Rs.140 billion, through banks, has already gone into the hands of the people for their use, while increasing the money circulation and meeting the increase in real money demand, officials said.
This money roll-out could also facilitate the Government’s COVID-19 relief measures for affected people and institutions including handing cash to the poorest of the poor and the needy, a senior Treasury official said.
The Central Bank resorts to cash pumping or money printing to meet seasonal cash demand as banks’ reserves go down due to withdrawals. While large sums of money are normally injected into the banking system during April New Year and December festivity periods, in this instance the injection of a massive sum of money was due to the economic crisis vis-à-vis COVID-19.
During a recession, it is possible to increase the money supply without causing inflation, the Colombo University’s Economics Professor, Sirimal Abeyratne, told the Sunday Times.
“In a recession, you would usually expect a fall in the inflation rate due to the lower demand,” he said, pointing out that prices were likely to fall (or at least rise at a slower pace) with falling economic output.
This is because the money supply depends not just on the monetary base, but also the velocity of circulation.
Citing an example, he explained that if there was a sharp drop in transactions (velocity of circulation) then it might be necessary to print money to avoid deflation.
During COVID-19, the demand for commodities and unsold goods as well as falling assets will reduce the prices leading to lower cost-push inflation.
Prof. Abeyratne said that normally if money was printed and released over and above the required amount, the result would be the increased demand for goods and services creating inflationary pressures in the economy under normal circumstances.
But under the present set up, he expressed the belief that the Central Bank maintained new money injections to match the requirement of money estimated to meet economic activity.