SL money printing drives foreign exchange shortages
Money printing that has taken place in Sri Lanka since January has not resulted in expanding the monetary base at a rate that is unsustainable (overheating of the economy) or increased inflation, Finance Ministry data showed.
The Central Bank has issued new currency amounting to Rs.94.5 billion this year up to July 2021 compared to Rs.156 billion in the same 2020 period.
In the meantime,
Sri Lanka’s face value treasury bill holdings (which includes money printing) has gone up by Rs. 33.68.billion to Rs. 1.31 trillion by the end of last week, Finance Ministry data revealed.
Money printing causes reserve losses, foreign exchange shortages and asset price inflation as well as commodity price inflation which will lead to rationing of goods, price controls and shortages, several economic experts said.
When money is printed after repayment of foreign loans, there is an immediate loss of forex reserves but it does not cause domestic inflation because the money does not come into circulation, a high ranking Treasury official who wished to remain anonymous told the Business Times.
The Central bank’s Treasury bill stock jumped by Rs. 53.9 billion to 1.19 trillion on August 2 from Rs. 1.14 trillion the previous day after the US$ I billion bond settlement day.
Treasury bills were issued to the Central Bank to get rupees for dollars in order to make the repayment of sovereign bond and thereby increasing the Treasury bill holdings, the official explained.
But there was nothing that came out to the (banking) system and it was similar to an advance given by the Central Bank to the Treasury, he said.
The Central Bank had to inject additional liquidity to the system through the purchasing of government securities owing to the depletion in foreign reserves which absorbed the liquidity from the market, he disclosed.
Reasons for the recent hike in overall monetary expansion by money printing were the payments for foreign debts and the defending of the Treasury bill yield.