Sri Lanka has printed 60 billion rupees this week taking the central bank’s Treasury bill stock to 904 billion rupees by April 08, while 29.31 billion rupees were borrowed by reserve short banks which were over-trading, data shows.
Better managed banks with excess cash deposited 140 billion rupees in the central bank.
The central bank’s bill stock climbed from 842 billion rupees to 904 billion rupees on April 06 as a 60 billion rupee ‘helicopter drop’ of finally accommodated cash (non-borrowed reserves) was injected to the banking system
Sri Lanka’s government usually gives festival advances in April requiring more money.
Sri Lanka has been printing money to finance the deficit and keep rates down through a combination of 50 to 60 billion rupee helicopter drops and failed Treasury bill auctions.
This week the central bank failed to sell 58 percent of a 45 billion rupee Treasuries auction.
However central bank officials said about 22 billion rupees of the maturing bills were held by the central bank and would be rolled over.
Before extraordinary money printing began in 2020 under Modern Monetary Theory, ripping the balance of payments apart, liquidity used to be injected in April to pay salary advances, while export firms also converted dollars.
In past years the rupee did not usually come under pressure as long as liquidity was kept short amid a festival drawdown of cash, which classical economists used to call an ‘internal drain.’
Under call money rate targeting in 2018 amid strong domestic credit growth, excess liquidity was injected through multiple means putting pressure on the rupee.
State banks have run short of reserves due to Treasury overdrafts during past balance of payments crises.
Sri Lanka has printed 834 billion dollars in permanently accommodated cash or 863 with overnight borrowings since ‘helicopter drops’ of cash began in March 2020.
Most of the money has left the country as an ‘external drain’ with the central bank defending the financial account. Current account defence began after credit growth picked up after lockdowns ended.
In 2020 Sri Lanka was hit by a 2.3 billion US dollar balance of payments deficit with 655 billion rupees printed based on changes in the T-bill stocks of the central bank.
In the first four months of 2020, 208 billion had been printed. Foreign reserves fell about 1.5 billion US dollars in 2021, with 400 million accounted for by an terminated swap with the Reserve Bank of India.
The official calculation of central bank credit to the government differs however as remaining excess liquidity is not counted as CB credit. In the past excess liquidity was not an excess reserve but it was executed through a repo transaction giving out a bill.