Sri Lanka’s private, state credit soars in March 2021, rupee down

Sri Lanka’s private credit from commercial banks grew by 112.2 billion rupees in March 2021, up from 79.4 billion in February while credit to the government also surged by 211.4 billion rupees, central bank data showed.

The central bank extended credit (printed) to 95.7 billion rupees in March 2021, up from 72.2 billion rupees in February.

The central bank prints money to finance or monetize current budget deficits and also to turn legacy debt from past years into reserve money by rejecting bids for maturing government debt to artificially keep Treasuries yields down.

In March every year private credit usually goes up as business stock up for April and economic activity gradually recovers from a January slowdown. In January private credit tends to slow down or fall.

In most years where the balance of payments crises was triggered (including in 2015, 2018 and 2020), money printing gathered pace in February/March.

Rates cuts usually follow in April which require more injections to enforce a lower ceiling policy rate.

In recent years the central bank has been targeting the middle or lower end of the policy corridor to push down a call money rate, which requires, even more, injection tearing the balance of payments apart in subsequent months as the newly minted money is redeemed for forex reserves.

The rupee exchange (perceived de facto convertibility undertaking) can also fall if insufficient dollars are supplied to redeem the newly injected domestic money that turns into credit and imports.

Sri Lanka has been printing money unceasingly over the past year under the so-called Modern Monetary Theory after tax cuts in December 2019 blew a hole in the budget and more state workers were hired.

Analysts had warned that monetary instability will intensify as domestic private credit recovered under the MMT framework as it had done under ‘flexible’ inflation targeting with state finance also in disarray.

In March the rupee fell to 199 to the US dollar. The central bank bought 75 million US dollars from the interbank market from current transactions, partly under a surrender requirement, injecting more liquidity.

However, forex reserves fell as the government borrowed excess liquidity and redeemed rupees for dollars from the central bank to repay debt in de facto unsterilized interventions in the financial account.

Gross foreign reserves fell to 4,055 billion dollars in March from 4,583 million dollars in February. Reserves can also fall from unwound swaps.


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