ECNOMYNEXT – Sri Lankan banknotes held by the public rose sharply during a coronavirus pandemic, a senior central bank official said, as the monetary authority injected liquidity through multiple means triggering deficits in the balance of payments and domestic debate.
The currency in circulation increased from 678 billion rupees at the end of 2019 to 834.8 billion rupees at the end of 2020 or 156.8 billion rupees and an additional 94.5 billion rupees in July 07.
“Essentially, this was caused by the general public holding more currencies rather than going back to the banking system,” Central Bank director of economic research Chandranath Amarasekera said.
“Usually what we see in other years is that the currency in circulation increases during the holiday season and decreases thereafter. But we haven’t seen this happen since the outbreak of the Covid pandemic in early 2020. ”
Public cash holdings increase under economic uncertainty due to a “precautionary motive”. Some classical economists also call it “private sector sterilization”.
Although the increase in public liquidity (a real demand for banknotes) is not inflationary and may absorb the money printed for deficit financing and prevent a collapse of the exchange rate and the balance of payments deficit.
However, rising prices after the currency depreciates also tend to increase cash holdings and broaden the monetary base as the money required for daily transactions increases.
Sri Lanka in 2020 reduced the reserve requirement ratio (mandatory deposits of commercial banks to the central bank) freeing up more liquidity to banks and also injected liquidity through outright purchases of government securities.
Meanwhile, money was taken out of the system in 2020 through a reduction in interim advances, by Rs 83.5 billion, as state revenues were hit in 2019.
The Interim Advance is a tool incorporated into the Sri Lankan central bank by its creator, US Money Doctor John Exter, to advance 10% of expected revenue to the government for just six months in the hope of ending permanent monetization of debt and loss of convertibility or depreciation.
A similar tool was integrated into the central bank of Indonesia after independence. Indonesia’s central bank is among the worst in East Asia, and the Rupiah was hit the hardest during the East Asian crisis.
However, it performed better than the one in the Philippines, which was rebuilt after a bankruptcy also created by Exter, and the one in Korea created by his colleague Arthur Bloomfield to issue the Hwan currency which went bankrupt and a new (won) currency. been recreated from scratch.
While provisional advances are supposed to be repaid in six months, in practice they have continued to accumulate, subject to a paper reversal every six months that does not disrupt the monetary base or the banking system.
Until July 2021, 45 billion rupees had been injected into the banking system through provisional advances.
The reversal of the paper at the end of June sparked great interest among central bank watchers in Sri Lanka who are unfamiliar with central bank operations but closely monitor the increase in the stock of government bonds. Treasury as reserves are lost, import and exchange controls are imposed. and rationed dollars.
The banknote stock which is the main national asset through which liquidity is injected to stimulate credit, put pressure on the peg and ultimately trigger a balance of payments deficit when it is repaid against foreign exchange reserves.
If liquidity is redeemed against reserves (the peg is defended) as part of a commercial transaction, the external current account deficit will also increase.
Sri Lanka printed money, sold treasury bills to the central bank, and paid off some of its external debt, reducing its reserves.
Sri Lanka recorded a balance of payments deficit of $ 2.3 million in 2020 and around $ 929 million until April.
Central Bank credit to the government (usually referred to as printing money in a fixed exchange rate agreement) increased by Rs 506.8 billion in 2020 and Rs 185.2 billion or Rs 1,055.5 billion. in July 07.
Classical economists call these policies inflationary policies.
In contrast, in 2019, claims on the government fell from Rs 473.1 billion to Rs 363.5 billion, in what is commonly referred to as deflationary policies.
However, the policy ended in July 2019, ending the accumulation of currency reserves, analysts showed, when “targeting of the output gap” began.
Under the last Yahapalanaya administration, a “bills-only policy” established by then central bank governor AS Jayewardene, which put an end to soaring inflation and strikes, was scrapped.
Jayewardene also used to sterilize interim advances within days of their advance, according to long-term central bank observers.
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The best-performing East Asian central banks have built up large reserves by pursuing a consistent deflationary policy by selling sterilization securities to build up large foreign exchange reserves. The People’s Bank of China has also built up reserves with very high reserve requirements of up to 20%.
The American mercantilists had falsely qualified the deflationary policy of East Asia which led to very strong monetary anchors of “undervaluation”, which is generally put forward by the Western media which has little or no influence. knowledge about how anchors work, according to reviews.
In contrast, Latin American central banks conduct an inflationary policy – usually by not renewing sterilization vouchers as the economy recovers sharply and not because of fiscal problems – triggering currency collapses.
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The collapsing central banks of Latin America were inspired by the Argentine central bank created by its creator Raoul Prebisch, and duplicated by the head of the Latin America unit of the Fed, Robert Triffin. Some were created after Triffin left the Fed and Prebisch was sacked from Argentina’s central bank.
Sri Lanka’s central bank treasury bills outstanding increased by 650 billion rupees in 2020 and an additional 196.7 billion rupees as of July 07, according to the data.
There is a lag between the actual monetization of debt and net credit to the government, due to the way treasury bills are counted in the money supply calculations.
In Sri Lanka, excess overnight liquidity is not considered reserve currency, although the money is available for final clearing of the economy’s transactions each day.
At the end of 2020, 208 billion rupees of excess cash remained from treasury bill acquisitions and other transactions, which had been reduced to 91.5 billion rupees on July 7, thanks to the combination of a deficit of balance of payments and an increase in holdings of banknotes. (Colombo / July 15/2021)