7 March, 2021

Money printing is done world over by economies to stimulate economic growth and in Sri Lanka the move has not resulted in inflationary pressure so far although some have been harping that it would, said a senior official of the Central Bank (CBD) on the sidelines of the  Monetary Policy media briefing last week.

“As all Central Banks we too resorted to the best option given the low economic growth in the past few years as a move to stimulate growth,” the official said, noting that inflation has been in the mid single digit levels since last year.

Inflation is projected to remain subdued during the remainder of the year supported by the envisaged improvements in domestic supply conditions, which would also contribute towards maintaining inflation in the targeted range of 4-6 percent over the medium term according to the Central Bank.

Central Bank Governor Prof. W.D. Lakshman has been reiterating that domestic currency debt in a country with sovereign powers of money printing is not a huge problem, as modern monetary theorists would argue. The country resorted to money printing last year to fund State coffers  as tax revenues fell and foreign financing withered, the officials said, adding that the depleting balance of payments triggered rating downgrades. The Central Bank purchased a substantial volume of Treasury Bills to finance deficits and  target interest rates at various points along the yield curve. The Central Bank held around Rs. 566 billion in government securities towards the end of 2020.

The general notion is that excessive creation of money disregarding the quantum of goods and services produced in a country results in price inflation. However, certain proponents of Modern Monetary Theories say money could be printed by the approved authority to repay rupee denominated bonds within the ‘sovereign powers’. However, the Sri Lankan economy is expected to make a notable recovery this year, supported by policy stimulus and improving business sentiments according to the Central Bank. Positive sentiments fuelled by the Covid-19 vaccination drive and the impact of growth promoting policies are expected to support the economic revival over the short to medium term.

Given the low inflation environment, the Central Bank is in the process of actively supporting the Government’s economic agenda focused on developing a production-based economy.

The regulator also noted that the exchange rate has recorded intermittent volatility, and the Central Bank has taken steps to dampen excessive speculation causing such volatility in the foreign exchange market.

The Sri Lankan Rupee depreciated by 4.5 per cent against the US dollar thus far this year following the 2.6 per cent depreciation last year.

Increased non-debt creating foreign exchange inflows are expected, supported by the measures introduced by the Government and the Central Economic Research Department.

The Central Bank reaffirms its commitment to continue the current accommodative monetary policy stance The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on March 3, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 4.50 percent and 5.50 percent  considering the macroeconomic conditions and expected developments on the domestic and global fronts.

The external sector performance is being closely monitored by the Central Bank The trade deficit contracted by US dollars 2.0 billion in 2020 benefiting from the notable decline in expenditure on imports, which more than compensated the decline in earnings from exports.

The trade deficit is expected to remain compressed in 2021, supported by appropriate measures taken by the Government.

Workers’ remittances continued to increase steadily from mid 2020, recording an annual increase of 5.8 per cent, and a further growth of 16.3 per cent in January 2021, from a year earlier. “In spite of adverse speculation, all debt service obligations of the Government have been duly met thus far in 2021, and the Government remains committed to maintaining its impeccable debt service record in the future as well,” the Governor said.

Monetary policy easing measures implemented since early last year have resulted in historically low interest rates. Reflecting the transmission of monetary easing measures taken by the Central Bank in the recent past, both market deposit and lending rates have declined substantially towards establishing a single digit interest rate structure. Many market interest rates have declined to historic lows.

However, certain market interest rates, such as yields on government securities, have shown unwarranted volatility recently, which is not in line with monetary policy expectations.

The Central Bank reiterates that the high level of excess liquidity in the money market and the reduction in policy interest rates thus far are intended to result in a stable low interest rate environment, while providing a positive real return to savers.

The bank noted that credit to productive sectors remains crucial in ensuring a sustained economic recovery Reflecting the expansion in domestic credit, the growth of broad money (M2b) continued to accelerate.

However, despite the substantial reduction in market lending rates, growth of credit towards productive sectors of the economy appears to remain inadequate.

 “Discussions with the banking community and other stakeholders are ongoing to rectify deficiencies in extending credit to productive, growth-supportive, sectors,” the Governor said.