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Sri Lanka prints Rs113bn in November 2021 maintaining forex shortages | EconomyNext - EconomyNext

Monday January 3, 2022 3:17 pm

Monday January 3, 2022 3:17 pm

ECONOMYNEXT – Sri Lanka has printed 113 billion rupees in November 2021, with sterilized interventions playing a key role, while private credit also expanded 60.4 billion rupees, up to 35.1 billion a month earlier, official data showed.

Private credit grew 60 billion in November, up from 35 billion in October.

Credit to state enterprises fell 9.1 billion rupees, after growing 70.7 billion rupees a month earlier.

Credit to government form the banking system including the central bank grew to 151.3 billion rupees, keeping the momentum from 130.9 billion a month earlier amid a large budget deficit.

In the 11 months, bank financing of the government totalled 1.5 trillion rupees.

In November the central bank intervened in the forex market selling at least 320 million dollars for imports, which has to be sterilized to maintain 6.0 percent policy rate under an unstable soft-pegged regime.

Though generally tabulated as central bank credit to government, liquidity injected to sterilize interventions usually go to commercial banks to allow them to lend more money than in a stable peg, preventing reserve money from contracting and triggering a balance of payments deficit.

Most Latin American currencies collapse and countries default due to sterilized foreign exchange sales, though monetary instability is usually blamed on fiscal problems in mainstream Western media and imports by Mercantilists.

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In a hard peg interventions are unsterilized, keeping the exchange rate fixed but interest rates moving, and while in a mostly stable but not fully credible peg, interventions are partially sterilized allowing liquidity to tighten somewhat rates to go up to a wide policy ceiling.

To prevent a monetary collapse, rates have to be hiked and the currency floated.

In the first 11 months of 2021, the central bank has printed 1.1 trillion rupees of which the majority has been lost in a fall in official reserves of about 4 billion US dollars.

Another 323 billion rupees has been absorbed as an increase in the base money supply with inflation also picking up. Inflation in the capital Colombo hit 12.1 percent in December 2021.

At a low policy rate central bank is forced to sterilize and will accommodate any and all increases in reserve money losing control of the variable and inflation and the currency peg as a consequence.

The central bank has also unwound a part of its swap portfolio and got an injection from the special drawing rights allocation in 2023. (Colombo/Jan03/2021)