ECONOMYNEXT – Sri Lanka’s central bank spent US$222.73 million to defend a peg and engage in import monetary financing in June 2022, three months after it apparently “drained” its reserves, official data shows .

Sri Lanka defaulted in April 2012 after two years of money printing to cut interest rates combined with tax cuts in the worst central bank-triggered currency crisis in its history.

At the time, officials said the country was running out of reserves.

In March, the rupiah collapsed from 200 to 360 in the United States after a failed attempt to float (suspend convertibility) with a buy-back rule (forced sales of dollars to the central bank) and policy rates too low to reduce credit.

However, the central bank continued to intervene in the currency markets on both sides of a peg (now around 360 to the US dollar). When interventions are made with ACU dollars borrowed from India, the central bank takes on more debt.

Related

Sri Lanka’s central bank is heavily indebted, shortage of dollars at “indicative” rate: Wijewardena

In June, the central bank bought $68 million from banks, which are experiencing severe currency shortages due to a dysfunctional peg, from $76.6 million a month earlier, putting pressure on the market. lashing.

The central bank then sold $222.74 million to defend the peg, engaging in monetary financing of imports.

The central bank receives deferred payments from the Reserve Bank of India and spends them on monetary financing of imports that take on more debt.

After giving dollars for imports, an entrenched central bank then sterilizes intervention by injecting fresh money to maintain a policy rate and prevent the reserve currency from declining, effectively financing monetary imports by replacing reserves with rupees lost in banks.

Related

Sri Lanka’s imports jumped to $2.2 billion in December 2021 after reserves were sold

However, reserve currency growth in June slowed amid high interest rates and appears to be contracting in July as the economy is battered by high interest rates and currency shortages.

In Sri Lanka, economists who have rejected classical theory as well as the business community strongly believe that reserves should be used to finance imports and help the country live beyond its means due to the rejection of the economy classic.

There have been widespread calls for monetary financing of imports into Sri Lanka as the country hit rock bottom at the start of 2021 and imports soared by more than US$2.0 billion in December after three months of decline. sterilized interventions between 300 and 400 million US dollars per month.

Interventions are sterilized with the acquisition of public securities in banks, and not of private securities unlike the era of the great classics when central banks applied a floating key rate against bankers’ acceptances, and this appears as budgetary financing for subsequent observers. (Sri Lanka, the world’s poor suffer from the accidental discovery of the Fed)

After printing money to create currency shortages, incumbent Sri Lankan economists also have a habit of importing fuel on credit, further increasing imports and indebting state enterprises.

However, after a payment default in April 2012, the traditional tactic of putting the CPC into debt is no longer possible and oil imports have been quickly settled or prepaid like any other import. However, attempts are still made to consume borrowed money through a line of credit.

Sri Lanka also attempted to secure $6.0 billion in “bridge financing” for imports and other spending in 2022 after defaulting in April 2012.

Since the default in April and the depletion of reserves, $337 million has been spent intervening with energy officials, including lobbying the central bank for money to import oil via peg (weak side convertibility).

The clean floating central bank does not give a penny for imports.

The ruling economists in Sri Lanka had the opportunity to create currency crises on August 28, 1950 with the creation of a soft anchor for money printing after the abolition of a hard anchor that had kept the country stable for almost 70 years.

Analysts had warned that contradictory policy and a botched float would lead to continued monetary instability and high interest rates with adverse effects on the banking system unless a functioning monetary regime was established. (Colombo/July 18/2022)


Read more