Money printing is carried out worldwide by economies to stimulate economic growth and in Sri Lanka this move has not resulted in inflationary pressure so far, although some have insisted that it would, a senior Central Bank (CBD) official said on the sidelines of the monetary policy press conference last week.
“Like all central banks, we have also resorted to the best option given the weak economic growth of recent years in order to stimulate growth,” the official said, noting that inflation was in the mid-range. single digit levels since last year.
Inflation is expected to remain subdued for the remainder of the year, supported by expected improvements in domestic supply conditions, which would also help keep inflation within the target range of 4-6% over the medium term, according to the Central Bank.
Central Bank Governor Professor WD Lakshman reiterated that domestic currency debt in a country with sovereign money-printing powers is not a huge problem, as modern monetary theorists would say. The country resorted to money printing last year to finance state coffers as tax revenues dwindled and foreign funding waned, officials said, adding that the depletion of the balance of payments had triggered downgrades. The central bank bought a substantial volume of treasury bills to finance deficits and target interest rates at various points on the yield curve. The Central Bank held around Rs. 566 billion of government securities by the end of 2020.
The general idea is that creating excessive money without taking into account the amount of goods and services produced in a country leads to price inflation. However, some proponents of modern monetary theories say that the money could be printed by the authority approved to repay rupee-denominated bonds within “sovereign powers”. However, the Sri Lankan economy is expected to experience a notable recovery this year, supported by stimulus measures and improving business confidence according to the Central Bank. The positive sentiments fueled by the Covid-19 vaccination campaign and the impact of growth promotion policies are expected to support economic recovery in the short to medium term.
In view of the low inflation rate, the Central Bank is actively supporting the government’s economic program focused on the development of a production-based economy.
The regulator also noted that the exchange rate has experienced intermittent volatility, and the Central Bank has taken steps to curb excessive speculation causing such volatility in the forex market.
The Sri Lankan rupee has depreciated 4.5 percent against the US dollar so far this year after depreciating 2.6 percent last year.
An increase in non-indebted currency inflows is expected, supported by measures introduced by the government and the Central Department of Economic Research.
The Central Bank reaffirms its commitment to continue the current orientation of the accommodative monetary policy The Monetary Council of the Central Bank of Sri Lanka, at its meeting on March 3, decided to maintain the rate of the permanent deposit facility (SDFR ) and the Central Bank Permanent Loan Facility (SLFR) rate at their current levels of 4.50% and 5.50% taking into account macroeconomic conditions and expected developments on the national and global fronts.
The performance of the external sector is closely monitored by the Central Bank The trade deficit narrowed by US $ 2.0 billion in 2020 benefiting from the notable drop in import spending, which more than offset the decline in revenue export.
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, registering an annual increase of 5.8% and a further growth of 16.3% in January 2021, compared to the previous year. “Despite adverse speculation, all of the government’s debt service obligations have been duly fulfilled so far in 2021, and the government remains committed to maintaining its impeccable debt service record in the future as well. debt, ”the governor said.
The monetary policy easing measures implemented since the start of 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, market deposit and loan rates have declined significantly towards establishing a single-digit interest rate structure. Many market interest rates have fallen to historic lows.
However, some market interest rates, such as government bond yields, have recently exhibited unwarranted volatility, which is not in line with monetary policy expectations.
The Central Bank recalls that the high level of excess liquidity in the money market and the reduction in key interest rates so far aim to create a stable low interest rate environment, while offering a positive real return to savers .
The bank noted that credit to productive sectors remained crucial to ensure a sustained economic recovery Reflecting the expansion of domestic credit, the growth of broad money (M2b) continued to accelerate.
However, despite the substantial reduction in market lending rates, credit growth to productive sectors of the economy appears to remain insufficient.
“Discussions with the banking community and other stakeholders are underway to correct the gaps in the provision of credit to productive and growth-promoting sectors,” said the governor.