12 November 2021 10:06 am Views - 135
The Central Bank and the commercial banks gave the government Rs.110 billion in September on a net basis, little lower than what the government borrowed a month ago as the debate is raging if the liquidity injections by the Central Bank to the government should be reined in to tackle the igniting inflation pressures and the current shortage of foreign exchange in the domestic market which contributed to the shortages of key commodities and other hardships to the people and firms.
September however marked the third consecutive month the quantum of net credit to the government came down as such credit was recorded at Rs.168.7 billion in August from Rs.318.8 billion in July when the Central Bank had to print money to settle a billion dollar sovereign bond.
While the government borrowings come from both Central Bank liquidity and licensed commercial banks, all such credit in September came from the Central Bank by way of increasing the holdings of government securities, which is also referred to as the printed money.
For instance, the Rs.110.1 billion in net credit was formed through Rs.296.5 billion in credit provided by, in what was referred to as the monetary authorities which includes the Central Bank credit, as the credit from the licensed commercial banks recorded a de-growth of Rs.186.4 billion in September.
While the Central Banks around the world unleashed unprecedented monetary policy support maintaining ultra low interest rates and sloshing markets with trillions of dollars worth liquidity to blunt the impact of the pandemic on the economies , a strong consensus is now building up around the world including in Sri Lanka that such policy support is reaching its limits as it created enormous excess by way of soaring prices, which are reaching multiple decades high in certain places.
The United States on Wednesday reported its consumer price inflation at 6.2 percent for October, the highest in three decades, which sent waves across global bond and stock markets as people demanded higher yields seeking protection against the fast losing value of money. The preferred range of consumer price inflation in the US is at 2.0 percent.
Higher consumer prices which are expected to last longer than being transitory are also expected to quicken the US Fed’s pace of tapering its bond buying programme and raise rates earlier than anticipated by the Fed officials as they announced last week the starting of winding down their bond buying programme by Rs.15 billion a month from this month but fell short of providing a time line as to when the interest rates would be raised.
In Sri Lanka, the Monetary Board is meeting next Wednesday for the eleventh time to decide on the trajectory of its key rates and the broader monetary policy after staying pat in October.
Meanwhile, the public corporations settled part of their loans during September as the outstanding credit to them by the banking sector came down by Rs.13.8 billion, after declining Rs.4.0 billion in August.
Total outstanding credit to public corporations by the end of September stood at Rs.650.7 billion. Due to the combined effects of the significant slowdown seen in the private sector credit in September, credit to the state sector and the decline in outstanding credit to public corporations helped ease the growth in the money supply measured through broad money or M2b to 18.2 percent from 21.0 percent in August, ending a month-long growth of over 20 percent in money supply in the economy.