Central Bank defends money printing

• Says its liquidity provisions not excessive and need of the hour  
• Rules out inflationary fears and BoP pressures as both under control  
• Points out intervention in currency markets has been minimum  

The Central Bank flat out rejected the notion propagated by certain parties with ideological bias that attempt to always showcase money printing as bad and said those were the ones who were ignorant of the role of the Central Bank. 

Sri Lanka, among other central banks in the world, provided billions of liquidity by purchasing government securities from the beginning of lockdowns in March, to put money in the hands of the people and to support the banks facing liquidity shortages form the temporary suspension of loan recoveries running into billions of rupees. 

“At a time of exceptional circumstances such as what we are facing now, the role of any central bank in the world is to provide sufficient liquidity to the banking sector and sufficient liquidity to the public, to enable them to make transactions by putting sufficient cash on their hands, specially in the lockdown period,” Senior Deputy Governor Dr. Nandalal Weerasinghe said.

Sri Lanka’s liberal media and certain economic think tanks that want to see the Central Bank abolished have been slamming the monetary authority for money printing, which is also referred to as ‘liquidity provisions’ in central banking parlance, as they think it is the Central Bank, which is responsible for all economic ills. 

The central banks around the world have been supporting their economies with trillions of dollars of liquidity and that remains one of the key reasons behind the investor optimism, as reflected in the upward movement in major stock indices.

Major central banks, including the Federal Reserve in the United States and the Bank of Japan, have pledged to buy debt in almost unlimited quantities, to support a new wave of government spending to revive their economies battered by the new coronavirus shutdowns. 

The European Central Bank last week scaled up its bond buying programme to US $ 1.52 trillion, putting its stimulus efforts in line with that of the Federal Reserve. 
Sri Lanka’s Central Bank provides liquidity to markets by way of buying foreign currency and issuing equivalent rupees into the market and buying treasury bills and bonds in either primary or secondary markets. 

What the Central Bank has done since March was to purchase government securities in both the primary and secondary markets, to provide liquidity.  

“If we did not do that, just imagine the situation that we are going to face? Basically, people would not have currency for their day-to-day transactions in their hands and banks would not have sufficient liquidity to smother out the kind of situation to provide credit and necessary financing to the businesses affected by the shutdowns,” Dr. Weerasinghe explained. 
According to him, the liquidity provided by Sri Lanka’s Central Bank is just a fraction of what the central banks in other frontier, emerging and advance markets have provided to their economies.

The balance sheets of certain central banks have expanded by between 10 to 15 percent, due to additional liquidity provisions. 

Hence, he said the liquidity provided by Sri Lanka’s Central Bank is not excessive. 

Meanwhile Dr. Weerasinghe brushed off fears over inflation or pressure on the currency, which leads to balance of payments troubles caused typically by excessive money printing. 
He said the price pressures are well contained because the economy is growing at well below its potential, due to the pandemic-caused economic disruptions. Hence, there is no scope for overheating of the economy, due to the Central Bank liquidity. 

“Our expectation is that the inflation is very well anchored. We will be able to maintain inflation at the target range of 4 to 6 percent. And the growth will be much lower than our potential growth. And therefore, as a result of providing liquidity to the market, which is not excessive compared to the overall monetary expansion, we are not expecting any adverse impact of overheating the economy,” he said. 

“So, we have done the right thing and it is important for the public to understand the perception of money printing versus the Central Bank duty to provide liquidity in this kind of situation and how we are going to manage that situation going forward, without destabilising the economy,” he stressed. 

“If we are providing excessive liquidity to the market, then what we are going to see is the pressure on the currency. That is also not the case here,” Dr. Weerasinghe said adding that they have not been defending the currency using foreign reserves. 

“We have been able to maintain a sufficient level of reserves while allowing currency to be flexible and also now, the currency is appreciating. 

And our interventions have been minimum. That I can say with responsibility and there is a pressure for the currency to appreciate further. So, there is no pressure on the balance of payments side because that is also supported by certain import controls as well,” he added.