CB’s monetary stimulus since pandemic’s onset amounts to whopping Rs.2.7tn

The Central Bank’s monetary easing measures have unleashed a whopping Rs.3.0 trillion worth of stimulus into the broader economy since March 2020 through June 2021, with the objectives of alleviating the full impact of the pandemic on the economy.

Although part of the stimulus programme was rolled back on August 19, the Central Bank said its various easing actions and macro-prudential measures put in place to ensure the markets remain adequately liquid and money supply is maintained at a healthy level, have resulted in an estimated Rs.2, 736 billion worth of direct benefits to the economy. 

This full benefit was generated at Rs.1, 607 billion in 2020 and Rs.1,129 billion in the six months through June 2021. 

This stimulus programme in relation to the size of Sri Lanka’s economy is measured at 18.2 percent of the nominal Gross Domestic Product of 2020.

This is however in addition to the support extended by the government through its fiscal stimulus by way of various concessions, financial support to needy segments of the society and increased health 
related expenses. 

The economies around the world responded to the pandemic and its toll on businesses and jobs through fiscal and monetary stimulus in varying degrees depending on the fiscal capacity of each economy, but the heavy lifting was carried out in most countries by their Central Banks by way of liquidity support and ultra low interest rates. 
Due to the lack of fiscal space in Sri Lanka, the Central Bank had to do the heavy lifting in the country’s response to the pandemic. 

For instance, the monetary stimulus extended by way of purchasing of treasury bills from the primary market and direct allocations amounted to Rs.831 billion during March-December 2020, while such liquidity injections amounted to Rs.917 billion during the first six months of 2021. 

This activity drew tremendous flack from a section of economists, which claimed that such actions were the reason for the current foreign currency shortage and rising prices. 

However, these actions supported in making cash transfers to millions who lost their daily incomes from the pandemic-induced lockdowns and meeting part of the recurrent State expenditure, including the payment of salaries to State sector employees.  

Further, the COVID-19 Saubagya refinancing scheme extended working capital loans worth Rs.180 billion to pandemic- affected borrowers at 4.0 percent for two years with a six-month grace period. 

Also, the banks’ statutory reserve ratio cut last year released a further Rs.180 billion in liquidity into the money markets while the profit transfers from the Central Bank amounted to Rs.24 billion in 2020 and Rs.15 billion in the first six months of 2021. Meanwhile, savings in terms of reduced interest rates to the private sector as measured by assuming the end period outstanding credit volume at the average weighted lending rate was estimated at Rs.204 billion in 2020 and Rs.112 billion in the first half of 2021. Savings to the public sector, which include the State-owned enterprises affected by reduced interest rates were estimated at Rs.189 billion in 2020 and Rs.85 billion in the first six months of 2021. This has been measured by assuming the end period outstanding credit volume at 1-year Treasury bill rate.