New PM says money printing will have to stay till budget is fixed through higher taxes

The new Prime Minister Ranil Wickremesinghe said the government may have to continue to seek the Central Bank liquidity until the taxes are raised, non-essential and non-urgent expenses are cut to bridge the gaping hole in the budget, in order to pay the salaries of the bloated Sri Lankan public service.  

In an interview with BBC News Sinhala, the premier said they would have to inject money into the system through printed money, when the Treasury cannot find its own money in the interim, until he fix the budget through tax and other fiscal reforms. 

“We have printed Rs.3.0 trillion worth of money. All these are now exhausted. At the moment, the government has only Rs.100 billion. So, Parliament will have to ask for more money 
to be printed.

 If not, we will not be able to pay the public sector salaries,” Wickremesinghe said, outlining a slew of measures that he is prepared to employ in the near term to emerge from the current economic crisis, which has caused endless mystery to people.  

When the reporter pressed him if money printing is going to be his economic policy, he said, “My policy is not that but we will have to do that for the time being. If we don’t do that, we will not be able to pay salaries to the state sector employees.” There is a widespread false notion that every time the money is printed, it causes inflation. But excessive money printing does cause inflation when the productive capacity doesn’t keep pace with the growth in the money supply. 

Unprecedented monetary and fiscal stimulus unleashed by the global central banks and governments in the two years of the pandemic, when the supply was repeatedly disrupted due to the pandemic-induced lockdowns and other restrictions, caused the current bout of record high inflation and commodities shortages around the world. 
Wickremesinghe’s comments echoed with the comments made by Central Bank Governor Dr. Nandala Weerasinghe a few days ago, when he said that he might have to resort to print money to support the Treasury when the latter cannot find money to pay for urgent and essential requirements such as payment of state sector salaries. 

However, he reiterated that now the Central Bank does it with utmost caution and self-restraint. 
Wickremesinghe meanwhile said that it is of utmost importance to ensure that the economy functions in order to generate incomes to the people. However, the economy is either stopped or operating at much lower level than its optimal level at present, partly caused by the fuel shortages and power cuts, which he said must be dealt with swiftly. 

For that to happen, he said the country needs to raise foreign borrowings from its bilateral and multilateral partners imminently to restore dollar liquidity in the domestic foreign exchange market, which would provide money to pay for essential imports.   Shortly after taking office Wickremesinghe met with several diplomats and is exploring the possibility of establishing a consortium of foreign aid to assist Sri Lanka to emerge from its current depths. 

Initiating a very good practice, which was absent during the last two years, he often communicates apprising the public of the actions he daily takes to resuscitate the economy.