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Money printing: More printing, more problems?

22 Jan 2022

By Skandha Gunasekara With the Central Bank of Sri Lanka (CBSL) printing close upon one-and-a-half trillion rupees in the last year alone, experts have opined that this approach has done more harm than good to the country’s economy, with concerns that the practice may aid the further depreciation of the rupee as well as worsen the forex crisis. Central Bank Economic Research Department Director Anil Perera addressing a media briefing on 15 January revealed that Sri Lanka had printed Rs. 1.4 trillion in 2021. CBSL Governor Ajith Nivard Cabraal, speaking at the same briefing, admitted that the country had not printed such a large amount of money before, but argued that it had been necessary to do so to survive the economic depression Sri Lanka was currently facing. Inflation as calculated by the National Consumer Price Index (NCPI) hit an all-time high of 11.1% in November last year – the first time it hit double digits since it was introduced in 2014. With the financial data painting a gloomy picture and Opposition politicians continuing to criticise the Government’s money printing policies, The Sunday Morning looks at what experts have to say about the move and its impact on the economy. More printing, more outflows Economic policy think-tank Advocata Institute’s Chief Operating Officer (COO) Dhananath Fernando explained that excessive money printing had resulted in more foreign exchange outflows. He said that money printing enabled consumers to purchase more, causing an increased demand in imports, which in turn increased the need for dollars. “When money is printed in excess, then that money will go towards imports. For example, if everyone is given Rs. 5,000 in printed money, all will buy goods and services. For example, I will go and buy one kilogramme of dhal which is already available at the grocery store. The grocery shop owner will use that excess money to order more goods from the wholesale dealer, who in turn will ask for more from the importer. At that point, the importer will need more dollars to import more dhal. This results in an unnecessary demand for dollars.” Fernando said that while one rationale behind money printing had been that it would kickstart a production-driven economy, experience and research had shown otherwise, emphasising that it leads to a strain on the country’s foreign reserves. “Another argument presented is that when you print more money, people will ask for more dhal, which will compel people to produce more dhal in Sri Lanka. They believe that the production economy will kick in. However, what we have seen from experience and what empirical research shows is that while that can also happen, it is also likely to increase prices. When prices increase in this manner it is called inflation. For an economy like Sri Lanka, where we have a weaker currency, it is basically inflation, but before inflation it creates a forex crisis. That is what we are experiencing, in my view. The CBSL Governor recently said we had imported about $ 21 billion worth of imports; this is even higher than 2018. Money printing is the reason,” Fernando stated. He also noted how, despite restrictions being imposed, import expenses had increased in the last two years, causing dollar outflows.  He elaborated that due to increased imports, the CBSL had to release dollars from its reserves as a method of ensuring its price control of the rupee’s value against the dollar – which in turn caused its foreign reserves to diminish as an indirect effect of money printing. “With regard to how it affects foreign reserves, we are keeping the dollar at Rs. 200. The only way that you can do that is by releasing dollars from your reserves to keep that rate at that level. When there is more demand for imports, there’ll be more demand for dollars, and then the price will increase. But now the CBSL is not allowing the prices to go up. The CBSL is artificially restricting it to an extent and saying that there are no more dollars. On the flip side, it has released dollars to maintain the Rs. 200 rate. That’s how the Central Bank loses its reserves. It’s not a direct link but more of a circle,” Fernando explained.  Fernando also pointed out that a demand in imports caused by money printing would result in a demand for dollars by importers from commercial banks and such demand would force the price of the dollar to increase, thus compelling the Central Bank to release its reserves to the banking system to artificially control the dollar rate while also ensuring that dollars were available to continue importing essential goods. However, unnatural control of the dollar rate has also had a negative effect on foreign exchange inflows as exporters and expat workers are reluctant to bring in dollars to the country at a loss to themselves. “What is making matters worse is that exporters and other parties who bring in dollars to the country, and from whom the commercial banks usually buy the dollars, are not selling to commercial banks because the rate is artificially kept low by the Central Bank. This again forces the Central Bank to release dollars, further depleting its reserves.” Fernando also stressed that quantitative easing also resulted in the rupee depreciating in value: “When you print more money, you’re basically encouraging the outflow of dollars, and you’re discouraging the inflow of dollars. As a result, you’re increasing the rupee value you have to pay for the dollar. But actually, if you leave that out, it will balance itself out. That’s why I always advise to maintain the real value of the dollar and then I believe the entire system will balance out. Even our debt repayments can be brought to a certain level if we actually allow the currency to reach its actual value.” More printing, more devaluing Meanwhile, former Central Bank Deputy Governor and Senior Economist W.A. Wijewardena noted that Sri Lanka had a rupee liquidity shortage causing the need for money printing and thus devaluing the rupee. “Sri Lanka is facing not only a foreign exchange problem but also a rupee liquidity shortage because the banking sector doesn’t have rupees. The shortage is about Rs. 450 billion per day and the CBSL, in addition to printing money for the Government, has to give Rs. 450 billion each day to commercial banks as well. As a result, the rupee will have to fall. This is no secret. These are the fundamental things we learn in economics.” He said the CBSL was powerless in stopping foreign exchange outflows due to the increase in imports prompted by increased consumption. “Consumption will promote imports. There is already evidence that imports had increased to Rs. 22 billion in 2021 from Rs. 19 billion in 2020. An increase of Rs. 3 billion is a problem and therefore money flows out of Sri Lanka. When money flows out we have a deficit in the balance of payments so the foreign reserves fall and the Central Bank cannot stop that.” He said that money printing had seen finances directed to consumers instead of investors. “Import restrictions have only affected 5% of the total import bill. Major imports still come from medicine, fuel, essential food items, raw materials, and so on. When people have money in their hands, they buy petrol and go travelling. You may see a lot of people on the road. That is the problem – you have given the money into the hands of the wrong people and not to investors,” he concluded. More printing, more pumping One of the key reasons for the Government printing money, however, was to meet its need for finances for State expenditure, explained University of Colombo Department of Economics Lecturer Umesh Moramudali. “Money printing is basically the CBSL buying Government securities, which means the Central Bank has to pump money that isn’t currently there into the banking system. If a commercial bank buys Treasury bills or Treasury bonds, it’ll be the commercial bank’s own money that is spent and no new money is introduced for the commercial banks to lend, but when the Central Bank buys Treasury bonds that means monies that were not in the banking system are introduced and that can be used by the Government. The main purpose of money printing is because the Government doesn’t have money and it needs money for its expenses such as to pay the salaries of State sector employees. This is caused mainly by the revenue problem the Government is facing as a result of it reducing a large number of taxes soon after coming into power.” Moramudali warned that it was high time the Government cut down on money printing and looked at ways of increasing its revenue in order to fund its expenses.

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