Money printing continues as inflation soars

26 Mar 2022

Money printing continues as inflation soars

26 Mar 2022

By Vinu Opanayake The Central Bank of Sri Lanka (CBSL) printed Rs. 1.2 trillion in 2021 and a further further Rs. 146 billion in the first three weeks of this year alone. The Central Bank continues to print money, with Treasury bills and bonds increasing by billions of rupees overnight, as the incumbent Governor promotes Modern Monetary Policy Theory (MMT). The CBSL’s money printing spree has created inflationary pressure, as pointed out by local and international economists. However, the Central Bank continues to print money, with a whopping Rs. 22.27 billion being printed overnight on the 14th of this month. As CBSL Governor Ajith Nivard Cabraal did not provide a response to The Sunday Morning’s question on why the banking sector regulator continues to print money despite knowing about its impact on inflation, The Sunday Morning spoke to a senior official from the Central Bank. Compelled to print? The official shared with The Sunday Morning that the Central Bank did not print money on impulse and only decided to do so under certain circumstances. However, the official did not elaborate what those circumstances were. Explaining the inability to proceed with the Bank’s operations without printing money, the official revealed that sometimes the Central Bank was ‘being asked to’ print money and that it was compelled to comply when such requests were made. However, a few weeks ago, CBSL Governor Cabraal told The Sunday Morning: “CBSL’s Treasury bill holdings have reduced since I assumed duties as Governor. Hence, contrary to your assertion, it is the reverse that has happened. Over 80% of the increase in the CCPI last year has been due to supply-side shocks and not due to the increase in Treasury bill holdings of the CBSL.” Money printing has wreaked havoc on inflation with the rate exceeding 16% in January 2022 and the monthly inflation rate for February and March expected to be much higher than the January figures. Cut Government expenditure Economist and Former Director of the Central Bank Dr. Roshan Perera told The Sunday Morning that the Central Bank continued to print money as the Government obviously required funding to finance its expenditures. “Since the last auction, the policy rates have gone up by 100 basis points. They are not allowing it to go up further. There is already a huge liquidity shortage in the market. The Government needs rupees to buy dollars that are available in the market but they do not have rupees either, that is why they keep printing,” Perera stated. She added that the primary means of dealing with this issue would be to cut down Government expenditure, failing which economic survival would become difficult. As per the Budget 2022, the recurrent expenditure forecast for 2022 is Rs. 2,878,526 million (Rs. 2,878 billion or Rs. 2.8 trillion). The total expenditure forecast for the same year is Rs. 5,128,470 million (Rs. 5,128 billion or Rs. 5.1 trillion). There is a stark difference between the expenditure and the actual tax revenue earned by the Department of Inland Revenue (IRD). In 2020, the revenue target given by the Government to the IRD was Rs. 613 billion, which was close to the total revenue collection of 2016. This reduction in the target was made due to the various tax relief measures introduced by the Government in their initial months to stimulate consumer spending and economic growth in the country. Perera stated that it was imperative that the Government increased the taxes, at least now. She added that the Government should also hike the policy rates to effectively bridge the budget deficit to a certain extent. “If the Government implements these measures, it might not have to print money as much as it does now. The Surcharge Tax Bill is now deemed unconstitutional by the Supreme Court, which is a relief. Hopefully, the Government can pass the Bill and collect that tax. The Government should also think about restoring some of the taxes it slashed in 2019, while curtailing expenditure,” Perera stated. The proposed Surcharge Tax Bill sought to impose a 25% surcharge tax on the taxable income of any individual, partnership, or company, whose taxable income for FY 2021/21 exceeds Rs. 2 billion or each company of a group of companies where the aggregate taxable income of the group exceeds Rs. 2 billion for FY 2020/21. Hyperinflation risks Speaking to The Sunday Morning, University of Colombo Department of Economics Senior Lecturer Dr. Shanuka Senarath stated that economists, apart from those who worked at the Central Bank, were questioning why the bank was still printing money. “The Government lacks sufficient amounts of money to spend on local activities. That is why the Government is printing money – there are no other reasons. You can see that the inflation on goods and services is more than 12%, while food inflation is 30%. If the Government keeps on printing money like this, there will be hyperinflation,” Senarath warned. “I think the International Monetary Fund (IMF) as well as economists have already given guidelines to reduce economic activities. The Government should encourage the inflow of money through the local banking system,” Senarath advised. MMT mess Emeritus Professor Sirimevan Colombage, an eminent economist who served on the academic staff of the University of Ceylon, Peradeniya Department of Economics before joining the CBSL, told The Sunday Morning that the CBSL had adopted MMT in 2020 and it had increased the money supply, thereby aggravating inflation. MMT argues that a government can create its own money as much as it wants, in a manner that does not lead to inflation. Basically, MMT states that printing money alone cannot be the cause of inflation. In addition to this, ABC Australia noted that MMT economists say the argument (promoted famously by British prime minister Margaret Thatcher) that national governments must tax or borrow before they can spend is wrong. It further added that MMT economists were of the opinion that inflation would only be a problem (in a country like Australia) if the federal government spent too much money into an economy that was already running at, or close to, full capacity. According to Prof. Colombage, the broad money supply (M2), defined as the narrow money supply (currency and demand deposits) plus time and savings deposits held by the public with commercial banks, rose by 17% in 2021. This was due to a 23% increase in the net domestic assets of the banking system mainly caused by the rise in Net Credit to the Government (NCG), Colombage stated. He added the 38% increase in NCG was a reason for the hike in money supply, as Bond Currency Derivatives (BCD) disbursed by the CBSL and commercial banks rose by 156% and 15% respectively. Further, money lent by the CBSL and other Licensed Commercial Banks (LCBs) to the Government amounted to Rs. 1.65 trillion as of December 2021. The Government obtained as much as Rs. 1,658 billion of net credit from the CBSL and commercial banks in 2021. This reflects the extent to which liquidity is injected into the market by way of banks lending to the Government. Colombage noted that the CBSL had adopted an unrealistic exchange rate to avert the adverse effects of rupee depreciation. State Minister of Samurdhi, Household Economy, Micro Finance, Self Employment and Business Development Shehan Semasinghe told The Sunday Morning that money printing had to be managed properly. “The interest rate has increased by 100 basis points, which is also a management tool. This is one strategy that is being adopted when issuing Treasury bills. Almost every country has done this, not only Sri Lanka. We have to manage and take other alternative steps now.” He added that relaxing the exchange rate and letting it sync with the market rate would result in more inflows, adding that the Government had short-term and long-term plans to resolve the economic crisis. “However, with the IMF coming in, our ratings will be impacted positively and investors will start considering Sri Lanka again, and it will make negotiations with the funding countries easier,” the State Minister concluded.

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Money printing continues as inflation soars

Money printing continues as inflation soars

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