ECONOMYNEXT – The central bank’s net foreign assets were negative by 158.7 billion rupees (about 780 million US dollars by September 2021, and reserve backing of rupee notes were went deeper into negative territory official data show.
Dollar backing of rupees was negative by 12.2 percent.
The central bank has printed unprecedented volumes of money since February 2020, undermining bond markets with price controls further compounding the problem and lost record volumes of reserves.
As a result its reserve liabilities have risen compared to existing reserves.
The central bank owes money to the International Monetary Fund and domestic and international counterparties to swaps.
In addition the central bank also ends up with a negative balance on an International Monetary Fund special drawing rights allocation exceeds the holding.
However for net international reserves, calculated under IMF rules, the holding can be added up, despite the fact that interest is paid on the allocation.
Sri Lanka’s monetary policy started to deteriorate from around the third quarter of 2014, when different types of ‘monetary stimulus’ was used for boost unsustainable domestic credit in pro-cyclical credit recovery periods and shatter the balance of payments.
Up to December 2019 money was printed either to target the call money rate or to target an output gap.
From 2020 full blown injections were made under so-called modern monetary theory (MMT) coupled with fiscal stimulus and rural finance.
Some of the interventions are allowed under a sweeping powers given to the Monetary Board under a Latin America style central bank set up by a US money doctor, which had ruined many countries in the region.
However some including purchase of bonds may violate sections of the law and the overall economic instability generated by the central bank violates section 5 (a) of the MLA.
Net reserve banking of rupees which was 148 percent in September 2014 had declined to negative 12.2 percent by September 2021 based on the official reserve money.
In September reserve money went up due to hike in the statutory reserve ratio.
When reserve backing of the rupee falls, a central bank loses its ability to enforce a exchange rate peg (provide convertibility) and is forced to float (suspend convertibility). (Colombo/Nov09/2021)