Sri Lanka’s Central Bank Limits Covert Money Printing

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By: Staff Writer

March 23, Colombo (LNW): Sri Lanka’s central bank has reduced its back-door money printing operations, as confirmed by opposition legislator Rohini Kaviratne.

She thanked the central bank for curbing liquidity injections through open market operations. Kaviratne had previously revealed in Parliament in October 2024 that 100 billion rupees had been printed covertly, prompting a shift in the central bank’s monetary policy.

The central bank has restricted its practice of injecting money into the interbank market through low-rate, short-term operations (7-day and 14-day). Kaviratne’s revelations sparked a national conversation about the central bank’s open market operations, leading to changes in the way liquidity is managed.

The central bank has also terminated the use of printed money in its domestic operations, although liquidity continues to rise from unsterilized dollar purchases.

In the first quarter of 2025, excess liquidity in the money markets increased due to dollar purchases, following a decline in private credit.

This allowed economists to retract the printed money. While some analysts warn that unsterilized dollar purchases could cause depreciation without an exchange rate target, others argue that claims suggesting the central bank is banned from printing money under the new monetary law are unfounded.

They stress that no central bank with a policy rate is completely prevented from printing money, which can destabilize a country.

Critics also note that a single policy rate regime with excess liquidity, unlike a corridor system for liquidity adjustment, is a worse approach. In the past two quarters, the central bank has increased swaps to inject liquidity into the domestic market, artificially lowering rates, similar to printing money.

These operations, unrelated to credit market conditions, are seen as another means of affecting money supply.

Since October 2024, about 40 billion rupees in excess liquidity have flowed into the Treasury markets, driven by confidence in the country’s exchange rate management.

While short-term capital inflows based on exchange rate confidence are considered a legitimate source of capital, critics argue that in a country with a flawed monetary regime, such inflows can destabilize the economy.

Sri Lanka’s exchange rate conflicts and the use of exchange controls may worsen external instability if rates are mis-targeted, as was the case from 2015 to 2019.

The central bank’s actions have sparked comparisons to historical financial crises, such as the Mississippi Bubble in France, where indiscriminate liquidity injections led to severe economic consequences. Critics warn that similar mismanagement of monetary policy in Sri Lanka could have far-reaching impacts on its economic stability.

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