The Central Bank of Sri Lanka (CBSL) has addressed recent claims suggesting it printed Rs. 100 billion through its Open Market Operations (OMOs) on October 25, 2024. These assertions are incorrect and misrepresent the actual purpose and nature of OMOs, according to a statement from the CBSL. Here, we’ll break down the CBSL’s response, clarify the role of OMOs, and explain why this routine action should not be labeled as “money printing.”
Understanding “Money Printing” and Its Economic Implications
In economic terms, “money printing” typically refers to the process by which a central bank issues new currency, also called “reserve money” or “base money.” This reserve money forms the monetary base, which allows commercial banks to extend loans and generate additional currency, hence fueling the economy. However, the CBSL has clarified that reserve money increased only modestly by Rs. 147 billion throughout 2024 to support economic activity. The increase mainly stems from foreign currency purchases by CBSL and a reduction in government securities holdings.
Importantly, under the Central Bank of Sri Lanka Act, No. 16 of 2023, which took effect in September 2023, the CBSL is legally restricted from printing money directly to finance government spending through the primary purchase of Treasury bills. This reform indicates a commitment to responsible monetary practices, as the CBSL now focuses on stability without directly intervening in government funding.
What are Open Market Operations (OMOs)?
OMOs serve as a tool for central banks globally, including CBSL, to manage the liquidity in the banking system, keeping short-term interest rates steady and inflation under control. OMOs do not equate to “money printing”; instead, they aim to ensure enough liquidity to facilitate the regular functioning of financial institutions and support economic stability.
In OMOs, the CBSL injects or withdraws money from the banking system by temporarily buying or selling government securities from the secondary market. In Sri Lanka, these operations are typically short-term, lasting overnight or up to a week. Their purpose is to prevent sudden spikes in interest rates, stabilizing the broader financial environment.
During 2024, OMOs helped maintain stability in interbank lending rates, essential for daily banking operations. Due to liquidity mismatches across banks, these interventions were necessary to support smooth economic activity and stable interest rates, rather than adding new money to the economy.
How OMOs Addressed 2024’s Economic Challenges
This year, CBSL conducted frequent liquidity injections to counterbalance uneven liquidity distribution among commercial banks, even though the overall banking system held a liquidity surplus. Some banks encountered liquidity shortages due to stricter lending limits, impacted by the country’s credit rating downgrade. Additionally, foreign banks in Sri Lanka were hesitant to lend due to exposure limits, despite having sufficient funds. These conditions made OMOs essential to bridge liquidity gaps and support the stability of interest rates.
Without these interventions, short-term interest rates, particularly the call money rates in the interbank market, could have surged, possibly destabilizing the economy. This scenario would disrupt lending practices, strain the banking sector, and challenge the CBSL’s inflation control objectives. CBSL’s OMOs thus acted as a stabilizing mechanism rather than a “money printing” exercise.
Global Perspective on Central Bank Liquidity Management
The CBSL is not alone in conducting such liquidity operations; central banks worldwide regularly use OMOs as a standard method to regulate monetary policy and liquidity. OMOs are a common central banking practice, essential for effective monetary policy implementation and ensuring price stability. As markets fluctuate, OMOs allow central banks to make temporary liquidity adjustments, helping prevent drastic interest rate shifts and protecting the economic landscape.
CBSL’s Commitment to Price Stability and Economic Health
The CBSL’s main goal remains domestic price stability, ensuring that inflation remains low and manageable. OMOs are a critical component of CBSL’s toolkit to achieve this, providing a balanced environment in which businesses and individuals can operate.
During 2024, OMOs played an essential role in Sri Lanka’s financial landscape by helping manage inflationary pressures while addressing liquidity needs across banks. This routine practice highlights CBSL’s commitment to supporting Sri Lanka’s economic health without adding new money into circulation purely for government funding.
Final Thoughts
In summary, CBSL’s Open Market Operations (OMOs) are a regular aspect of monetary policy, focusing on financial stability and not an expansion of the monetary base. Claims that CBSL has been “printing” money are a misunderstanding of how OMOs work and their role in stabilizing short-term interest rates. The CBSL’s monetary operations uphold its commitment to price stability, aligning with global central banking standards and fostering a stable economic environment for Sri Lanka.
