Money Printing claims : Central Bank reveals what happened
An Explanatory Note on Central Bank of Sri Lanka’s Open Market Operations (OMOs) and Money Printing
There have been recent claims in the media that the Central Bank of Sri Lanka (CBSL) has “printed” Rs. 100 billion on 25 October 2024, through its Open Market Operations (OMOs).
It is important to clarify that these claims are not accurate and are baseless. The liquidity (money) injected through OMOs is a routine central banking function aimed at managing adequate liquidity in the banking system for the purpose of stabilizing the short-term interest rates in the economy and ensuring price stability, and hence it should not be grossly misinterpreted as “money printing.”
What is Money Printing?
“Money printing” generally means issuing new money to the economy and in economic terms, new money issued by a central bank is known as ‘reserve money’ or ‘base money’.
Reserve money is also called the ‘monetary base’ of the country (or high-powered money), as the commercial banks can create more money based on the money issued by the central bank. Reserve money is also treated as the monetary liabilities of a central bank and this is reflected in the liability side of the central bank balance sheet, which includes total currency issued by the central bank and the commercial banks’ deposits with the central bank. During 2024, reserve money issued by the CBSL has only increased by about Rs. 147 billion, which is an adequate amount to facilitate transactions in the economy.
During 2024,reserve money increase was an outcome of significant purchases of foreign currency by the CBSL, while there has been a reduction in the stock of government securities held by the CBSL.
One of the determining factors of new money issued to the economy by the CBSL in the past was purchasing Treasury bills by the CBSL directly from the primary market. However, with the introduction of the Central Bank of Sri Lanka Act, No. 16 of 2023, which came into effect in September 2023, the CBSL is now prohibited from printing money through the purchase of government securities in the primary market to fund the government.