Economy Forward

  This article is an update of the series released in this blog on the subject of CB's monetary policy operations to cover first 11 months of 2023. The article provides highlights on money printing operations and resulting money market outcomes with the help of a graphical presentation. These highlights cover only domestic monetary operations as CB's foreign currency or the exchange rate policy has not been communicated yet. However, its foreign currency operations will be captured in domestic monetary operations because they are designed to neutralize the impact of foreign currency operations on the domestic currency liquidity at levels desirable to the CB. The article raises concerns over the appropriateness of the present monetary policy model to recover the economy from the bankruptcy caused by the monetary policy itself. Meaning of Monetary Operations in Sri Lanka Monetary operations are the price (interest rate) and quantity (money printing) control-based financial opera...

  Article's Background It is the long tradition of the CB to use public debt management as the conduit for the monetary policy. The major reason is the inherent ineffectiveness of policy interest rates to drive interest rates in the economy. The ineffectiveness mainly arises as policy rates target the levels of overnight inter-bank interest rates whose lending volume is insignificant,  as compared to the total flow of credit and money created by the banking system,  to affect other interest rates. In addition, the policy rates system from the beginning of this year has restricted the CB's standing facilities and, therefore, policy rates are a dormant policy instrument. In this context, given the large size and credit quality, the CB uses T bill yield rates as de-facto policy interest rates. This strategy is aided by the legal requirement for issuance of government securities through the CB as the fiscal agent of the government where the CB conducts weekly auctio...

  The monetary policy press release issued today (  Monetary Policy Press Release  ) by the Economic Research Department planted a policy rate cut of 100 bps to 10%-11% as a great thing. Meanwhile, the design of the press release shows a drastic shift of the Monetary Policy Board (PMB) from previous fashion of macroeconomic performance talks to movements of Census and Statistics' Consumer Price Index (CPI) to drive the monetary policy/policy interest rates. The new policy rhetoric seems to display a sort of divine ability of the MPB to fix the y-o-y CPI change around 5% in the medium-term by magical power of policy interest rates adjustment. The new rhetoric is a result of zero knowledge of the MPB on policy rates in modern monetary systems and the macroeconomic role of the CB in present plight of Sri Lankan economy. I recall serious concerns raised by Mr. A S Jayawardena in 2002 when CB leading economists with the advice of IMF/World Bank propose...

  Background In the previous article, technical background for rejection of all bids for the T bond auction held on 30 October 2023 was presented (see  T bond auction ). However, at the next T bond auction held on 13 November 2023, the CB has accepted bids worth (face value) 29.3% of total amount of three bonds offered for the auction. Meanwhile, the CB has been able to accept bids for total amount offered for the T bill auction held on 15 November 2023. Therefore, this article highlights the disrupted conditions of the government securities market as revealed from auctions results, consequent to inappropriate monetary and debt management policies, and warning of a possible collapse in debt market catastrophic to the fiscal, monetary and financial system.  T bond auction announced held on 13 November 2023 - A failure This auction was a rollover of T bond maturity of face value Rs. 180.6 bn and balance coupon payment due on 15th this month. As existing investors are g...