Apr 22, 2020 (LBO) – Excess liquidity in Sri Lanka’s money markets were high and base money was growing faster since the last quarter, but the Central Bank will ‘closely monitor’ changes and take action if needed, the monetary authority said. “Reserve money has been expanding at a higher rate since the last quarter of 2009,” the Central Bank said in its April monetary policy statement.
“The expansion has been mainly due to the increase in currency in circulation on account of the two elections held during the early part of 2010 coupled with the seasonal demand for currency.
“The Bank is also monitoring the developments in the money market as excess rupee liquidity continues to remain high.
Sri Lanka’s rupee is pegged to the US dollar but unlike Asia’s two most successful pegs in Singapore and Hong Kong, the island’s monetary authority does not allow bank required reserves to be run down to meet seasonal demands for base money.
Instead of allowing bank deposits in the central bank to shift to money in circulation and keeping the monetary base or reserve money stable, fresh injections of cash expands money supply during the traditional April New Year festival period in Sri Lanka.