Nov 22, 2007 (LBO) – Sri Lanka has engaged in an unprecedented money printing and reserve appropriation drive running into 45 billion rupees to bridge a widening budget deficit that sent inflation skyrocketing in 2007, newly released data has revealed. By September 2007 total central bank credit to government (printed money) had risen to a massive 135.7 billion rupees up from just 90.5 billion in April, indicating that the government had taken 45.2 billion rupees from the central bank in just five months.
Up to April the Central Bank was running a tight monetary policy regime which stabilized the economy and brought inflation down.
But from May concerns over interest rate stability overcame inflation and central bank was unable to sterilize excess liquidity from a seasonal demand for cash.
The bank was then forced to finance the government with printed money sending inflation rocketing up and the exchange rate plunging down.
In Sri Lanka due to a flaw in the monetary law that makes the central bank subservient to the Treasury money can be officially printed in two ways; by making the central bank buy treasury bills in the primary auction and by taking pr