Sri Lanka’s Central Bank scrambles to satisfy unprecedented cash demand

Apr.17 (LBO) – Sri Lanka’s Central Bank scrambled to cater to an unusually heavy demand for currency notes over the April festive holiday season. Commercial bankers say they were surprised to find the Central Bank returning old currency notes sent by the banks earlier with their seals intact.

“Usually Central Bank gives us machine-strapped bundles sorted at the central bank, but this time we got the same bundles we sent,” a banking official said.

Central Bank’s currency department says it is usual for extra currency notes to be issued to the banking system to cater to the traditional Sinhalese and Tamil New Year holiday shopping spree.

But this year’s demand had been unusually heavy, which bankers say could have been caused by the relatively longer set of holidays, or an upsurge in economic activity over the weekend.

Commercial bankers say that the Rs1000 notes coming back to the banks from customers were less than usual, which could be because people had a preference for the Rs1000 notes.

“Lots of Rs500 notes are coming back, but not Rs1000 notes,” one banker said.

Another reason attributed to the relative scarcity of the Rs1000 notes is on the supply side.

Central Bank was expected to issue Rs2000 notes this year replacing the bulk of the old Rs1000 notes that are pulled out of circulation each year as part of the Central Bank’s ‘clean note’ policy.

However, the Central Bank’s currency department says the delay in the issue of the Rs2000 note is not a problem of maintaining the clean note policy of the Bank.

An official said the reason banks were issued used notes with the commercial banks’ own seals was the higher-than-expected demand for cash.

The central bank was expected to issue the larger note to ease the monetary transactions of the public after two decades of rising inflation forced the public to carry more cash.

However a political controversy erupted after the opposition charged that the new note was tangible evidence of economic mis-management by the government.

In 2004, inflation rose sharply fuelled by expansionary fiscal policies and loose monetary policy.

-LBO Newsdesk: lboemail@vanguardlk.com