Sri Lanka’s central bank in record loss; ‘profits’ transferred to budget

Apr 09, 2014 (LBO) – Sri Lanka’s central bank lost 24.2 billion rupees in 2013, down from profits of 66.2 billion rupees, but the bank had transferred 25 billion rupees in profits to the state budget, its annual accounts showed. Other than interest income from its forex assets, a central bank primarily makes profits from inflation, either through currency depreciation or interest from ‘domestic assets’.

Domestic assets are government securities, which tends to grow sharply when large volumes of money are printed usually to bridge the deficit or keep interest rates down, generating high inflation and balance of payment crises.

Lower central bank profits generally points to lower inflation in the economy.

Domestic Asset Income

Interest income from domestic assets therefore also plunged to 11.4 billion rupees from 25.9 billion rupees a year earlier as the Central Bank sold down its Treasury bills portfolio as the banking system recovered from balance of payments troubles of 2011 and 2012.

As the Treasury bills portfolio is sold down to withdraw liquidity, the domestic currency also tends to appreciate resulting in further foreign exchange losses of its reserve assets.

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