Dec 31, 2012 (LBO) – Sri Lanka’s central bank has cut its Treasury bill holding with a year-end transfer of profits Governor Nivard Cabraal said, in a move that will help avoid any negative effect on inflation, the exchange rate and foreign reserves. “We knocked off Treasury bills with it (profit transfer),” Cabraal said.
A cash transfer of profits (printed money) to the state, when spent, increases demand in the economy, pressuring inflation and pushing up imports, which in turn triggers a weakening of the exchange rate unless the Central Bank intervenes in the forex market.
Any intervention in forex markets then generates a foreign reserve loss. By off-setting Treasury bills in it stock, with profits due to the Treasury, the potential cycle of negative effects had been avoided altogether.
“We will probably end the year with the neutral credit to government,” Cabraal said.
By December 28 the Central Bank’s Treasury bill stock was 176 billion rupees around the 167 billion rupee mark at the end of 2011. The Central Bank however also makes provisional advances which have been accumulating over the years.
The Central Bank acquired the 167 billion rupees of bills by sterilizing foreign exchange sales in a balance of payments cri