Dec 26, (LBO) – The Central Bank of Sri Lanka has restricted the use of its cash facility to the banking system, from January 01, in a further attempt to tighten liquidity and reduce inflationary pressure. The monetary authority told commercial banks that they will not be able to borrow cash through the reverse repo window, on days when the overall market has excess liquidity, while the facility would continue to be available when the market was short of cash on a net basis.
At the moment, while banks which are short of cash borrow from the central bank via the reverse repo window, others with excess balances deposit cash at the central bank through the repo window.
This happens either because the banks that have cash have exceeded their credit limit to the borrowers in the interbank market, or because call market rates are higher than the reverse repo rate and borrowers prefer to borrow from the central bank.
“We sometimes have excess cash but we cannot give it because the borrowing have exceeded our prudential lending limits,” one dealer said.
“Usually it is the state banks that exceed the limits.”
Banks that fund their lending through reverse repo cash are effectively printing money, and contributing to inflation and pressure on the balance of payments.
Economists have pointed out that Bank of Ceylon and People’s Bank which has to extend a large overdraft to the treasury usually go to the reverse repo window to finance them, and are a cause of inflation and balance of payments crises in Sri Lanka.
Analysts have warned that the Treasury overdraft with the Bank of Ceylon and Peoples’ Bank have been topping 30 billion rupees.
With the restrictions coming into place, banks that are short will have to borrow the money from the interbank market, even at high rates, or limit their lending to manageable levels.
Analysts all banks which have high loan-to-deposit ratios would have to intensify efforts to raise deposits, and not rely on central bank financing to cover their lending, including state banks which lend to the Treasury.
In the last monetary policy statement the Central Bank asked banks to raise deposit rates and mobilize more deposits.
The Central Bank earlier completely cut off primary dealer in government securities from the reverse repo window.
Sri Lanka’s monetary sector unraveled from about April as expansionary fiscal policy took firm hold of the economy and the government covered revenue shortfalls with commercial bank and central bank credit (printed money).
Consumer inflation rose to 19.8 percent in November (3.4 percent in March) and the Sri Lanka rupee fell below 108 to the dollar from 102 earlier in the year, as Central Bank credit rose to 108.3 billion rupees in October from about 60 billion rupees in February.