Sri Lanka central bank sells own securities to destroy money

Aug 20, 2008 (LBO) – Sri Lanka’s central bank said it is selling its own securities to remove money from the banking system, after running out of its Treasury bill stock in a bid to keep money supply growth low. But access to the window has been restricted, allowing market rates further up the yield curve to be market based.

Instead, the central bank targets reserve money, or the monetary base which is made up of the country’s money issue and deposits placed by commercial bank at the central bank which is used for final transactions in the economy.

The central bank has said it will keep reserve money growth down to 11.75 percent in 2008 tighter than an originally planned 12.5 percent.

However the central bank also maintains a peg with the US dollar at 108.70 rupees.

Economic analysts have pointed out that if a peg is maintained, the reserve money requirement of a country is automatically determined by the peg when net balance of payments proceeds are converted to rupees.

If money is generated in excess of the peg, by the acquisition of Treasury bills by the central bank, it causes a balance of payments crises and high inflation.

If money created by the peg, or external anchor, is