Allegations of “excessive money printing” baseless and false says CB

Reserve money growth in 2007 was only 10.3%

Central Bank last week rejected allegations of “excessive money printing” as baseless and false.

In a statement the Bank said its attention has been drawn to a few mischievous and /or erroneous reports where allegations have been made that the Central Bank has resorted to “wide scale money printing” to finance the fiscal deficit of the Government.

It is likely that such allegations have been made deliberately to generate negative sentiment within the economy and therefore the Central Bank wishes to set out the actual position in the public interest.

In conducting monetary policy, the Central Bank presently follows a monetary targeting framework where Reserve Money is the operating target and Broad Money Supply is the intermediate target. Broad Money is the overall liquidity in the country generated through a multiplier process using Reserve Money as the base. Since there is a strong link between those two variables, the Central Bank attempts to influence the level of Broad Money by maintaining Reserve Money at pre-determined levels.

The increase in Reserve Money is caused by fresh money being released to the economy by the Central Bank through acquisition of foreign and domestic assets. Reserve Money includes: (a) currency issued by the Central Bank; and (b) the deposits of commercial banks with the Central Bank.

At the beginning of each year, the Central Bank sets monthly and quarterly targets for Reserve Money that is consistent with the expected macro-economic outlook, including economic growth and likely inflation. On that basis, the annual percentage increases in Reserve Money in the recent past had been set at around 15 per cent per annum while the actual percentage increases from the year 2002 to 2007 is set out below.

As seen from the above table, the actual Reserve Money growth in 2005 was 15.8 per cent while it increased to 21.2 per cent in 2006, due to increases in both Net Foreign Assets (NFA) and Net Domestic Assets (NDA) of the Central Bank. Such an outcome was particularly due to: (a) higher than projected economic growth; and (b) higher than projected inflation fuelled by oil price increases as well as the adjustment of administered prices.

In that background, the Reserve Money target for 2007 was set at a more stringent level of 11.7 per cent, or, in value terms, at Rs. 267.6 billion. However, the actual amount of Reserve Money as at end December 2007 was Rs. 264.4 billion (composed of currency issued by the Central Bank of Rs. 173.4 billion and deposits of commercial banks of Rs. 91.0 billion). In comparison, the quantum of Reserve Money as at end December 2006 was Rs. 239.9 billion (composed of currency issued by the Central Bank of Rs. 157.2 billion and deposits of commercial banks of Rs. 82.6 billion). Therefore, it would be noted that, notwithstanding the unprecedented local and international challenges during the year 2007, the Central Bank has been able to maintain Reserve Money within the stringent quarterly targets. In fact, the actual Reserve Money growth rate during the year 2007 was at 10.3 per cent, while was even lower than the very tight target set at the beginning of the year.

To achieve such Reserve Money target for 2007, the Central Bank implemented a tight monetary policy by: (a) raising policy interest rates; (b) conducting aggressive Open Market Operations; and (c) imposing certain quantitative restrictions on the provision of funds by the Central Bank to commercial banks. These measures have led to a deceleration in Broad Money, as expected. Consequently, Broad Money growth was decelerated to around 18 per cent by end 2007 from the higher growth rates recorded during previous months.

From the foregoing, it is clear that the regular allegations of “excessive money printing” are baseless, and are obviously not driven by honourable motives.

For purpose of record, we also set out below, the Central Bank’s targets of Reserve Money for 2008. The rationale for such targets has been clearly explained in the Central Bank’s Road Map for 2008 as enunciated on 2nd January 2008.

The Central Bank is confident that the measures that are being taken to maintain Reserve Money at the tight pre-determined levels during the year 2008 would have a favourable impact on the deceleration of the inflation and therefore would continue in its endeavour to be within the targets during the year 2008 as well.