New money: CB admits printing Rs. 20 billion
The Central Bank this week admitted to printing of Rs. 20 billion of new money for the first ten months of 2004, up from Rs. 15 billion printed for the entire year 2003, confirming a joint Sunday Times - Lanka Business Report story that the Bank has accumulated Rs. 69.5 billion worth of Treasury Bills.

The Bank has expressed fears that the amount of new money to be printed could increase by the end of the year, but states that raising of policy interest rates is aimed at arresting the trend..

In a release issued, the Central Bank denies media reports that the Government has printed new money amounting to Rs. 55 billion to Rs. 69 billion as stated in sections of the media in the recent past.

The argument in the media has been based on the Bank’s investment in Treasury Bills outstanding at Rs. 69.5 billion as at 5th November 2004. Since the Central Bank’s investments in Treasury Bills do not necessarily lead to printing of ‘new money’, the media reports under reference could mislead the public.

The following explanation is, therefore, intended to inform the public of the correct position, the release states. The new money is created in the system by way of ‘reserve money’ in the ordinary operations of the Central Bank that include its activities in the foreign exchange market, investments in Treasury Bills and other miscellaneous operations.

However, the total money in the economy, known as money supply, is created by commercial banks by using the reserve money. It is this total money that affects inflation. The Central Bank has a pre-determined program for changing the level of total money in the economy taking into account the increased economic activities and higher levels of money demanded by people on the expectations about changing price levels.

To maintain this total money level in the economy, the Central Bank permits a pre-targeted level of reserve money which is allowed to grow according to this plan, the release adds.

The Central Bank states that in terms of this program, the reserve money, representing new money printed by the Central Bank, was permitted to increase by Rs. 7 billion in 2001, Rs. 14 billion in 2002, Rs. 15 billion in 2003 and Rs. 20 billion during the first 10 months of 2004.

The growing level of reserve money is due to the need for facilitating the growing economic activities and rising value of economic transactions. Since the reserve money has increased only by Rs. 20 billion, it is erroneous to conclude that new money to the tune of Rs. 55 billion to Rs. 69 billion has been printed by the government.

Even though the increase in reserve money by Rs. 20 billion during the first 10 months of 2004 was within the pre-targeted level, it was envisaged that it could accelerate during the balance part of the year.

Hence, the Central Bank has taken effective monetary policy measures by way of raising the policy interest rates to contain the growth of reserve money within the pre-targeted level, the Bank states in its release issued this week.

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