ECONOMYNEXT – Sri Lanka’s Finance Ministry has maintained a positive cash balance of 542.3 billion rupees by end April 2024, only slightly down from 599.5 billion at the end of December, official data showed.
The Finance Ministry had received revenues of 1,205.1 billion from taxes, fees and other revenues, 7.9 percent above target, while total cash outflows was 1,420.5 billion rupees, was less than expected coming in at 93.5 percent of the target.
Capital payments were slightly higher than target at 188 billion rupees.
The cash deficit to be financed was 403.4 billion rupees, less than the 603.7 billion rupees planned.
The deficit was financed with 796.5 billion rupees of gross borrowings, down from 959.9 billion rupees last year, and debt repayments were 444.4 billion rupees, higher than expected.
Net borrowings at 352.1 billion rupees was less than 690 billion expected.
The government ended up with 542.3 billion rupees cash surplus by April.
This usually corresponds to the balance in the current account of state banks. By end of April 2023 Sri Lanka had small 4.9 billion rupees deficit which was turned into a surplus by 599.5 billion rupees by end 2023.
Sri Lanka’s macroeconomists who used to run the Treasury in the past used to run hundreds of billions of rupee overdrafts in state banks which were initially re-financed by central bank standing facilities in some case, triggering forex shortages and inflation.
They were later turned into bonds and given to state banks, a practice that does not create any new inflation.
However, analysts have warned that running that running excessively large cash balances by borrowings which are domestically invested tend to be re-loaned to other borrowers and in the interbank market.
A sudden drawdown of cash which are lent in the interbank bank market has a ripple effect on interest rates and could lead to reverse repo injections because there is a policy rate, in the same way as swaps undermine monetary stability in a country with a policy rate.
Before inflation and currency depreciation was triggered by macro-economists after the central bank was created in 1950, Sri Lanka (then Ceylon) had excess cash which were deposited in the currency board triggering deflationary policy. Due to the lack of a policy rate, cash deposited in the currency board immediately turned into a foreign reserve.
Singapore still follows such a system to this day.
Not only government cash surpluses but also Central Provident Fund excess cash is taken in by the Monetary Authority of Singapore and invested in the sovereign wealth fund as foreign exchange, triggering an external current account surplus.
The framework was developed by GIC architect Goh Keng Swee who also created Singapore’s currency board when the island separated from Malaysia in 1967.
However, analysts say the knowledge of balance of payments and note issue banking in general was lost due to the doctrine that was taught at so-called Cambridge-Saltwater universities from the 1920s and worsened in the break-up of the Bretton Woods in 1971 and the IMF’s Second Amendment in 1978. (Colombo/July02/2024)