Sri Lanka printed 1.2 trillion rupees in 2021 and in the first quarter of 2022 it printed 588 billion rupees. Between December 2019 and August 2021, Sri Lanka’s money supply increased by 42%.
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Sri Lanka borrowed heavily for years but wasted the money on Chinese-funded infrastructure projects, many of which are now largely obsolete. Its deficit (the difference between borrowings and income) has become massive. Without raising taxes, the populist Rajapaksa regime stepped up currency printing to finance the deficit.
Sri Lankan central bank governor WD Lakshman and his successor Ajith Nivard Cabraal both allowed printing presses to operate 24/7 and denied the link between money printing and the inflation or currency depreciation.
Sri Lanka headed into its worst economic crisis since independence with no one holding back.
Although printing money to avoid a short-term crisis may seem like an attractive idea, it is a trap. Printing more money does not increase economic output: it only increases the amount of cash circulating in the economy.
Yet Sri Lanka prints money because not doing so would be “a bigger crisis” according to current central bank governor Nandalal Weerasinghe. Government employees are the first beneficiaries of printed money, but this later leads to higher prices as the currency depreciates and inflation rises.
“If money printing is stopped and wages are not paid, there will be a bigger crisis,” Weerasinghe said. “I can clearly say that there is no problem paying the salaries and pensions of state employees. Because we can give money which is paid in rupees. But we have to do it with a certain responsibility and we must not do as before and increase inflation to around 40%”.
Meanwhile, Sri Lanka appears to be heading for its first external debt default as it is unlikely to be able to pay interest to bondholders by Wednesday (May 18), when his grace period to do so will end.