CBSL Governor corrects the record on “money printing”

Fact Check

Commenting on the question of inflationary pressure created in Sri Lanka due to increased money printing, the Governor of the Central Bank of Sri Lanka (CBSL) claims that the money printing has reduced in 2022 compared to 2021.  

The governor in his statement refers to the change in the “reserve money” as the amount of “money printed” in the country. There is also a common usage in which the direct financing of government debt by the CBSL is called “money printing” as it expands the money base in circulation. However, this is not the only mechanism for increasing the money base. Open market operations (buying and selling securities in the secondary market), the purchase of foreign assets and change in the net asset position of the CBSL also change the money base. The sum of all the above changes is captured in the change in “reserve money”, which makes it the correct overall indicator for the increase in the money base (what is also referred to as “money printing”).  

According to CBSL data, the increase in reserve money was LKR 341 billion in 2021 whereas the increase was only LKR 44 billion in 2022. The LKR 44 billion figure is closer to the amount cited by the governor as the amount of “money printed”.  

The popular understanding has been based on the amount of direct financing of government debt by CBSL, which increased by LKR 1,181 billion in 2022, whilst it only increased by LKR 692 billion in 2021.  Therefore, despite the increase in this method of increasing base money in 2022 other actions relating to net foreign assets and open market operations reduced overall base money in 2022.  

Overall, the governor is correct in quoting the net increase in base money, as the amount of “money printed” in 2022. Therefore, we classify his statement as TRUE. 

*FactCheck.lk’s verdict is based on the most recent information that is publicly accessible. As with every fact check, if new information becomes available, FactCheck.lk will revisit the assessment.    

Exhibit 1: Change in the value of central bank balance sheet aggregates (LKR Billions)  

Source: CBSL 

Additional Note: 

The quantity theory of money suggests there is a positive relationship between inflation and money supply. Therefore, there is a general belief that when base money is increased (“money is printed” by the central bank, that it increases the inflation in an economy.  

Money supply can be measured through a range of aggregates (for more details visit Monetary Policy – FAQs | Central Bank of Sri Lanka (cbsl.gov.lk))  The usual indicator used to measure the money supply in Sri Lanka is Broad Money Supply (M2b) – includes currency notes and coins held by public, and deposits held in commercial and central banks. The central bank can control the money supply through issuing more currency notes to the market— measured through reserve/base money changes— or the central bank can alter the Statutory Reserve Ratio (SRR). SRR is the portion of reservable liabilities that commercial banks must hold onto, rather than lend out or invest.  

Therefore, despite a reduction in the increase in the reserve money, the change in money supply (M2b) has increased to LKR 1,649 billion in 2022 compared to LKR 1,241 billion in 2021. Even though the government has reduced the amount of money issued, it has not led to a reduction in inflation in 2022.   

However, money supply is not the only instrument used to control inflation. Modern central banks use interest rates as a preferred instrument to control inflation.