The meltdown faced by the government, led by the strongman president Gotabaya Rajapaksa, is in part caused by the immediate impact of the Covid crisis and the loss of tourism but is compounded by high government spending and tax cuts eroding state revenues, vast debt repayments to China and foreign exchange reserves at their lowest levels in a decade. Inflation has meanwhile been spurred by the government printing money to pay off domestic loans and foreign bonds.
In August the central bank imposed a ceiling rate of 5.0 percent on dollar deposits, discouraging the active raising of deposits by banks.
Sri Lanka’s dollar yields have risen sharply as liquidity tightened after downgrades and counterparty risks rose.
Sri Lanka is currently facing a currency crisis due to low interest rates enforced with liquidity injections.
During the ousted ‘Yahapalana’ administration when the currency collapsed from 131 to 181 in two crises, deposit rate controls were slapped on rupee deposits of hapless poor savers after printing money to bust the currency peg and drive inflation up.
The rupee is now on a 200 to the US dollar peg which has lost credibility and parallel exchange rates are around 250 to the dollar.
Yep. They’re trying to control all three. The interest rate, the money supply and the FX rate. As the Murphmeister says a central bank and government together can.
And as reality keeps proving you can’t. You can, at best, control two of the three and the third will be the balancing item. As with supply, demand and prices. The third is always the derivative of the interactions of the other two which is why all three can’t be controlled at the same time.