Dec 14, 2008 (LBO) - State-run Sri Lanka Tea Board has spent over 200 million rupees to buy tea, using printed money from the Central Bank, in a Zimbabwe-style inflationary quasi-fiscal move, the latest information reveals.
Tea Board chairman Lalith Hettiarachchi said last week that it had bought almost a million kilograms of tea worth 232 million rupees with a credit facility provided by state-run Bank of Ceylon via central bank 're-finance'.
Worst Inflation
Central Bank re-finance is simply printed money, and Sri Lanka had relied on such dangerously de-stabilizing forces to finance rural development programs in the 1980s.
The 1980s saw the worst inflation in the country's history, until April 2008, when consumer inflation in Colombo hit 29.9 percent. The weights of the index were then changed.
In the 1990s under then central bank governor A S Jayawardene, direct central bank financing of real economic activities was halted and inflation was brought down to single digits.
However such tactics are still widely used in hyper-inflationary countries like Zimbabwe to 'promote' economic activities.
Zimbabwe's hyper-inflation and currency collapse has been blamed on massive money printing to directly finance the government as well as quasi-fiscal financing of state-corporations and agriculture and other goods.
Quasi-fiscal
The Reserve Bank of Zimbabwe is involved in a Grain Procurement and Commodity Producers' support program as well as a host of others directed at various sectors of the economy, including agriculture.
These included the Agricultural Sector Productivity Enhancement Facility (ASPEF) and the Basic Commodities Supply Side Intervention (BACOSSI) program, the RBZ said.
Under the ASPEF facility 24.6 quadrillion Zimbabwe dollars had been disbursed by July 2008.
To finance bankrupt state enterprises and local authorities RBZ also had a Parastatals Re-orientation Program (PARP) and Local Authorities Reorientation Program.
Under direct fiscal support, the government had been given 83.6 quadrillion Zimbabwe dollars through a Reserve Bank of Zimbabwe overdraft facility.
Sri Lanka's central bank also has 'provisional advance' which economic analysts have urged to be outlawed as soon as possible.
By December 2007, 60.6 billion rupees had been disbursed under the facility to the Treasury, according to the Central Bank's annual report.
Intervention
Meanwhile in Zimbabwe all the central bank financing and interventions had resulted in annual inflation of 231,150,888.87 percent (231 million percent) in July 2008, which is the latest official data available, and the exchange rate has collapsed.
The official exchange rate is 404,294 Zim dollars to the greenback in December. According to media reports the black market rate is over 1.1 million Zim dollars to the US dollar.
The quasi-fiscal activity of Sri Lanka's central bank to buy tea comes to light as the country is going through a severe balance of payments crisis.
The country has lost more than a third of its reserves due to liquidity injections and peg defence by the central bank. The currency fell to 111.30 last week from 110.65 with no intervention.
The central bank has injected 120 billion rupees in two months of intervention and also cut the statutory reserve ratio twice, releasing more money to the system.
Ironically tea was bought to stabilize prices, amidst a bursting global commodity bubble, brought on by a collapsed credit bubble, which in turn was originally fired by loose monetary policy from so-called 'hard' currency central banks like the Federal Reserve.
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