MONEY AND BANKING Money Supply A considerable acceleration in the rate of growth of money sxpply, mainly resulting from a substantial expansion in domestic credit, was the salient feature of monetary developments in 1988. The annual rate of growth of narrow money supply (M,), consisting of currency and demand deposits held by the public, which stood at 18 per cent as at the end of 1987, increased to 29 per cent by the end of 1988. In absolute terms, the narrow money supply rose substantially by Rs. 7,296 million in 1988, ; compared with an increase of Rs. 3,904 million in the previous year. Meanwhile, the time and savings deposits of the public held with commercial banks (quasi-money) increased at a slower rate of 7 per cent in 1988, compared with a 12 per cent growth in 1987. Consequently, the broad money supply (MJ, defined to include M, plus quasi-money, grew by Rs. 9,611 million or 16 per cent in 1988, compared with a growth of Rs. 7,475 million or 15 per cent in the preceding year. The substantial growth in M] during 1988 was mainly reflected in the currency holdings of the public, which rose by Rs. 4,992 million or 37 per cent. The corres­ ponding increase in 1987 was Rs, 1,925 million or 17 per cent. Consequently, the share of the currency component in M, rose from 54 per cent in 1987 to 57 per cent in 1988, largely reflecting the public's preference for liquid assets to meet unforeseen emergencies arising from the sporadic civil disturbances in the country. At the same time, the public's demand for currency notes of higher denominations of Rs. 1,000 and Rs. 500, continued to remain high, reflecting the increased use of high value notes for transaction purposes against a background of continuing inflationary pressures. Accordingly, the share of these notes in the total currency issue rose from 61 per cent at end of 1987 to 66 per cent by the end of 1988. During 1988, quasi-money increased by Rs. 2,315 million or 7 per cent. This was reflected largely in time and savings deposits of the other private sector constituents (OPSC), which grew by Rs. 2,100 million or 8 per cent. In comparison, time and savings deposits of government corporations recorded a marginal increase of Rs. 242 million or 5 per cent. Meanwhile, time and savings deposits of co-operative insti­ tutions declined marginally by Rs. 27 million, in contrast to an increase of Rs. 68 million during 1987. A sharp growth in domestic credit (DC) amounting to Rs. 21,302 million or 28 per cent was the underlying factor for the sharp increase in the monetary aggregates in 1988. Comparable growth in 1987 was Rs. 11,457 million or 18 per cent. The growth in DC in 1988 comprised an increase of Rs. 9,017 million or 33 per cent in net credit to government (NCG) from the banking system and an expansion of Rs. 12,285 million or 25 per cent in gross credit to the private sector (GCPS) by commercial banks. The comparable increases in NCG and GCPS in the previous year were Rs. 4,502 million or 20 per cent and Rs. 6,955 million or 17 per cent respectively. Against the background of a growing budget deficit, the government's recourse to borrowings from the banking system rose considerably during 1988. The gross credit to government from the banking system rose by Rs. 12.8 billion in 1988, as :( ) MONEY SUPPLY MONTHLY RUPEES MILLlSN RUPEES MILLfON 70000 null mm 7QQQ0 60000 BROAD MONEY 60000 SUPPLY • TIME & 50000 -SAVINGS 50000 DEPOSITS 40000 = 40000 30000 30000 20000 20000 10000 10000 1984 1985 1986 1987 . 198^ Central Sank at Sri Ugfc*. TABLE 1 . 46 Monetary Aggregates 1986—1988 Amount in Rs. Million Narrow Money Supply (Mi) Broad Money Supply (Mj) End of Period % Change % Change % Change % Change % Change % Change 1988 over 1986 1987 1988 1986 over 1987 over 1938 over 1986 1987 1988 1986 over 1987 over 1985 1986 1987 1985 1986 1987 + 70 + 15-8 18,456 21,845 25,336 + 11.7 + 18-4 + 16-0 48,498 51,887 60,060 + 104 January 60,846 + 8-3 + 8-7 + 15-2 February 19,062 21,738 25,672 + 14-9 + 14-0 + 18-1 48,587 52,799 22,556 26,640 + 18-7 + 10-3 + 181 49,410 53,855 61,081 + 9-2 + 90 + 13-4 March 20,454 + 80 + 17-2 20,287 22,121 27,467 + 17-1 + 90 + 24-2 49,335 53,278 62,465 4- 7-2 April: 53,972 63,687 + 6-6 + 9-9 + 180 May 20,043 22,305 28,178 + 16-5 + 11-3 + 26-3 49,119 22,075 27,792 + 15-1 + 10-7 + 25-9 48,959 53,942 63,118 + 5-9 + 10-2 + 17-0 June 19,949 + 11-7 + 165 19,615 22,574 28,053 + 15-6 + 15-1 + 24-3 48,882 54,624 63,645 + 4-8 July 55,236 64,116 + 3-8 + 13-3 + 161 August 19,731 23,160 28,234 + 14-5 + 17-4 + 21-9 48,771 22,973 28,453 + 16-8 + 12'. 6 + 23-8 49,430 55,927 63,932 + 3-2 + 131 + 14-3 September 20,399 + 13-4 + 13-8 20,219 23,143 28,684 + 13-8 • + 14-5 + 23-9 49,868 56,560 64,371 + 3-1 October 56,916 66,088 + 60 + 13-7 + 161 November 20,293 23,551 30,379 + 11-6 + 161 + 290 50,057 : 58,335 67,946 + 5-1 + 14-7 + 16-4 December 21,179 .25,083 ' 32,379 + 12-9 •+ 18-4 + 29-1 50,860 14,0 54,778 63,446 + 6-1 + HI + 15-8 Monthly Average 19,974 22,760 28,106 •] +14-9 .+ + 23-4 49,315 »V rtf C»M T c ( 137 ) DOMESTIC CREDIT MONTHLY RUPEES MILLION RUPEES; MILLION 50000 imi|iiim 50000 45000 r- 45000 40000 40000 35000 30000 25000 NET CREDIT 20000 TO THE GOVERNMENT ,—1 20000 15000 15000 10000 3 10000 TO GOVERNMENT/^, flORPOR ATinMC .^i 5000 H 5000 TO CO-OPERATIVES/> X _L liiiiilinnTiiiiili|in 1984 1985 1986- 1987 1988 Central Bank of Sri Lanka. TABLE 1.47 Monetary Aggregates and Underlying Factors : Amount in Rs. Million Change^.1986/1987 • Change 1987/1988 Item December December December 1986 1987 1988 Amount. Percentage Amount Percentage • 1 Monetary Aggregates 1. Currency held by the public 11,570 13,495 18,487 4- 1,925 + 16-6 4- 4,992 4- 37-0 2. Demand deposits held by the public 9,609 11,588 13,892 4- 1,979 4- 20-6 4- 2,304 4- 19-9 Narrow Money Supply (Mi) 21.179 25.083 32.379 +•: 3,904 4- 18-4 4- 7,296 4- 29-1 3. Time and Savings Deposits of the private sector held with commercial banks 29.681 33,252 35,567 •4- 3,571 + 120 4- 2,315 4- 7-0 3.1 Co-operative Institutions 702 771 ,•' 743 4- 69 4- 9-7 27 -. 3-6 3-2 Government Corporations 4,742 4,861 5,103 + 119 + 2-5 4-- 242 4- 50 3-3 Other Private Sector Constituents (a) 24,237 27,620 29,721 + 3,383 4- 13-9 + 2,100 4- 7-6 Broad Money Supply (M2) 50.860 58,335 67,946 4- 7,475 4- 14-7 + 9,611 4- 16-4 Underlying Factors 1. Domestic Credit 64,109 75,566 96,867 + 11,457 4- 17-9 + 21,302 4- 28-2 1 • 1 Net Credit to Government 22,546 27,048 36,065 4- 4,502 4- 200 + 9,017 4- 33-3 1-1-1 Gross credit to Government 27,599 31,519 44,311 4- 3,920 4- 14-2 4- 12,792 4- 40-6 by Central Bank 24,846 26,157 36,439 4- 1,311 4- 5-3 4- 10,282 + 39-3 by Commercial Banks 2,753 5,362 7,872 4- 2,609 + 94-7 4- 2,510 4- 46-8 1-1-2 Government deposits and cash balances -5,053 -4,471 -8,246 4- 582 4- 115 3,775 - 84-4 1-2 Gross Credit to Private Sector 41,563 48,518 60,802 + 6,955 4- 16-7: +- 12,285 4- 25-3 1-2-1 Co-operative Institutions 1,424 1,123 1,318 301 211 + 195 + 17-4 1-2-2 Government Corporations 4,739 7,366 10,787 4- 2,627 4- 55-4: 4- 3,421 4- 46-4 1-2-3 Other Private Sector Constituents 35,400 40,029 48,697 + 4,629 + 13-1: 4- 8,669 4- 21-7 f 2. External Banking Assets (net) 8,859 8,416 4,644 - 443 - 501 3,772 - 448 3. Other items (net) -22,108 -25,647 -33,566 _ 3,539 _ 161 _ 7,919 _ 309 3-1 Other liabilities (net) of Central Bank • 15,332 -15,282 - (14,693 50 i 4- 588 3-2 Other liabilities (net) of Commercial Banks - 6,881 -10,413 -18,472 3,532 8,059 3-3 Adjustments for items in transit 105 48 - n 400 57 - 448 Broad Money Supply (M2) 50,860 58,335 - 67,946 4- 7,475 14-7 4-- 9,611 + 16-4 Note : Signs indicate the effect on M2. Source : Central Bank of Sri Lanka.