The country could breach the net domestic assets test if the central bank continues to print un-backed money to support the government.  The net domestic assets test measures the difference between the monetary base, that is, currency in circulation, cash in bank vaults and bank deposits held at the central bank.

Under the current agreement with the IMF, the net domestic assets or the stock of un-backed money, must not exceed $49.0 billion, as at the end of March this year and must be reduced to no more than $18.7 billion by the end of the fiscal year 2010/2011. The amount of money printed and government securities taken up by the bank since November of last year is now running at close to $40.0 billion after repayments by the government.

The central bank printed about $3.5 billion, while its portfolio of other securities jumped by $11.79 billion on February 24, compared with February when it provided more financial support to the government, amidst the administration’s massive revenue shortfall.

The bank can print money by making direct advances to the government, which are not repaid or by taking up securities, which cannot be resold to the market. This shortfall, which was running at $29.0 billion, as at the end of the period April to January of this fiscal year, despite the massive $22.0 billion tax package imposed at the beginning of the month, will certainly exceed last year’s record of $30.0 billion.

The banks’ continued support for the beleaguered government came against the background of continued lukewarm investor response to the debt instruments being floated by the administration, despite the current agreement with the multilateral agencies. This agreement could result in inflows of U$2.4 billion, if the country meets the eight quarterly performance targets outlined in it.

The BoJ’s continued assistance also came although central bank governor, Brian Wynter, argued that the support, which was given to the government last year was due to investor nervousness surrounding the long delays in coming to an agreement with the International Money Fund (IMF). He also said that no further help would be necessary once an agreement was signed with the agency.

Well, investors responded in a lukewarm manner to the 10.25 per cent per annum debenture, which was floated last month, despite the current agreement with the IMF because this rate was way below the rate of inflation. The rate of inflation was cantering at 12.20 per cent in January.

This inflation rate could move from a canter to a trot of about 15.0 per cent by the end of March this year, since the imposition of the 10 per cent general consumption tax (GCT) on the electricity bills of all companies, which became effective on March 1 of this year, will be passed on to consumers.

Electricity accounts for about 13.0 per cent of the cost of living, while gasoline represents another 13.0 per cent and both prices impact on each other because they are complements. Householders who used more than 200-kilowatt hours in February will have to pay the tax on their March and other monthly bills going forward.­