IMF warns Sri Lanka on inflation, credit growth
Mar 07, 2017 14:10 PM GMT+0530 | 2 Comment(s)
ECONOMYNEXT - The International Monetary Fund has warned the Central Bank to tighten monetary policy if inflation and credit growth does not slowdown, after a review mission ended short of reaching agreement on the next six month.
“The mission encourages the Central Bank of Sri Lanka (CBSL) to remain vigilant in monitoring inflation pressures and stand ready to tighten monetary policy if inflation or credit growth does not abate," the IMF Mission Chief Jaewoo Lee said in a statement.
"In light of mounting external pressures, the mission encourages the CBSL to take stronger actions towards rebuilding international reserves and maintaining exchange rate flexibility.
"In this regard, the mission and the authorities discussed IMF technical assistance to facilitate transition to flexible inflation targeting framework."
Sri Lanka's inflation rose to 6.8 percent in February from 5.5 percent in January. It is sharply higher than 3.8 percent in Indonesia, and 3.7 percnet in Pakistan in January, two countries that have history of bad monetary policy and currency depreciation. Sri Lanka's centarl bank has generated much higher inflation than Hong Kong (1.3 percent) which does not have a central bank, Singapore (0.6 percent) which has a modified curency board, Malaysia (3.2 percent) and Thailand (1.4 percent)
Though Sri Lanka met the budget deficit target, it failed to collect enough foreign reserves.
The mission ended work in Colombo after reviewing December 2016 without reaching agreement on the next six months.
Negotiations would continue in Washington in April the statement said. Seasoned IMF watchers interpret it to mean that prior actions involving fixing delayed structural benchmarks will have to be met during that time.
Sri Lanka loosened monetary policy by printing money up to three months or more to manipulate longer term rates from November 2016 (Sri Lanka loosens policy; signals longer term rates) in key policy error that would make it difficutl to collect forex reserves, push up credit growth and push the currency down. A massive bout of money printing on January 02 to repay a maturing bond that made internbant market slosh in excess liquidity for moer than a month.
IMF also warned the Central Bank not to defend the currency. (Currency defence requires more money to printed to maintain rates, unless rates are allowed to move up).
Sri Lanka however has a de facto peg with the US dollar where the central bank buys dollars to build reserves and stop the currency from strengthening.