Sri Lanka pledges not to curb import freedoms of citizens during IMF deal
Jun 14, 2016 17:02 PM GMT+0530 | 0 Comment(s)
ECONOMYNXT - Sri Lanka has agreed not curb citizen's freedom to import goods or slap direct or hidden exchange controls on people known as 'multiple currency practices' under a deal agreed with the International Monetary Fund but will instead have to follow prudent monetary policy.
Sri Lanka's central bank printed money to finance a profligate budget in 2015 instead of raising interest rates and triggered a balance of payments crisis with currency diving to147 to the US dollar from 131 unit before the crisis.
In a classical Mercantilist response, authorities then tried to curb a cherry picked import in the form of vehicles with credit restrictions and new taxes.
"During the program we will not impose or intensify restrictions on the making of payments and transfers for current international transactions; introduce or modify multiple currency practices… or impose or intensify import restrictions for balance of payments," the economic and financial policy pledges with the IMF signed by Central Bank Governor Arjuna Mahendran and Finance Minister Ravi Karunanayake said.
Sri Lanka's central bank has a strong history of generating balance of payments crises and high inflation by printing money and then imposing import and exchange curbs on hapless citizens including indirect ones categorised as multiple currency practices.
Past multiple currency practices included higher margins on import letters of credit. Sri Lanka has also printed money and imposed rationing on helpless citizens in the past.
During the latest balance of payments crisis, the central bank and finance ministry restricted import credit for vehicles and also forced exporters to bring in dollars in another regressive move.
Sri Lanka also pledged not to "conclude bilateral payments agreements that are inconsistent" with the IMF 'Article VIII' status.
Instead of restricting citizens, the IMF has partially curbed the discretion of the central bank to create monetary instability with a 'monetary policy clause'.
The IMF for the first time in an agreement with Sri Lanka has placed upper limits on inflation the central bank can generate during a program as a key target.
If the central bank generates inflation of over 6.7 percent to hurt the poor by end 2016, it has to consult with IMF staff and provide explanations.
If the central bank inflates the economy by 8.2 percent to impoverish the people as measured by Colombo Consumer Price Index by end 2016 the program will be temporarily suspended until a consultation is done with the IMF's executive board. IMFis forcasting inflation of 5.4 percent for the end of 2016.
However analysts warned that the lack of a ceiling on net domestic assets of the central bank as a performance criteria in the program may lead to currency depreciation as the central bank tries to meet forex reserve targets, which will inflate the economy in turn.
Economists and analysts have called for the central bank to be abolished and a currency board re-established to prevent exchange rate troubles and high inflation.
Under the current IMF program the central bank will have to move to a 'flexible inflation targeting' regime which could perhaps restrict the agency's discretion to cut rates and generate monetary instability frequently. (Colombo/June14/2016)