ECONOMYNEXT - An International Monetary Fund team will arrive in Sri Lanka to start talks on resuming a program, Managing Director Christine Lagarde had said after meeting Finance Minister Mangala Samaraweera and Central Bank Governor Indrajit Coomaraswamy.
“We agreed that a strong policy mix, with effective implementation of that agenda, is key to strengthening confidence, while putting Sri Lanka on a sustainable, high-quality growth path that would benefit its people," Lagarde said in a statement.
"The IMF remains ready to support the Sri Lankan authorities in these endeavors and an IMF team is scheduled to visit Colombo in mid-February to resume program discussions."
Sri Lanka raised taxes, market priced oil in 2018, but monetary instability emerged from the end of the first quarter of 2018 as after the central bank cut rates in April 2018 and started injecting money to keep rates down just as the credit system was starting to recover, despite running a de facto peg.
Sri Lanka is operating a highly unstable soft-pegged exchange rate regime with multiple convertibility undertakings including targeting the real effective exchange rate index.
However the central bank does not have a floating interest rate to be able to target an exchange rate.
The central bank has instead printed tens of billions of rupees to target the policy interest rate, allowing banks to give loans or buy bonds from exiting foreign bond holders without raising real deposits, and has also released liquidity by cutting the statutory reserve ratio leading to a steady loss of reserves.
In the last four months 2018, Sri Lanka has busted over 1.2 billion US dollars on maintaining a soft-pegged exchange rate. (Colombo/Jan16/2018)