Sri Lanka cabinet approves legal changes for flexible inflation targeting

ECONOMYNEXT – Sri Lanka’s Cabinet of Ministers have approved changes to the monetary law of the country to help the Central Bank conduct what it calls ‘flexible inflation targeting’.

The changes will improve governance and help the Central Bank move to a flexible inflation targeting policy framework, a statement from the state information office said.

The cabinet paper was submitted by Minister of Finance Mangala Samaraweera.

Sri Lanka is planning to remove provisions in the existing law, which forces the Central Bank to finance deficits with printed money by so-called provisional advances, and remove provisions that undermines its independence.

The Treasury representative at the moment also has effective veto power to stop rate increases aimed at maintaining economic stability when credit demand picks up, which is known as fiscal dominance of monetary policy.

However, there has been increased concern that Central Bank independence may lead to further instability as Sri Lanka was pushed into balance of payments trouble in 2018 with no fiscal dominance of monetary policy.

In contrast, there was monetary dominance of fiscal policy critics have said, with the Treasury forced to impose taxes on gold, cars and other imports in an Mercantilist effort to cover up policy errors.

Fears have been expressed that the ‘flexible’ inflation targeting would end up with the continued operation of a forex reserve collecting peg and not a floating rate that is required for effective inflation targeting. (Colombo/Mar21/2019-SB)

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