ECONOMYNEXT – Newly re-appointed Central Bank Governor Nivard Cabraal has met Sri Lanka’s key exporters and importers shortly after taking office as the country face foreign exchange shortages and reserve depletions.
“The exchange of views with the main #Importers & #Exporters in Sri Lanka was very helpful,” Cabraal said in a twitter.com
“Their commitment to stabilize our economy is very encouraging. I look forward to working with them.”
Sri Lanka’s exporters have been hoarding dollars amid record low interest rates enforced by liquidity injections via domestic operations amid and expanding budget deficit and recovering private credit.
Importers also have been given incentives to bet against the rupee by with low rates making stock holding cheap.
The liquidity injections were mainly effected by scuttling bond auctions through price controls, leading to a failure to channel private savings in the budget deficit and an expansions of central bank credit which then hit forex reserves as the new rupees were used.
Cabraal lifted the price controls pushing allowing the rates to rise across maturities at this week’s auction, in a move that will help reduce foreign reserve depletion.
However two days later, data showed that domestic operations had injected 87-day money into an existing liquidity short at below the 3-month rate and as low as 6.08 percent, or providing 87-day money at only 08 basis points higher than the overnight rates.
There have been calls to shut down the domestic operations department (re-create an East Asia style currency board) to ensure that liquidity injections cannot de-stabilize the external sector, generate import controls and social unrest, or a return to rule-based monetary regime involving low inflation targeting with an independently floating exchange rate.
Sri Lanka has a highly discretionary monetary regime which has no credible domestic anchor (‘flexible’ inflation targeting) with an inflation target as high as 6.0 percent, which had already been exceeded.
Neither is there a credible external anchor due to a ‘flexible’ exchange rate, though foreign reserve collection is a clearly articulated goal in all monetary policy statements.
Analysts warned in late 2019 that the obsession with low rates would land the country in trouble. Long term watchers of central bank policy errors have observed that whatever is said to the contrary the actual final target seems to be interest rates.
The rupee has fallen from 131 to 203 officially over the last 5-years amidst the anchor conflicts and forex markets are still dysfunctional.
Amid Covid-19 lockdown driven slowdowns in private credit slowdowns most South and East Asian central bank’s with more credible central banks have collected foreign reserves, generating foreign asset driven excess liquidity and low interest rates. (Colombo/Sept24/2021)