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Sri Lanka CB Governor says strong case to relax monetary policy: report

ECONOMYNEXT – Sri Lanka has a ‘strong case’ to relax monetary policy, Central Bank Governor Indrajit Coomarasmway said as the islands private credit fell and bank balance sheets contracted.

"If you look at all indicators, there’s a strong case for relaxing monetary policy,” Governor Indrajit Coomaraswamy was quoted as saying by Bloomberg Newswires.

"All options are there. It could be a SRR (statutory reserve ratio), it could be a policy-rate reduction, it could be a combination of the two."

Sri Lanka’s central bank triggered two runs on the rupee in 2018, by trying to artificially push down rates by printing large volumes of money as the credit demand and the economy recovered in so-called lost generation economics and the US tightened policy.

Sri Lanka targets a published real effective exchange rate making the rupee a sitting duck, and also has other convertibility undertakings including an International Monetary Fund forex reserve target, a undertaking to prevent ‘disorderly adjustment’ and ‘excessive volatility’.

But there is no floating short term rates to allow the exchange rate to be targeted in any way making it a classic balance of payments prone soft-peg.

The rupee fell from 153 to 182 in 2018 as 246 billion rupees were printed to generate excess liquidity and sterilize outflows and foreign investors in rupee bonds fled.

However after October 23, a political crisis undermined confidence, which analysts say made it even more difficult for the central bank to juggle the soft-peg and the credit system was hit with prolonged liquidity shortages.

Sri Lanka is seeing a private credit contraction after four years, analysts have said. When private credit contracts there will be a ‘surplus’ of dollars and the rupee faces appreciation pressure.

With credit contracting the central bank has bought dollars in the first quarter from commercial banks as well as the Treasury.





The central bank has managed the liquidity spike that occurs in late April and early May which tends to de-stabilize the rupee when credit is strong through repo auctions (auctions that withdraw money) and there was also uncertainty among foreign bond holders after Easter Sunday blasts.

Analysts say the risk may now have passed.

Short term rates are now being held repo auctions (auctions that withdraw money) at around 8.50 percent and may be kept artificially up. (Colombo/May21/2019)

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