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Friday July 12th, 2024

Sri Lanka central bank pushing for high inflation target to boost growth

ECONOMYNEXT – Sri Lanka’s central bank is pushing for a high inflation target of around 4 to 6 percent, for the country in the belief that price pressures needed to push up growth to high levels, officials said.

“We have a potential level of growth given our endowment,” Director of the Central Bank’s Director of Economic Research P K G Harishchandra said explaining the rationale for the agency’s high inflation target.

“You cannot double that growth without creating price pressure.”

Most stable countries target only 2 percent inflation.

However, the central bank fears that lower levels of inflation will lower growth.

“If you target 2 percent inflation, monetary policy conditions have to be relatively tight,” Harischandra said.

“In advanced economies inflation is around 2 percent and growth is also around that number.”

The belief that higher levels of inflation can create higher levels of growth (or that there was a growth inflation trade off) was pushed by Latin American structuralists and Keynesians among others.

“There has to be some level of positive inflation for an economy to function,” Harischandra said.

“On that basis the number is different from country to country. A developing economy is around 5 percent. And that is coming from the level of money which is needed for an economy.”

“What is the right level of inflation that can be accommodated within an economy while allowing an economy to grow in a sustained manner?

“That x percent is country dependent. If you look at different countries you have different answers.

“But we will have to take into account output stability as well.”

Under a new monetary law macro-economists have inserted a clause allowing potential output to be considered or targeted.

Post World War II inflationists were also supported by statistics including the so-called Phillips Curve, which appeared to show a correlation between growth and inflation.

From the second half of the 1960s developed countries started generating higher levels of inflation while trying to boost growth by printing money, eventually leading to a collapse of the US dollar and the Bretton Woods system.

In the 1970s inflation went even higher as developed country ‘independent’ central banks tried to find an anchor to replace the Bretton Woods and gold.

Some developed countries then targeted money supply with a floating rate with some degree of success. Inflation targeting proper came in the early 1990s.

Officials say Sri Lanka historically had high inflation.

However, inflationism in Sri Lanka and other countries with questionable monetary standards started mostly after the collapse of the Bretton Woods system. Inflationism became even more mainstreamed for the third world and Eastern Europe in the 1980s.

Up to the collapse of the Bretton Woods, despite its faults, the monetary anchors of Sri Lanka, the US, Germany or France or UK were the same, and inflation was also in the low single digits. As the anchor was the same, exchange rates did not move unless money was printed.

Sri Lanka’s inflation went above 3.1 percent only in 1964 just as the central bank started to go to the IMF for bailouts.

Inflation hit 7.4 percent in 1969, at a time global inflation also rose amid bad monetary policy in the US and UK.  Sri Lanka enacted an import control law at the time accelerating economic controls.

Before Keynesianism and inflationism generally, there was no discrimination in monetary anchors between industrialized, or non-industrialized or service oriented or mainly agricultural countries.

As long as the anchor (both gold and the US dollar were targeted at zero) was followed inflation in any country (including in Zimbabwe, a country like Australia with commercial agricultural system and natural resources) inflation was low in the period.

Sri Lanka’s inflation rocketed from the 1980s (along with that of Latin America) as the country operated without a consistent monetary anchor or it tried to target money supply without a floating rate after losing the traditional anchor (Gold or US dollar or both) in 1971.

Concerns have been raised that the central bank is targeting multiple anchors including inflation, GDP growth (potential output) as well as the exchange rate, while not having a clean float and trying to collect reserves.

Separate from the debate whether there really is a trade-off between growth and inflation, concerns have been raised that without a clean float, printing money to target a high level of inflation makes currency crises and depreciation inevitable.


Inflation and Growth: Is There a Trade-Off?

As a result, external stability is denied for even basic transactions and the purchasing power of salaries are busted, let alone allowing for sustained growth or investor confidence.

Critics have pointed out that the high inflation target has given the central bank more than enough room to print money through open market operations to target a call money rate and gilt yields (cut rates), triggering forex shortages and external crises even when inflation was at the lower threshold of the target band.

Inflation was only 3.9 percent by the Colombo Consumer Price by May 2021 when large volumes of money were printed for one and a half years to run down reserves through multiple tools and eventually driven the country to external default.

In 2018, inflation was only 3.8 percent in April when rates were cut and large volumes of money was printed to trigger forex shortages, triggering capital flight. In 2015 inflation was even lower when money was printed to depreciate the rupee and trigger capital flight from bond markets.

Under the new monetary law the Finance Ministry and the central bank have to agree on an inflation target.

The central bank is now conducting analysis on the inflation target in the post crisis environment.

There have been calls to deny the central bank the power to generate high inflation.

Giving the central bank to the right to generate inflation as high as 4.0 percent would be giving the agency goal independence as well as instrument independence, critics have warned (Sri Lanka legislators should deny high inflation goal independence to the central bank).  (Colombo/Aug07/2023)

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Sri Lanka appoints new Attorney General

ECONOMYNEXT – Sri Lanka’s President Ranil Wickremesinghe has appointed K A Parinda Ranasinghe PC as Attorney General.

He was appointed in terms of Article 61E (b) of the Constitution of Sri Lanka, the president’s media division said.

The new AG received the appointment from President Wickremesinghe at the Presidential Secretariat on Friday.

Ranasinghe is the 49th Attorney General of Sri Lanka.

He fills the post after the retirement of former Attorney General Sanjay Rajaratnam. (Colombo/Jul12/2024)

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Sri Lanka rupee closes stronger at 301.70/302.00 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed stronger at 301.70/302.00 to the US dollar on Friday, from 302.80/303.00 to the US dollar on Thursday, dealers said, while bond yields were up.

A bond maturing on 15.12.2026 closed at 10.90/11.00 percent, up from 10.85/95 percent.

A bond maturing on 15.12.2027 closed at 11.75/80 percent, up from 11.80/88 percent.

A bond maturing on 01.05.2028 closed at 11.90/12.00 percent.

A bond maturing on 15.09.2029 closed at 12.10/30 percent, up from 12.15/25 percent. (Colombo/Jul12/2024)

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Sri Lanka stocks close up, muted activity

ECONOMYNEXT – The Colombo Stock Exchange closed up on Friday, data on its site showed.

The broader All Share Index closed up 0.35 percent, or 41.71 points, at 11,843; while the more liquid S&P SL20 Index closed up 0.56 percent, or 19.20 points, at 3,454.

Turnover was low at 653 million.

“The market picked up a bit from yesterday but it’s still below the psychological 12,000 mark,” Softlogic Stockbrokers said.

“Local retail participation drove the market predominantly.”

John Keells Holdings Plc brought in Rs109mn to the turnover, and the share closed flat at 194.50.

Melstacorp Plc contributed in Rs104mn to the turnover, and the share closed flat at 85.00.

Sentiment around the banking counters was mostly negative. Sampath Bank Plc closed down at 77.00, closed flat at 101.25, and Hatton National Bank Plc closed flat at 195.25.

The top contributors to the ASPI were Commercial Bank of Ceylon Plc (up at 103.50), Bukit Darah Plc (up at 397.00), and Hayleys Plc (up at 101.00).

Foreign participation remained low as well. There was a higher net foreign outflow of 101 million.

“Foreign selling was seen on John Keells Holdings, and banking counters; Hatton National Bank Plc (down at 195.00), Pan Asia Banking Corporation Plc (down at 20.70), and Commercial Bank of Ceylon Plc.

There was selective foreing interest on the diversified financials sector, particularly in companies that had vehicle leasing portfolios. “We think this might be due to the news of the vehicle import ban possibly ending.”

LOLC Holdings Plc closed up at 440.50, People’s Leasing and Finance Plc closed up at 12.20.

Softlogic Holdings Plc which announced the date of its rights issue, closed up at 8.50. (Colombo/Jul12/2024)

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