ECONOMYNEXT – Sri Lanka is drawing up a new banking law, which is expected to be passed by parliament next year, and will also form part of an International Monetary Fund backed program Deputy Governor Yvette Fernando said.
“On the Banking Act we have done a new Act,” Deputy Governor Fernando said. “..[W]e want to do a little bit more consultation also there,”
“Because we want to expand on the resolution area. So that is happening now.”
The new banking law which will have provisions to more easily resolve troubled banks. It has been included as part of a reform package backed by the IMF.
“Most probably during next year we are expected to finalize it, by going to cabinet and consultation process and also finally getting Parliament approval.”
Sri Lanka is also expected to enact a new monetary law act under the IMF program.
Analysts have warned that a draft monetary law prepared before 2019 institutionalizes an ‘impossible trinity regime’ where floating rate style liquidity injections (inflationary policy) are applied to a foreign reserve collecting peg (flexible inflation targeting).
Policy errors are then compensated for by depreciation (flexible exchange rate). Sri Lanka has been juggling with impossible trinity regimes since 1951 and going to the IMF 17 times.
The IMF is unable to permanently stop balance of payments trouble, general impoverishment of the population through monetary debasement and social unrest as there is no exit to a single anchor regime from the impossible trinity regime that led to currency crisis in the first place.
IMF generally does not prescribe consistent single anchor regime, partly because it gives loans to a central bank which has to collect reserves to repay the loan by running deflationary policy for a time.
However due to aggressive open market operations to suppress rates or sterilize interventions (operation of a dual anchor or impossible trinity regime), such a central bank returns to inflationary policy in the credit cycle following the end of an IMF program.
Under flexible inflation targeting with a monetary consultation clause Sri Lanka operated inflationary policy in 2018 with aggressive open market operations and ran into balance of payments trouble even before the last IMF program ended.
Critics say the flexible inflation targeting with a high inflation target above 3 to 4 percent is perhaps deadliest impossible trinity regime cooked up by Washington based policy makers up to now and is far more unstable than the original Bretton Woods. (Colombo/Sept08/2022)