ECONOMYNEXT – Sri Lanka needs further rate hike to contain monetary expansion and put the brakes on inflation but a rate hike is will also help support the rupee, W A Wijewardena, former Deputy Governor of the central bank said.
An overall plan covering interest rates, exchange rates, and the budget was needed.
“We have to raise rates to contain the rising inflation in the country,” Wijewardene said.
“But it has a positive effect on the exchange rate. One reason very high demand for imports is the money available. The high aggregate demand is driving imports.”
Wijewardene said the 200 rate was could not be held and the day of reckoning had come.
He said the 7.50 policy rate was not enough because the Treasury bill yields have already gone above 10 percent.
It gave arbitrage opportunities for bond buyers to borrow from the central bank at 7.50 percent and invest in government securities.
Wijewardene said the the gap between domestic dollar yields and rupees have to be widened.
Sri Lanka floated the rupee this week and the rupee opened at 240/260 on Thursday and is currently trading at 260/275.
Wijewardene said an overall economic program covering monetary and fiscal sector was needed.
“A piecemeal attack will not help,” Wijewardena said. “We need a macro-economic plan that will cover the interest rates, exchange rate, monetary policy and the budget.”
Wijewardena said eventually debt re-structuring will be needed as reserves were too low.
Wijewardene designed a tight reserve money program that helped the country contain inflation and maintain stability when Sri Lanka was facing high commodity prices from the Greenspan-Bernanke bubble.
Global commodity prices are also high now with Fed Chief Jerome Powell firing a bubble.