Sri Lanka is a flexible inflation targeting country now: CB Governor

ECONOMYNEXT – Sri Lanka has ‘pretty much’ completed a transition to a flexible inflation targeting regime, Central Bank Governor Indrajit Coomaraswamy said, urging a new monetary law to be passed in parliament.

“Really for a number of year’s now, the central bank has been transitioning towards a flexible inflation targeting regime,” Central Bank Governor Indrajit Coomarawamy told a forum at the bank.

“Senior Deputy Governor (Nandalal Weerasinghe) has been at the helm of things and we have pretty much transitioned.

“We are now a flexible inflation targeting country.

“So if the flexible inflation targeting regime is embedded in the law as we like it to be, on the next day nothing would change.”

He said the planned law, will remove ‘fiscal dominance’ and the Treasury secretary would not be a member of the rate setting policy committee.

Coomarasamy said a legal framework would address the lack of consistency and predictability in policy.

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“If the flexible inflation targeting regime is embedded in the law, then automatically you have greater predictability and consistency,” he said.

President Maithripala Sirisena has blocked the law at cabinet raising concerns over provision aimed at stopping money printing through direct purchases of Treasury.

In the past the central bank had triggered balance of payments deficits and crises essentially by generating excess liquidity in the process of fixing Treasury bill rates at three months and beyond, whenever private or state credit demand expanded.

The new law would contain provisions for the Central Bank Governor to be called to parliament.

The central bank is also considering publishing minutes of monetary policy meetings with a lag, he said.

The proposed law has been referred by cabinet to a parliamentary committee for review he said.

A note by President Sirisena had also called for greater public debate.

Analysts who track Sri Lanka’s central bank closely have suggested the proposed changes also outlaw forward guarantees for forex (swaps) as China did to end monetary instability in the early 1990s.

Concerns have also been raised about the ‘flexible exchange rate’ backed by contradictory policy, which has led to monetary instability, a permanently collapsing currency from 131 to 180 since 2015, trade restrictions, output shocks, revenue shortfalls, comprehensive financial repression in the form bank interest controls. (Colombo/Sept12/2019-sb)