Sri Lanka June inflation tops IMF’s lower ceiling, triggering consultation clause

ECONOMYNEXT – Sri Lanka’s inflation in June accelerated to 6.0 percent from 4.8 percent in May topping a 4.9 percent inner ceiling agreed with the International Monetary Fund under a three year reform program.

The June ceiling fell short of a 6.4 percent ceiling which leads to a suspension of the IMF program.

Under the agreement if inflation tops 49 percent in June, Sri Lanka has to complete "a consultation with IMF staff on the reasons for the deviation and the proposed policy response."

Sri Lanka’s central bank has a long history of delaying rate cuts or raising rates and then continuing to print money, generating balance of payments crises and high inflation.

Since fiscal and monetary policy deteriorated from the first quarter of 2015, the rupee has fallen from 131 to around 147 to the US dollar.

The rupee started to fall sharply from September 2015 after the central bank reduced interventions but continued to print money by rejecting real bids at Treasury bill auctions.  When the currency falls inflation goes up.

Monetary policy has generally been tighter in 2016, with the central bank’s domestic operations department keeping markets short of liquidity overnight instead of excess liquidity in most of 2015. (Colombo/July01/2016)

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