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Saturday November 27th, 2021

Sri Lanka new CB Governor earns cautious approval from Wijewardena

ECONOMYNEXT – Sri Lanka’s newly appointed Central Bank Governor Nivard Cabraal has earned cautious approval from W A Wijewardena, a former Deputy Governor of the note-issue bank which has a legal tender monopoly in the country.

A day after assuming office Governor Cabraal immediately lifted a price control on bill auctions though which the agency’s domestic operations had been creating new interest free IOUs (like a checque) exchangeable for dollars and domestic goods.

Instead of borrowing real savings from the private citizens and channeling them to the budget to pay state workers keeping the external sector in balanced, the agency had been writing cheques through failed bond auctions.

The cheques written without cash in the account (net foreign assets) are now bouncing in the foreign exchange market creating severe dollar shortages after state workers spend them or the government pays suppliers.

People who have saved money are unwilling to buy bonds at controlled rates as inflation is now around 6.7 percent.

Cabraal said he was placing stability before growth as the country faced severe external pressures and a loss of confidence.

Wijewardena as Deputy Governor and Cabraal in 2008/2009 along with tamed the agency’s domestic operations to maintain monetary stability to a great extent.

“As promised by @an_cabraal ,at today’s Treasury bill issue, yields have been permitted to rise by 30-38 basis points but could raise only 20.171 bn out of 39.5bn offered; roughly,19.3bn will be purchased by CB;seems to be adjusting gradually without causing pain to economy,” Wijewardena said in a message.

The IOUs of a note-issue bank in addition to being used for final transactions are also used to denominate credit and savings.

Therefore the vagaries in its value has consequences for the broader economy. As Sri Lanka now has only one note-issuing bank, the fortunes of the bank are linked to the economy.

The Chinese backed Port City has been freed from the domestic operations of the central bank and is now a multiple currency area, the most free market monetary arrangement imgineable, which goes beyond low inflation targeting (2.0 percent of below) with an independently floating exchange rate or a currency board (anchored to a central bank with a low inflation target).

Sri Lanka’s 12-month bill yields are still below the level in January 2020 when the external sector was broadly in balance and the country still had access to international capital markets.

Even if investor confidence is restored in bonds, the central bank still has the challenge of restoring confidence in forex markets and getting it to work again, analysts say.

Sri Lanka is operating a ‘flexible exchange rate’ a new fangled term for an intermediate monetary arrangement with dangerously conflicting anchors which are variously known as dirty floats, managed floats, crawling pegs.

As Cabraal lifted price controls, in the broader political arena the parliament ratcheted up fines for traders who are breaking price controls. (Colombo/Sept24/2021)

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