ECONOMYNEXT – Sri Lanka will take up for debate a bill for a new central bank law on May 11 and a welfare benefit bill on May 12, the statement from the parliament said.
The controversial new central bank is expected to legalize output gap targeting (printing money for growth) as a sub objective.
The banks will also get a legal mandate to simultaneously operate money and exchange polices, (so-called dual anchor or impossible trinity regime), in the course of operating flexible inflation targeting regime.
Provisional advances – another form of delivering liquidity shocks – will be done for interest instead of free as of now.
Sri Lanka has had monetary instability from shortly after the central bank was created in 1950 with simultaneous money and exchange policies but the country had managed to avoid external sovereign default until 2022.
Flexible inflation targeting with output gap targeting with aggressive open market operations started around seven years ago after the IMF gave technical assistance to calculate a so-called potential output.
The new monetary law is a structural benchmark in the IMF program.
On May 12, a welfare benefit law will be taken up. (Colombo/ May04/2023)