ECONOMYNEXT – A new monetary law planned in 2019, if it had been enacted may have prevented the steep tax cuts made in that year which was followed by unprecedented money printing, ex-Central Bank Governor Indrajit Coomaraswamy said.
The bill for the central bank law was ready in 2019 but the then administration ran out of parliamentary time to enact it, he said.
Economists backing the new administration slashed taxes in December 2019 and placed price controls on Treasuries auctions bought new and maturing securities, claiming that there was a ‘persistent output gap’.
Coomaraswamy said he keeps wondering whether “someone sitting in the Treasury would have implemented those tax cuts” if the law had been enacted.
“We would never know,” he told an investor forum organized by CT CLSA Securities, a Colombo-based brokerage.
The new law however will sill allow open market operations under a highly discretionary ‘flexible’ inflation targeting regime.
A reserve collecting central bank which injects money to push down interest rates as domestic credit recovers triggers forex shortages.
The currency is then depreciated to cover the policy error through what is known as a ‘flexible exchange rate’ which is neither a clean float nor a hard peg.
From 2015 to 2019 two currency crises were triggered mainly through open market operations amid public opposition to direct purchases of Treasury bills, analysts have shown.
Sri Lanka’s central bank generally triggers currency crises in the second or third year of the credit cycle by purchasing maturing bills from existing holders (monetizing the gross financing requirement) as private loan demand pick up and not necessarily to monetize current year deficits, critics have pointed out.
Past deficits can be monetized as long as open market operations are permitted through outright purchases of bill in the hands of banks and other holders.
In Latin America central banks trigger currency crises mainly by their failure to roll-over sterilization securities. (Colombo/Nov29/2022)