An Echelon Media Company
Tuesday April 23rd, 2024

Sri Lanka political leadership accepts 5 to 7-pct inflation without protest

ECONOMYNEXT – Sri Lanka’s government headed by people’s representatives, had allowed macro-economists to generate up to 7 percent inflation without protest, under a controversial new monetary law, it has been revealed.

Under the new monetary law, President Ranil Wickremesinghe, had signed an agreement allowing the central bank to generate 5 percent inflation spiking up to 7 percent if mistakes are made.

The new monetary law allows peoples’ representatives to bargain with macro-economists, who, according to critics have been given the power to print money (suppress rates with inflationary liquidity tools and unbridled standing facilities) for multiple ends.

Journalists asked what the process of negotiation and who represented the government and who represented macro-economists at the negotiation and whether a lower inflation rate was asked by the government.

Related Sri Lanka central bank gets political nod to create up to 7-pct inflation

There had been no such negotiation or an ask for a lower rate.

“We submitted a recommendation, which the central bank viewed as appropriate and the government agreed to that.”

The 5 percent inflation target was arrived at following research, it was said.

“This is the first time the agreement was arrived at,” Assistant Governor Chandranath Amarasekera explained.

“Going forward the public opinion on the desired inflation target could change. Because it was the first time the government had relied on the recommendation.”

If a disagreement arose on the target, a lower rate could be imposed on the central bank by cabinet decision, officials said.

The central bank has sought a high inflation target partly because any misses on a 2 percent target would lead to loss of credibility of the flexible inflation targeting regime.

Another (non-monetary) excuse given involved ‘food price volatility’ in the index, macro-economists said.

Journalists pointed out that inflation measured by the Colombo Consumer Price Index was close to zero before the mid 1960s, when most of the index was made of mostly unlike now, and also around US inflation up to 1978.

Amarasekera explained that in the 1960s Sri Lanka (and the rest of the world) was under the Bretton Woods agreement, leading to low inflation. But exchange rate targets were could not be achieved later.

Sri Lanka was a country which had generally the same inflation as the US (amid forex shortages, exchange and trade controls) up to 1978 when the IMF’s Second Amendment left the rupee without a credible monetary anchor, critics have said, giving macro-economists a free hand to depreciate the currency after mis-targeting rates.

Before 1971, Sri Lanka was externally (exchange rate target) as well as domestically anchored in theory (a gold target) under the law. To maintain the exchange rate target, money printed for non-market interest rates had be constrained or exchange controls imposed.

Under ‘flexible inflation’ targeting style operations since the end of the war the central bank had generated a series of currency crises with the index showing 5 percent or lower inflation, with the aid of inflationary open market operations and unbridled standing facilities, critics say.

Under a flexible inflation targeting regime attempts are made to target a domestic anchor (inflation index) without a clean floating exchange rate (a de facto variable peg or flexible exchange rate where reserve money is altered by fx transactions as well as domestic assets of the central bank).

Sri Lanka does not have a penal rate for standing facilities unlike lower inflation floating regimes (UK bank rate plus 200bp) or exchange rate targeting regimes (Singapore – floating – reference rate +50 bp) allowing banks to trade with central bank money and not collect deposits.

The central bank recently lifted counterparty limits for banks to borrow from the window. (Colombo/Feb22/2024)

Leave a Comment

Your email address will not be published. Required fields are marked *

Leave a Comment

Leave a Comment

Cancel reply

Your email address will not be published. Required fields are marked *

Iran President to open Sri Lanka $514mn irrigation, hydro power project

MULTIPURPOSE: Uma Oya multipurpose development project is the largest since the end of the Mahaweli projects.

ECONOMYNEXT – Iran President Seyyed Ebrahim Raisi will inaugurate an irrigation and hydropower project that was designed and built by Iranian engineering firm and was also initially financed before international sanctions hit the project.

The Uma Oya (River) project will irrigate 4,500 acres of new agricultural land, generate 290 Gigawatt hours of electricity and also provide drinking water, a government statement said.

Sri Lanka had awarded an engineering, procurement, construction (EPC) to Iran’s FARAB engineering group to design and construct the 514 million dollar multipurpose project in 2010.

The project was funded until 2013 with a million US dollar credit from the Export Development Bank of Iran but international sanctions prevented the country from continuing financing, a government statement said.

The project continued with funding from Sri Lanka. Sri Lanka had since repaid 19.3 million dollars of the credit and 35.2 million remains outstanding.

The Uma Oya project has a 120MW of hydro power generators, which can generate 290 Giga Watt hours of energy.

Each year 145 million cubic metres of water will be taken from Uma Oya to the Kirindi Oya river valley after generating electricity in an underground power station.

It will irrigate 1,500 hectares of existing agricultural and 4,500 hectares of new land in the Moneragala district, where crops can be cultivated in both the Maha and Yala seasons.

About 39 million cubic meters of water will be used for drinking and industrial purposes.

Two reservoirs built at Dyraaba and Puhulpola in Uma Oya basin is connected by a 3.98 kilometre conveyance tunnel and water is taken through a 15.2 kilomtre headrace tunnel to an underground power station. A tailrace tunnel takes water from the power station to the Kirindi Oya basin.

The project was originally expected to be completed in 2015, but due to financing delays and later water leaking into the headrace tunnel and the Covid pandemic had delayed it. The project completion date was extended to March 31, 2024 and defect liability date to March 31, 2025.

(Colombo/April23/2024 – CORRECTED Iran President Seyyed Ebrahim Raisi will inaugurate an irrigation and hydropower project that was designed and built by Iranian engineering firm.)

Continue Reading

Sri Lanka state oligopoly allowed to import some black gram

ECONOMYNEXT – Sri Lanka has allowed the import of some black gram, by three state agencies, according to a gazette notice issued under the hand of President Ranil Wickremesinghe.

Import licenses will be given for 2,000 metric tonnes of the seed classified under HS Code 7312.31.22 and 29.

Sri Lanka State Trading Corporation, National Food Promotion Board and Sri Lanka Hadabima Authority is to be given import licenses.

Traders have resorted to smuggling some types of black gram (ulundu) mis classified as chick peas, to get over high taxes and import restrictions.

Tamil legislators have also protested the import controls, which they go into several key ethnic foods they consume. (Colombo/Apr23/2024)

Continue Reading

Sri Lanka Foreign Ministry consular division shifted to Battaramulla

ECONOMYNEXT – Sri Lanka’s Foreign Ministry said it consular division would be shifted to the Suhurupaya building in Subuthipura, Battaramulla from May 02, 2024.

Document authentication services provided by the Consular Affairs Division in Colombo will be suspended on 29 and 30 April 2024 held transfer the Electronic Document Authentication System (e-DAS) to the new premises at Suhurupaya.

Urgent applications for authentication to the Consular Division in Colombo, or any Regional Consular Offices by 4.15 pm on 26 April 2024, the Foreign Ministry said.

Regional Consular Offices in Jaffna, Trincomalee, Kurunegala, Kandy and Matara will remain open to accept applications.

Authenticated documents will be delivered to the applicants only on Thursday, 02 May 2024.

Continue Reading