ECONOMYNEXT – Sri Lanka’s recent rate hike was a step in the right direction into standard policy but an International Monetary Program may be inevitable, W A Wjiewardene, a former central bank deputy governor said.
For over 19 months Sri Lanka’s central bank has maintained that there was an ‘alternative’ set of policies to maintain economic stability and printed large volumes of money and also boosted bank credit to the government, he said.
Critical
“But today we have come to a very critical level,” Wijewardene said in a conversation with Dhananath Fernando, Chief Operating Officer of Advocata Institute, a Colombo-based think tank.
“With IMF or without IMF we cannot continue with this loose monetary policy anymore and we cannot maintain this low interest rate regime anymore
“As a result the central bank has done what it should do in a situation like this. It has reversed its policy stance.
“Instead of claiming that it is going by this alternative policy, it is now going by its normal monetary policy where it has increased the policy interest rate and increase the statutory reserve ratio.
“This is actually the beginning of a long journey in order to maintain the macro-economy in Sri Lanka.”
“Without going to the IMF there is no other solution.”
Though the government itself had spelled it out in a formal document, Sri Lanka was using an ‘alternative’ policy in vogue among many irresponsible governments in the world, called the modern monetary theory, according to statements.
MMT advocates claim “the printing of money has no relation to inflation or exchange rate depreciation,” Wijewardene explained.
“And based on that the central bank had been printing new money on a massive scale and had been permitting commercial banks to lend to the government huge amounts of money…” he said.
Sri Lanka is now facing severe forex shortages as money was printed to keep rates down, turning legacy debt into reserve money, as well as funding the current deficit.
Corrective Policies
The government has vastly expanded the money supply by taking large volumes of credit after cutting taxes and creating a large hole in the budget, he said.
Foreign financiers of the government debt had also lost confidence, which was leading to high yields in government debt.
He said before going to the IMF, Sri Lanka will have to raise taxes “and put its house in order’ to avoid a ‘tsunami’.
Raising taxes will reduce the corrective interest rate required to balance the budget and halt money printing.
A debt restructuring will also reduce the required corrective rate analysts have said. An IMF program also unlocks other budget support loans from development lenders. (Colombo/Aug23/2021)