Sri Lanka says meets IMF program targets for June, amid inflation spike
ECONOMYNEXT – Sri Lanka has likely met key targets for June 30, in an International Monetary Fund stabilization program, with final data is to come Deputy Central Bank Governor Nandalal Weerasinghe said.
Sri Lanka has met key targets of net international reserves, budget deficit (deficit before interest costs) and inflation, based on preliminary data, he told reporters in Colombo.
The central bank however generated 6.0 percent inflation in the year to June 2015, soaring over a middle band of 4.8 percent by wide margin, but is below the 6.4 percent ceiling at which the program will be suspended.
Under the program, Sri Lanka is supposed to explain the difference and come up with counter-measures in a ‘consultation’ with IMF staff
But Weerasinghe said there was only a regulator review due in September.
Analysts had warned that with the tendency of Sri Lanka’s central bank to keep rates by printing money to blow credit bubbles or to print money and bust the currency, the IMF should have placed a ceiling on domestic assets of the Central Bank.
In the past under a so-called monetary targeting framework, net international reserves and a reserve money targets have been set in IMF program.
Weerasinghe said in discussions with the IMF, Sri Lanka has persuaded the Fund to adopt the so-called ‘monetary consultation clause’ incorporating inflation targets.
The fear is that the inflation targets are too wide to push the central bank to follow prudent policy, and in meeting the net international reserves, the rupee will fall sharply.
But Weerasinghe said over the past two months, the Central Bank has been a net buyer in forex markets, and the NIR target has been met.
The central bank has bought dollars both outright and through swaps from commercial banks, he said.
Sri Lanka’s forex markets however are under heavy moral suasion of the authorities and there is no spot market for dollars in the country. Trader deal in the one week forward market for price discovery.
After the June deadline, the Treasury bill stock (domestic assets of the central bank) has started to climb. (Colombo/July06/2016)