ECONOMYNEXT – Sri Lanka is on track to start a modified inflation targeting framework from the first quarter of 2019, with amendments to the country’s monetary law to stop deficit financing with printed money.
"We are on track to introduce flexible inflation targeting regime by the end of the first quarter of next year," Central Bank Governor Indrajit Coomarawamy said.
"We will be putting in place a legal framework which will make it not possible to have fiscal forbearance."
Sri Lanka has had high inflation and currency depreciation due to money printed to keep interest rates low in a bid to finance the budget deficit (fiscal forbearance), but the rupee has also been pushed down due to devaluationist ideology, or a belief that the path to prosperity lies in unsound money.
Sri Lanka’s inflation has reduced in recent years, down from the 20 percent levels seen in the 1980s’s when the rupee depreciated at a much faster rate.
The central bank was making progress in several fronts amid investigations and forensic audits into past activities, Coomaraswamy said.
Under Coomaraswamy public confidence and credibility of the central bank has improved and policy debates are now on civil technical grounds.
Reports by the International Monetary Fund are made public promptly.
Coomaraswamy said Sri Lanka’s banks were moving fast on implementing Basel III standards. Banks were ‘sound’ though there was an uptick on non-performing loans, he said.
Bad loans usually followed periods of steep credit growth. (Colombo/Aug29/2018)