ECONONOMYNEXT – Sri Lanka’s usable foreign reserves were down to 50 million US dollars and it may take six months to wrap up a deal with the International Monetary Fund, Finance Minister Ali Sabry said.
“Our liquid reserves, usable reserves, are less than 50 million US dollars,” Sabry told parliament.
“People should know that. Sri Lanka is facing the worst economic crisis in history.”
Sri Lanka has an intermediate regime central bank which economists in the country uses to print money for stimulus and trigger currency crises and end up in the International Monetary Fund with economic slowdowns or contractions.
Policy deteriorated sharply in recent years after the International Monetary Fund gave technical support to calculated an output gap waving a red flag in the face of the country’s trigger happy Mercantilists.
The rupee fell sharply from 203 to the 370 to the US dollar so far, in an attempt to shift the third world peg into a floating rate. Under floating rate where convertibility is suspended there is a zero need for foreign reserves and inflows and outflows match without a ‘reserve pass through’.
Most ‘first world’ central banks including the Fed, Bank of England, the Bank of Canada, the ECB or Australian or New Zealand Reserve Bank does not give one cent of reserves for imports.
All money is ‘printed’ and its pace of expansion is contained through an inflation target (pegged to domestic consumer prices).
Sri Lanka has reserve collecting central bank which has to be pegged externally but the currency collapses due to also trying to peg domestically (flexible inflation targeting) bringing money and exchange policy into violent conflict as described in the impossible trinity of monetary policy objectives.
However the central bank has raised policy rates and temporarily abandoned ‘output gap targeting’ (printng money for stimulus) eliminating the policy conflict.
Meanwhile Sabry said negotiations with the International Monetary Fund were progressing well but it may take about six months to wrap up a deal.
Sri Lanka had to re-structure the debt to qualify for IMF program.
He expected to go to cabinet with selected debt advisors and appoint them within the next two weeks.
It may take as much as three years to emerge from the crisis, he said.
However he said the country would use it as a blessing and emerge like India had done it 1991 or go the way Venezuela had done.
In 1991 India stabilized the exchange rate by removing the Treasury secretary from the rate setting monetary board and selling down its Treasury bill stock (special issue bills).
However after 2011 India has seen higher level of depreciation with a shift in the anchor from the wholesale price index (which is less easy to manipulate) to consumer prices. (Colombo/May04/2022)