iMF asks Sri Lanka to keep monetary policy tight amid high inflation

ECONOMYNEXT – The International Monetary Fund has recommended tight monetary policy as high inflation continues to dog Sri Lanka, amid a depreciating currency.

“Inflation and credit growth remain on the high side,” the IMF said Mitsuhiro Furusawa, Acting Chair and Deputy Managing Director, said after the lender approved a 251.4 million dollar tranche under its program.

“Maintaining a tightening bias for monetary policy is recommended until clear signs emerge that inflation pressures and credit expansion have subsided.

“Macroprudential tools should also be used to help rein in credit growth and head off systemic risks.”

Sri Lanka's money printing central bank which operates an unstable soft -peg has de-stabilized the economy since 1951,

Until 1977 it operated a dollar soft-peg by printing money and draconian exchange controls, and after 1978 it printed money and let the exchange rate go (crawling peg), generating inflation close to 30 percent a year, when US inflation was also high.

In the 12-months to November 2017 Sri Lanka's central bank generated inflation of was 7.6 percent, higher than the price rises created by many Asian central banks despite policy rate at 7.25 percent, one of the highest in Asia and double digit market rates, amid currency depreciation.

Sri Lanka also does not market price energy, with shocks absorbed by the credit system, which are the monetarily accommodated.

As a result of contradictory monetary and exchange rate policies the country has run into frequent balance of payments crises, with deficit spending also made possible by monetary forbearance as well as fiscal dominance of monetary policy requiring IMF bailouts.

“Sri Lanka’s performance under the Fund-supported program has remained broadly on track since the second review,” Furusawa said.

“Macroeconomic and financial conditions have been stable, despite a series of weather-related supply shocks.

“The authorities remain committed to the economic reforms under the program and have undertaken measures to improve government revenue and accumulate international reserves.

“Going forward, it is important to build on the progress made and accelerate reforms to reduce fiscal and external vulnerabilities.

“Fiscal performance has been satisfactory and all targets until September were met. The new Inland Revenue Act will make the tax system more efficient and equitable, and generate resources for social and development programs.

“Nevertheless, Sri Lanka’s high debt burden, large gross financing needs, and weak financial performance of state-owned enterprises increases the importance of further fiscal consolidation.

“Timely progress in structural reforms, including tax administration and energy pricing, will support fiscal consolidation.” (Colombo/Dec08/2017 – Update II)