What action post Finance Minister’s statement in Oct. 2017 at IMF-WB meeting?

By P. Samarasiri

I refer to the Statement made by Minister Mangala Samaraweera with the Governor of the Central Bank and the Monetary Fund for Sri Lanka dated 13 October 2017 at the Annual Meetings of the IMF and World Bank Group in Washington DC and the following points made in the Statement.

• We have introduced three well-thought-out frameworks to manage the country’s fiscal policy, monetary policy and foreign exchange operations to ensure sound macroeconomic policies.
• Although headline inflation remained above the envisaged mid-single digit levels, core inflation decelerated gradually, reflecting the containment of demand driven inflationary pressures in the economy resulting from restrictive monetary policy measures adopted since end 2015.
• The Sri Lankan Rupee has depreciated by 2.2% against the US Dollar so far during the year. The exchange rate regime is now flexible and market-oriented.
• We are working, with commitment, to move to a flexible inflation targeting regime in the medium term to ensure sustained low inflation and to an exchange rate regime based on clear parameters to achieve a competitive currency.

Pending the public disclosure of this year’s statement at Annual Meetings 12-14 October this year in Bali, the Central Bank (CB) is requested to clarify the following points to follow up on the current status of the Sri Lankan economy as those points are in the statement in respect of the CB.

1.The CB has now announced a flexible inflation targeting framework based on 4-6% inflation target based on headline inflation, despite the core inflation that reflects the demand driven inflationary pressures in the economy referred to in the statement. The CB should clarify the following:

a.Why did the CB announce the present inflation targeting based on headline inflation which is not demand driven unlike the core inflation, despite the fact that the monetary policy in theory is to manage the economy’s overall demand to contain inflation?

b.Why did headline inflation rise above the envisaged mid-single levels (level not stated!) as against the decline in core inflation with same restrictive monetary policy up to October 2017? 

c.What macroeconomic factors contributed to the difference in two types of inflation?

d.What macroeconomic factors contributed to headline inflation to rise in both 2016 and 2017, despite the restrictive monetary policy adopted and not effective in controlling inflation continuously in the two years?

2.As against the Sri Lankan Rupee depreciation of 2.2% in a flexible and market-oriented environment for the period up to 13 October 2017 and three well-thought-out frameworks to manage the country’s fiscal policy, monetary policy and foreign exchange operations to ensure sound macroeconomic policies as referred to in the statement, the currency depreciation so far by 13 October 2018 has been around 12%, despite an exchange rate regime adopted based on clear parameters to achieve a competitive currency as referred to in the statement. The CB should clarify the followings.

a.What are those parameters?

b.Is the 12% currency depreciation within those parameters? 

c.Are these parameters built in the recently stated macroeconomic forecasting model of the CB used for the monetary policy?

d.If so, why did the CB suddenly wake up in September this year and decided to intervene in the domestic foreign exchange market through the foreign reserve and three old restrictions re-imposed on bank foreign currency positions and imports of vehicles and selected luxury items, despite many countries commenced policies far back in June 2018 to fight their currency depreciation?

I wish that the CB will provide a professional and technical response to each point stated above in the stated background to educate the public on its public policy accountability. 

(The writer is a recently-retired public servant who served in various capacities for nearly 35 years including as a Deputy Governor of the CB.)