IMF says Sri Lanka monetary policy appropriate, aim for tightening bias

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Sept 20, 2015 (LBO) – The International Monetary Fund believes Sri Lanka’s current monetary policy stance to be appropriate and the central bank should look to tighten monetary policy in the future, it said in a statement.

“The mission found the overall financial system stable and current monetary stance appropriate – but recommended vigilance given rising core inflation, the resurgence of private credit, and signs of receding slack in the economy,” the IMF said.

“In this context, a tightening bias appears prudent,” the fund said in a statement issued after a mission led by Todd Schneider visited Colombo Sept 8-18.

An increase in consumer spending created by sharp rise in public wages and salaries contributed to a major increase in imports of consumption and other goods which had more than offset savings from lower oil prices, the fund added.

This led to “persistent downward pressure on central bank foreign exchange reserves during the first eight months of the year.”

“Headline inflation is currently near zero but is expected to end the year around 3 percent.”

Commenting on the the central bank’s decision to allow a greater float for the rupee, the fund said: “The mission welcomes the CBSL’s recent decision to cease setting daily spot prices for the rupee and let market forces play a greater role in determining the exchange rate.”

“Moving ahead, the commitment to exchange rate flexibility should continue in order to maintain competitiveness and facilitate an increase in CBSL foreign exchange reserves.”

“The mission encouraged CBSL to work toward deepening foreign exchange markets and to revitalize a review of foreign exchange controls to enable inward investment,” it said.