Sri Lanka and IMF to discuss ways to rope in excess money

Apr 06, 2011 (LBO) – The International Monetary Fund will discuss ways to deal with the excess money in Sri Lanka’s banking system in a bid to contain further inflation from being generated through the pegged monetary system. Sri Lanka’s central bank allowed inflation hit 8.6 percent in the 12-months to March 2011 prompting calls for action to contain prices.

But Sri Lanka’s Central Bank runs a pegged exchange rate monetary system where inflation is de facto externally anchored, and past experience has shown that the monetary authority has little room to maneuver other than create more inflation.

The monetary authority is also sitting on more than 80 billion rupees in excess reserves in the banking system.

Watching Brief

The IMF says Sri Lanka’s current high inflation is partly transitory supply shocks and while an interest rate hike is not needed, the excess liquidity has to be watched.

“If and when there is a cause for tightening, probably it would not just involve just rate increases but rather some measures to directly tackle the excess liquidity in the system,” IMF’s resident representative Koshy Mathai said.

“Because of the presence of that excess liquidity simply raising policy