Sri Lanka exchange rate policy under fire

July 05, 2008 (LBO) – Sri Lanka’s central bank which has debauched the rupee since its creation in 1950, has made a strong case for a stable national currency, but a top industrialist warned that high inflation was making the policy backfire on industry.

Sri Lanka lost exchange rate stability shortly after 1950, when a stable hard-peg or currency board was abolished by then finance minister J R Jayewardene in favour of a central bank, creating the institutional framework for high inflation and chronic rupee depreciation.

Governor Nivard Cabraal told the economic summit that over the last 30 years Sri Lanka has had one of the highest inflation levels in the world.

Economists and financial analysts have already called for fundamental monetary reform to make the central bank more effective in keeping inflation down or abolishing the bank altogether in favour a currency board.

Creating a currency board involves closing the discount window of the central bank which gives ‘liquidity’ to commercial banks and taking away its power to buy Treasury bills, and with it the ability to torpedo the national currency.

US economist