Sri Lanka inflation rockets 4.4-pct in November

Nov 30, 2007 (LBO) – Consumer prices in Colombo’s capital jumped 4.4 percent in November keeping 12-month inflation at a record 19.6 percent for the second month running, the government’s statistics office said. The Colombo Consumer Price Index (CCPI) gained 253.2 points to move to 5976.2 index points.

The moving average of the index, averaged over 24 months, also remained at 17.7 percent, the Department of Census and Statistics said.

Inflation also jumped 4.4 percent in November 2006, a year that saw the government printing 38.5 billion rupees to bridge the deficit.

Printflation

From May to September 2007 the government printed 45.2 billion rupees but monetary conditions started to tighten that month.

Though money printing ended, in October the monetary system was again flooded by 30 billion rupees of excess liquidity as the government suddenly repaid short term borrowings from the proceeds of a bond issue.

This sent interest rates plummeting and loosened the system further, dismaying analysts who had expected the bond to have a positive impact on demand pressure.

In July the government fixed fuel prices, abandoning a fledgling automatic pricing formula and worsening macro-economic imbalances.

Due to weak knowledge of monetary economics Sri Lanka’s politicians believe that subsidizing petroleum could increase the domestic purchasing power of the national currency (lower inflation).

Meanwhile the statistics said the increase in the index was “mainly attributed to off-season of some domestic agricultural products during the reference month.”

However, price increases of domestically produced goods that are not usually imported or ‘non-tradables’ is considered a classic response of monetarily driven inflation.

Good macro-economic management in neighbouring India has seen inflation fall to 7-year lows of just over 2 percent.

Getting Better?

The International Monetary Fund (IMF) asked Sri Lanka to tighten monetary policy to contain high inflation in a statement released yesterday.

The Central Bank is to hike its discount rate – the rate at which money is printed for the banking system to meet liquidity shortfalls – to 19.00 percent from December 03. At the moment banks can take printed money cheaply at 12.00 percent.

Access to the cheap window is to be restricted. The government has been mis-using the window to re-finance Treasury overdrafts at state banks with printed money.

Due to a flaw in Sri Lanka’s monetary law the Central Bank is forced to print money for the government. In January 2007 the monetary authority promised to keep inflation at 10 percent but it was tripped up by fiscal dominance.

Economist and financial sector professionals are now calling for fundamental reforms to central bank’s governing law to make it independent from the Treasury and bring in a legislated inflation target or abolish it and return to a currency board.

Since its creation in 1951 the Central Bank has debauched the national currency from 4.76 to the US dollar to 110 rupees in 2007

It has created chronic high inflation, economic instability and frequent balance of payment problems and their inevitable companions; exchange controls, price controls, shortage and black markets.