Sri Lanka quantity targeting exercise fails; lessons for 2008

Jan 01, 2008 (LBO) – Sri Lanka's central bank says it met the milestones of an ill-fated reserve money targeting exercise in 2007, though inflation went out of control during the year, showing up the pitfalls of quantity targeting. The bank said it achieved the year end target of 267.6 billion rupees with room to spare at 264.5 billion rupees.

It had also met the interim targets of 252.9 million in March, 256.7 in June and 256.7 million in September.

Failed Outcomes

But inflation at the end of the year was 16.4 percent against a promised target of less than 10 percent indicating that the entire exercise had failed.

Meanwhile another newly introduced index which authorities claimed to show 'true' inflation showed a price rise of 18.8 percent in the 12 months of 2007.

Economic analysts say the exercise failed primarily because authorities allowed reserve money to rocket to 277 million rupees in April and then blundered by stumbling into a sterilized intervention campaign coupled with massive money printing for the Treasury.

From January to May the Colombo Consumer Price Index (CCPI) index fell by 88.7 points in absolute index number terms as the Central Bank tightened monetary policy and allowed