April 20, 2009 (LBO) – Sri Lanka will chair a meeting of South Asian central bank chiefs on the sidelines of International Monetary Fund and World Bank annual meetings later this week, Central Bank Governor Nivard Cabraal said.
To develop domestic-oriented economy or successfully ‘stimulate’ an economy through looser policy (money printing) a country has to run a floating exchange rate backed by domestic assets in the form of government debt.
But many poor countries do not have the institutional capacity to operate a floating exchange and instead settled for unstable pegged exchange rates backed by foreign assets.
Small countries in particular find it difficult to practically difficult to operate floating exchange rates mostly due to their size.
Even China, which is big enough, has chosen to run a pegged exchange rate, limiting the consumption of its own citizens by ‘sterilizing’ foreign exchange inflows and sending them out of the country through a build up of foreign reserves.
Even a run-down of foreign reserves do not add to net global consumption as externally invested money has to be brought back to the country from outside.
Countries with pegged exchange rates, which favour the development of