June 17, 2012 (LBO) – Sri Lankans are suffering due to wrong economic policy actions especially those involving state interventions in markets that are backfiring, a legislator who has earlier raised red flags about the balance of payments has said. Harsha de Silva, an economist who represents Sri Lanka’s main opposition United National Party said interventions in forex and interest rates markets had ended with heavy burdens on the people.
De Silva said he had warned that when the central bank tried to “dictate to markets with artificial interest rates and exchange rates that was going to end with nothing but a crash landing that would significantly increase the economic burdens on the people.”
Sri Lanka is now suffering from a balance of payments crisis which often hit so-called soft pegged exchange rate regimes where a central bank tries and fails to control both exchange rates and interest rates through sterilized foreign exchange sales.
A typically balance of payments crisis involving contradictory monetary and exchange rate policy triggers foreign reserves losses, exchange rate depreciation, high inflation, and high interest rates.
Such incidents can also trigger rating downgrades and capital fli