June 20, 2017 (LBO) – Sri Lanka is planning to adopt a full inflation targeting framework probably by next year, Central Bank Governor Indrajit Coomaraswamy said.
Delivering the keynote address at the launch of the Oxford Business Group’s 2017 report on Sri Lanka Monday, Coomaraswamy said this step will enhance greater transparency and predictability for businesses.
“We have set up a macro level unit in the research department of the Central Bank for this,” Coomaraswamy said.
He said the Central Bank is currently in the process of formulating the necessary legal framework for full inflation targeting.
“We are working on it already and within the next year or two, we will fully implement the inflation targeting framework.”
The Governor said the government is currently targeting 4 to 6 percent inflation and the Central Bank will also be empowered to use monetary policy to keep inflation within that band.
Full-fledged inflation targeters are countries that make an explicit commitment to meet a specified inflation rate or range within a specified time frame.
These countries have institutional arrangements to ensure that the central bank is accountable for meeting the target.
Coomaraswamy further said Sri Lanka will also target an inflation adjusted exchange rate relative to its competitors and gradually move the real effective exchange rate to 100.
“We are slowly planning to bring the nominal exchange rate down and we will also manage the nominal rate to fix the real effective exchange rate at 100,” he said.
The real effective exchange rate is the weighted average of a country’s currency relative to an index or basket of other major currencies, adjusted for the effects of inflation.
The weights are determined by comparing the relative trade balance of a country’s currency against each country within the index.
“The average inflation of Sri Lanka’s trading partners and competitors is roughly around 2 and 2.5 percent.”
“In this case, we can maintain competitiveness by gradually depreciating currency by about 2 to 2.5 percent. That’s the kind of framework we want to put in place.”