Sri Lanka cuts money target for third quarter, amid currency trouble

Nov 14, 2008 (LBO) – Sri Lanka’s central bank has cut the reserve money target for the fourth quarter of 2008, amid warnings that its monetary program has been severely de-stabilized by currency intervention and liquidity injections. The Central Bank said the fourth quarter reserve money target has been cut to 285 billion rupees, from 301.7 billion rupees, indicating that reserve money would grow by 9.7 percent instead of 11.75 percent.

Reserve money or the monetary base is made up of circulating money and commercial bank deposits in the central bank is the money used to clear final transactions in an economy.

Precarious Balance

However, economic analysts have warned that in the context of defending a US dollar peg, reserve money targeting would either crowd out both the government and private sector or result in currency troubles.

In the first half of the year, there was severe crowding out as the central bank collected foreign reserves, and in the second half of the year, currency pressure has emerged as an effective loosening of policy took place and the central bank rapidly lost reserves.

In a bid to maintain reserve money, the central bank has pumped in more than 90 billion rupees of money in the