Sri Lanka gets more IMF cash, suggests new monetary framework

Sept 25, 2010 (LBO) – The International Monetary Fund has released 212.5 million US dollars to Sri Lanka under its 2.5 billion US dollar program, backed reform proposals and suggested that the central bank move away from its quantity targeting monetary framework. “Further improvements in monetary policy formulation will provide useful support for macroeconomic stability,” Murilo Portugal, deputy managing director and acting chair, said in a statement.

Consumer inflation in Sri Lanka’s capital Colombo was up 5.0 percent in August, from an year earlier. Given the central bank’s historical record of double digit inflation, such a number is not considered bad in Sri Lanka.

Peg and base money targets

Sri Lanka maintains a tight peg with the US dollar, but trying to maintain a peg and have independent monetary policy (print money) has resulted in high inflation and balance of payments troubles for the country since shortly after the creation of the central bank in 1950.

Since 2007 Sri Lanka has maintained a quantity targeting framework to bring down inflation which hit 29.9 percent in April 2008, after which a controversial new inflation index was also introduced.

Liquidity shortages during a balance of payments crisis later in the con