Sri Lanka inflation battle threatened by cash injections

Oct 04, 2008 (LBO) – Sri Lanka’s central bank said inflation would come down to below 20 percent by year end, but its monetary program is now threatened by liquidity injections in the midst of a sudden foreign reserve outflow. “Point-to-point inflation would come down to below 20 percent,” central bank governor Nivard Cabraal told LBO.

After peaking at 28.2 percent in June, consumer inflation in Colombo had fallen to 24.3 percent in September.

The central bank is also banking on economic growth of “between 6.5 to 7.0 percent” in 2008, Cabraal said.

But an outflow of foreign reserves and liquidity injections made by purchasing treasury bills with printed money is threatening to de-stabilize the monetary system.

By Friday the Treasury bill stock of the central bank – a red flag for inflation watchers – had rocketed to 32 billion rupees, from almost nothing barely three weeks ago, showing the magnitude of liquidity injections and reserve appropriations that have taken place.

Up to mid September 2008, the central bank had maintained tight monetary policy by sterilizing excess liquidity and keeping to a tight monetary program.

But from September 18, the tide has turned, and the bank has engaged in he