Sri Lanka may need monetary tightening: ADB

Apr 06, 2011 (LBO) – Sri Lanka may need monetary tightening later in the year to contain rising inflation and maintain export competitiveness, though growth will be strong for the next two years, the Asian Development Bank said.

A central bank inflates an economy mainly by a coercive legal tender law that forces people to use the currency even when it generates high inflation.

Oil hit new highs this week as the US Federal Reserve continued to print money keeping rates near zero.

Brent crude reached $123.37 a barrel, highest since August 2008 when an imploding US credit bubble send commodity prices tumbling as the dollar strengthened.

West Texas Intermediate (WTI) reached 109.15 highest since Sept 08.

“Monetary tightening might be needed later in the year,” ADB economist Narhari Rao told reporters coinciding with the launch of a bank publication, the Asian Development Outlook.

Rao said Sri Lanka’s real effective exchange rate has appreciated about 5.0 percent last year and to maintain export competitiveness inflation will have to be contained or the exchange rate depreciated.

Growth however is expected to be over 8.0 percent.

The government is also expecting foreign direct investment o