Treasury Secretary Dr P B Jayasundera said he had no faith in the efficiency of Sri Lanka's financial system and said the country was blindly following market based monetary policy instruments.
"Despite many financial sector reforms and deepening of financial markets in this economy, I am not convinced that our financial markets and banking and financial institutions work efficiently and competitively," Dr Jayasundera told members of the Sri Lanka Economic Association last week at their annual sessions.
"We are blindly relying on market oriented monetary policy instruments without really knowing whether the enabling environment is in place.
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But critics of recent monetary policy trends say, the Central Bank had seemed to have abandoned the use of market based monetary policy since early 2004, and instead shifting its focus to printing money to finance the budget deficit and keeping rates low or negative against market fundamentals.
In 2004, half of the government's domestic debt financing amounting to three percent of GDP came from Central Bank credit.
This has distorted the interest rate structure in the country, resulting in financial repression as well as massive demand pressure, that drove up inflation, especially in late 2004.
Inflation has since moderated as the Central Bank avoided printing large amounts of additional money since early this year.
But analysts say whether the interest rate transmission mechanism is actually working is debatable.
At a recent media conference at the Central Bank, the head of a state commercial bank said there was no change in lending rates, despite two recent policy rate hikes.
At this Tuesday's Treasury Bill auction, Central Bank bought Rs 2.
4 billion worth of T-bills and allowed weighted average yields to move up exactly one basis point, on all maturities.
This was a change from the trend seen in the last two weeks, when the bank printed just enough money to fix the rates exactly at the previous week's level.
- Money Report Newsdesk: asantha@vanguardlk.com