Sri Lanka needs quick fiscal reforms, political stability: Central Bank union

- economynext.com

ECONOMYNEXT – Sri Lanka needs to accelerate fiscal reforms to bring back economic stability and a stable government to carry them out, Central Bank Executive Officers Union has warned as monetary instability and fore shortages continue and attempts are made to appoint a new President.

Though a new cabinet was appointed after protests in May 09, essential fiscal reforms have not happened for the past two months, the Union pointed out.

Delayed tax hikes would make high interest rates persist for a longer time, analysts say.

There are expectations that under a program endorsed by the International Monetary Fund required co-ordinated minimum fiscal and monetary policy changes would be made.

Of late all those in power has agreed that a IMF program is required, the Union said.

“To regain economic stability, there has be some a basic economic and political program that all parties can agree to,” the Union said.

“We would like to re-iterate that all parties should leave aside individual agenda’s and get together around a mechanism that can find solutions to the economic crisis.”

However the current parliaments majority may not reflect public opinion and there were doubts wehether a President chosen by parliament would be able to garner public support for very long the Union said.

As a result the it may be best to go for elections as soon as stability is reached.

The Union also called for the enactment of a central bank reform bill drawn up by a previous leadership which would give more independence to the central bank to carry out policy as it wished.

However analysts had warned that that the draft law does not bring any constitutional restraint to central bank and will give it carte blanche to carry out contradictory money and exchange policies that trigger currency crises in quick succession as had happened from 2015 to 2022.

The draft law seeks to legitimize a reserve collecting peg, called a flexible exchange rate which is neither a hard peg nor a free float, while also trying to operate an inflation targeting framework with open market operations despite the lack of floating exchange rate.

Under the similar framework in a currency crises was triggered despite the budget deficit being brought down and fuel being market priced in 2018 (de facto fiscal dominance of monetary policy also being taken away).

Due to liquidity injections to suppress interest rates under flexible policy, IMF reserve targets were missed, the currency fell and triggering political instability, critics have said.

IMF programs while bringing countries out of currency crises, a problem associated with non-lfoating flexible exchange rates or soft-pegs, does not bring permanent solutions since reserve collections and pegging is perpetuated.

‘Flexible’ inflation targeting is practiced in Latin America (Argentina was targeting 17-pct flexible inflation during its last currency crises and default) and is not practiced by stable reserve currency central banks. (Colombo/July18/2022)

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