Economy Forward

T he interim budget presented to the Parliament yesterday (30 th ) covered two proposals about money printing and monetary policy as follows. The new Central Bank Act will be implemented as a key legislation to  strengthen the monetary sector  in the country. This legislation would provide the framework for effective implementation of  inflation targeting   and prevent monetary financing of the budget deficit  - what is commonly known as  money printing . The new law insulates the Central Bank of Sri Lanka from  politicisation of monetary policy decisions . Given the weak government revenue and lack of net foreign financing of the budget, it is inevitable that  a limited level of monetary financing would continue   until tax policy measures help improve the government cash flow and the IMF programme unlocks foreign financing for the budget . As details are to come in future, I wish to present a few early observations on the above proposals. Observations on the 2 nd  proposal The limite

  Other than ad hoc statements made by some political leaders at the Parliament and media interviews on debt restructuring, international financial advisor appointed for that purpose and IMF programme, no official information is released on this subject by the Ministry of Finance (MoF) or the Central Bank in the capacity of the official fiscal agent and debt manager. However, the two documents released by the MoF regarding the suspension of foreign debt service for the purpose of restructuring dated 12 April 2022 and RFP for international financial advisors for debt restructuring service dated 9 April 2022 reveal several concerns on the subject. The objective of this article is to highlight several key concerns based on the contents of the two documents stated above. The experience and scope of work of the financial advisor communicated in the RFP Some of the contents in the RFP are commented as follows. Experience sought from international financial advisors The RFP states t

  The last article released on 16 August 2022 (and the article released on 7 th July) presented economic interpretations for the inflation, key factors underlying the galloping inflation in Sri Lanka and monetary policy actions taken by the Central Bank to control the inflation along with the CB Governor’s views on inflation outlook. The objective of this article is to establish that the present model of the Sri Lankan monetary policy cannot control current inflationary pressures although macroeconomic theory suggests the ability of the monetary policy tightening to control inflation by curtailing the growth of aggregate demand (AD) in the economy over a time period as AD is driven by money in circulation.  It is in this theoretical context that central banks have been assigned with statutory mandates of price stability. Therefore, almost all central banks have been tightening monetary policies competitively by primarily raising policy interest rates since the beginning of this year