Public Administration News
Share
 |
Sri Lanka Can Loosen Monetary Policy amid Fiscal Tightening |
| Source: |
lankabusinessonline.com |
| Source Date: |
Friday, January 14, 2011 |
| Focus: |
Electronic and Mobile Government, Citizen Engagement, Internet Governance
|
| Country: |
Sri Lanka |
| Created: |
Jan 18, 2011 |
|
Sri Lanka could loosen monetary policy if it is balanced by tightening fiscal policy to manage inflation, a senior World Bank economist said South Asian nations struggled with large deficits and high inflation from past loose policy.
"Aggregate demand can be sustained by tightening fiscal policy and loosening monetary policy," World Bank senior economist Andrew Burns said.
Sri Lanka budget deficit is expected to have fallen to 8.0 percent of gross domestic product in 2010 from over 10 percent in 2009 and is planned for 6.8 percent in 2011.
Last week the Central Bank cut is repo policy rate at which excess liquidity is drained from the market to 7.0 percent from 7.25 percent, which is still among the highest in the region.
Amid strong capital inflows which has generated liquidity, the effective policy rate is the repo rate.
The central bank said in its January monetary policy statement that cutting the fiscal deficit will give more space for private sector investment "without fuelling undue inflationary pressures in the period ahead."
But Sri Lanka's inflation has edged up to 6.9 percent by December.
The World Bank in its 'Global Economics Prospects' is forecasting at least 7.1 percent growth for Sri Lanka in 2010, easing off to 6.8 percent in 2011 and 6.0 percent in 2012 (based on 2005 US dollar prices), though latest official forecasts are higher.
Sri Lanka has a pegged exchange rate where the country's inflation is externally anchored to that of the US dollar with relatively little room for active monetary policy.
Global commodity prices, including however have been rising amid loose US monetary policy. Burns said recent Treasury bill purchases by the European Central Bank to help countries like Portugal may also impact developing countries negatively.
In the past the central bank has printed money to finance deficits (quantity easing) driving up inflation to levels much higher than that of the US requiring excessively high interest rates to bring stability back.
The printing also created 'foreign exchange shortages' and constrained external borrowing contributing sustained high interest rates.
Countries in Asia that do not have an active policy rate including Hong Kong and Singapore have historically managed with much lower inflation and interest rates than Sri Lanka.
Countries like India which deficit spent for 'stimulus' is now finding inflation rising.
"While policy interest-rates have been raised (beginning in mid-March 2010 in India, and, more recently, in Bangladesh and Pakistan), monetary policy normalization is incomplete and real interest rates remain negative," the World Bank report said.
South Asia also had some of the largest budget deficits in the world. Though Bangladesh only had a deficit of 2.5 percent of GDP, Maldives had a deficit of 22.4 percent of, India 9.6 percent, Pakistan 6.3 percent and Bhutan 6.1 percent.
Chronic high interest rates needed to counter high inflation generated by central bank and the need to finance large deficits had pushed up the interest bill in regional government spending to some of the highest levels in the world.
In Sri Lanka interest took up 25.8 percent of the interest bill, India 17.7 percent, Bangladesh 17.
In Afghanistan and Nepal the interest bill was only 4.0 percent of total state spending.
|
|
|
|
|
|
 Tag This |
Sri Lanka Can Loosen Monetary Policy amid Fiscal Tightening Sri Lanka could loosen monetary policy if it is balanced by tightening fiscal policy to manage inflation a senior World Bank economist said South Asian nations struggled with large deficits and high inflation from past loose policy
 Tell A Friend |
|
 del.icio.us digg this Slashdot |
| Rate: |
0 ratings
|
Views: |
101 |
| Comments: |
0 |
Favorited: |
0 |
Bookmarked: |
0 |
Tagged: |
0 |
|
|
|
|