IMF directs CB to adopt inflation-targeting
View(s):The International Monetary Fund (IMF) has directed the Central Bank (CB) to employ a system of inflation targeting for the first time under the US$1.5 billion worth, 3-year Extended Fund Facility (EFF), economists said. The government’s economic reform agenda should be expedited under six pillars including inflation targeting, revenue mobilization and reduce public debt, etc to tackle the current balance of payment crisis, Todd Schneider, the IMF mission chief for Sri Lanka said, adding that “the cost of inaction is relatively high,”. “Sri Lanka needs to do a fundamental reboot of macroeconomic policy or a ‘policy upgrade’,” he said in a video conference from Washington, addressing local journalists in Colombo.
Under this new initiative, the CB now has to announce targeted inflation and maintain it by through conservative and sustainable fiscal and monetary policies, economist and retired CB Deputy Governor W. A. Wijewardena told the Business Times. He said in countries like Australia, the Central Bank Governor will be forced to resign if the bank fails to maintain the targeted inflation. Mr. Wijewardena noted that an attempt was made to introduce inflation targeting several years ago when he was serving at the CB but it didn’t materialise as there was no accurate measurement of the consumer price index.
“But now we have the Colombo Consumers Price Index and the National Consumer Price Index, to determine the inflation,” he added. In this framework, the Central Bank estimates and makes public a projected, or “target,” inflation rate and then attempts to steer actual inflation toward that target, using such tools as interest rate changes. Dr. Sirimal Abeyratne of the Colombo University said the IMF facility is a short term relief for the country’s ailing economy but the actual need at present is to find medium and long term solutions to improve Sri Lanka’s debt servicing. Otherwise the country will even find it to difficult repay the IMF loan, he added.