Apr 05, 2011 (LBO) - The International Monetary Fund has given Sri Lanka 218.3 million dollars under its 2.5 billion US dollar program but issued called on the Central Bank to tighten liquidity management to prevent further inflation.
Sri Lanka stopped permanently sterilizing excess reserves in the banking system late last year and released more than a billion rupees of cash (about a third of the monetary base) as excess reserves.
Sri Lanka now has one of the highest levels of inflation among dollar pegged countries in Asia, except Vietnam which is also having balance of payments troubles.
"Steps to expand the liquidity management tools at the central bank’s disposal will help maintain its control over monetary conditions," John Lipsky, IMF's deputy managing director John Lipsky said in a statement.
Excess reserves in Sri Lanka's banking system is around 80 to 90 billion rupees, down from 120 billion late last year, or about the third of reserve money, which is defined without excess reserves.
Excess reserves leave more cash for banks to lend to the real economy. Credit growth picked up to nearly 30 percent last month.
"Going forward, monetary policy will need to be vigilant about the possible second-round effects from higher prices on core inflation and strike the right balance between supporting economic growth and preventing excess liquidity from fueling inflationary pressures," the IMF said.
When excess reserves are loaned to the real economy it will either increase defined reserve money (monetary base) helping push inflation up or cause foreign reserve losses, or both.
The IMF said it was giving 218 million US dollars, despite Sri Lanka not having met key targets on foreign reserves, reserve money or government borrowing.
source - www.lbo.lk
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