Macro Stability

Sri Lanka inflation to be 2.8-pct in June 2014: Treasury Secretary June 29, 2014 (LBO) - Sri Lanka's inflation would be 2.8 percent in June and the country now had strong economic growth and a stable exchange rate, Treasury Secretary P B Jayasundera said.Jayasundera told a forum of Sri Lanka's key exporters and importers Friday that as he walked into the forum he got a text message that inflation in June would be 2.8 percent.

"International rates. And last five months plus this month we are having inflation below 5 percent," he said.

"Single digit. So governor central bank can have a carnival. He can be a governor who can claim 'I am a governor of the central bank because monetary policy, financial stability is in place'."

He said no bank has collapsed.

"Exchange rate is flexible, yet foreign exchange rate regime is stable," Jayasundera said.

"Flexibility does not mean ruthless fluctuations. So it needs to be predictable. In fact that has come in line."

He said foreign reserves were also nearly 9 billion US dollars and was moving towards the 10 billion mark.

Sri Lanka's rupee has been facing upward pressure over several months after weak or negative credit growth reduced outflows of foreign exchange as domestic demand fell and a depreciated exchange rate decimated the spending power of the poor and the rich alike.

Sri Lanka is recovering from a balance of payments crisis triggered in 2011 after the state manipulated energy prices with bank loans which were ultimately accommodated with central bank credit (printed money) through sterilized foreign reserve sales.

The rupee fell from 110 to 130 to the US dollar in the wake of the crisis.

Sri Lanka has been prone to high inflation and balance of payments trouble since shortly after 1951 when a hard peg was broken by then finance minister J R Jayewardene and a money printing central bank was set up to join then now collapsed Bretton Woods soft-peg system.

The forex shortages also gave an opportunity for trade-deficit Mercantilists and autarkist- nationalists to raise their head and seek rents from protectionism and import substitution, denying the less affluent affordable access to products especially foods, critics say.

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