Sri Lanka

Sri Lanka initially fixed its (official) exchange rate with a largely passive monetary policy, but for most of the period pursued some combination of external and increasingly internal (price stability) objectives together with a very gradual transition towards a more active and eventually indirect instrument-based monetary policy, with gradual improvements in financial infrastructure and institutional capacity. By the end of the period it had announced a plan for the eventual adoption of inflation targeting.

Years

Targets and attainment

Classification

1974-7

dual exchange rate, official rate fixed first to GBP and then from 1976 to (undisclosed) basket, second depreciated rate for non-traditional exports and non-essential imports; significant banking system, partly foreign- or state-owned; small secondary market in Treasury bills; economy open to swings in export commodity prices; longstanding use of price and other controls; central bank sets credit ceilings, refinancing for banks and reserve requirements, within largely passive monetary policy emphasising income distribution and growth; small exchange rate adjustments late 1976 and early 1977, large revaluation vs GBP March 1977 reversed in autumn 1977

augmented exchange rate fix AERF

1978-2017

November 1977 exchange rate unified and floated with initial large depreciation, intervention currency now USD, within wider liberalisation, including rises in interest rates, limits to and penalties on rediscounting and a shift towards more active monetary policy focused on inflation as well as growth and exchange rate/reserves; high public sector capital spending and lack of fiscal discipline repeatedly feed into monetary growth; small frequent devaluations from 1982 intended to offset overvaluation arising from domestic inflation and link to appreciating USD; ethnic conflict of varying intensity from 1983 to 2009, with rises in defence spending, fiscal deficits and monetary growth; from early 1980s periodic use of credit ceilings but small shift towards indirect instruments: more use of interest rates and reserve requirements, more frequent and efficient auctions of government and central bank securities to absorb liquidity; shift towards indirect instruments stronger from 1986; faster depreciation 1988-9, more market-oriented exchange rate arrangement 1990; 1991 reforms to secondary market in Treasury bills, with more scope for OMOs, but primary and secondary markets remain shallow and (like wider financial system) uncompetitive, and nonbank holdings are small; from 1992 reserve money programming; policy complicated by volatile capital inflows which authorities try to sterilise, and by high fiscal deficits financed in part by central and/or commercial banks; as stock of Treasury bills declines central bank issues own securities; 1995 central bank increases own forex spread to encourage interbank market; 1997 auctions of 2- and 4-year bonds to replace existing long-term loans from ‘captive sources’, with heavier focus on OMOs as key instrument; standing repo facilities (forming policy rate corridor) from 1999; 1999 law makes price stability priority for central bank, though other objectives remain, and improves transparency; 2000-2001 heavy exchange rate pressure leads to widening of central bank forex spreads and then to float of exchange rate; 2003 daily repo auctions; from 2008 recurring short term pegs to USD; from 2010 talk of medium term move to flexible inflation targeting, complicated by weakness of transmission mechanisms, lack of institutional capacity and continuing forex intervention; late 2017 central bank adopts roadmap for transition to inflation targeting and greater exchange rate flexibility, by 2020

loosely structured discretion LSD

Selected IMF references: RED 1974 pp34-6, 57-9; SR 1975 pp9-10; RED 1977 p20; RED 1978 pp20-1, 30-1; SR 1978 pp5-6; RED May 1979 pp21, 34; RED 1980 pp24; SR 1981 p15; RED 1982 pp55-6; SR 1983 pp12, 16-17; RED 1985 pp45-6; RED 1986 pp44-6; SR 1986 pp11, 19-20; RED 1987 pp36-40, 58; SR 1987 p10; RED 1988 pp43-4, 60; RED 1989 pp41-4, 61-2; SR 1990 pp22-3, 28; RED 1992 pp21-3, 27; BP 1994 pp37-60, 70-2; SR 1994 pp8-10; BP 1995 pp10-11, 16; SI 1997 pp27-9, 95-9; SR 1997 pp11-13; RED 1998 pp26-8; REPD 1999 pp25, 44; SR 1999 pp10-12; RED 2001 pp22-3, 42; SR 2001 pp9-12; SISA 2004 pp3-4; SI 2008 pp20-2; SR 2009 pp5-6; SR 2012 pp13-14; SI 2014 pp4-7, 22; SR 2014 pp12-14; SR 2016 pp15-18, 28-9; SR 2017 pp8-9; SR 2018 pp14-17.

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