ECONOMYNEXT – Sri Lanka’s cabinet of ministers have approved and extension of exchange controls in a proposed by the central bank to extend for six months exchange controls which expired on December 19.
The cabinet has approved extending the exchange control regulation for another six months.
The exchange controls have been revised, a post-cabinet statement said without specifying the changes.
The June 2024 regulations were also less tighter than the earlier ones.
Sri Lanka and other central banks which go to the International Monetary Fund regularly impose exchange control on the people due to deep flaws in their operating framework where monetary policy is in fundamental conflict with exchange rate policy.
When the policy conflicts intensify due to open market operations to narrowly target a policy rate, exchange controls are intensified instead of correcting monetary policy.
Trade controls may also follow. Sri Lanka is to open vehicle imports which were blocked for almost four years due to central bank policy in February 2024.
Since September 2022 Sri Lanka has operated deflationary policy, but warnings have been issued that inflationary operations.
Sri Lanka’s single policy rate, (following a rate cut to 8.00 pct) a recovery in private credit and the resumption of interest payments on external debt are starting at the same time.
A soft-pegged (a managed exchange rate central bank that collects reserves) can also destabilize the currency by engaging in swaps with domestic market participants.
Sri Lanka’s external instability and social unrest worsened after adopting flexible inflation targeting (operating an inflation targeting framework without clean floating regime) where large volumes of money was printed to target mid-corridor rates.
Errors in targeting a policy rate with inflationary open market operations were then compensated with currency depreciation (exchange rate as the first line of defence), instead of abandoning the mid-corridor targeting (now called single policy rate) promptly.
Modern-style exchange controls were devised by the Bank of Russia in 1906 limiting outflows to 50,000 German units. The country ended up in high inflation and revolution a decade later. (Colombo/Dec19/2024)