March 30, 2008 / 5:44 AM / 11 years ago

Domestic factors behind record S.Lanka inflation-IMF

 By Shihar Aneez
 COLOMBO, March 30 (Reuters) - Sri Lanka's record high
inflation is due mainly to loose fiscal and monetary policies,
rather than high oil prices, the International Monetary Fund
said.
 Sri Lanka has been battling rampant inflation, with soaring
oil prices being blamed by the central bank in its monthly
monetary policy reviews for the past few months.
 But the IMF said the oil price impact was just one of a
number of other factors including expansionary fiscal policy
and monetary policy that is not tight enough.
 "Increases in oil prices in the recent past, a common shock
to most economies in the region, cannot explain most of the
increase in inflation in Sri Lanka," the IMF said in its latest
report on the island nation's inflation released on Saturday.
 "External shocks appear to explain about 25 percent of the
variation in consumer prices and about 32 percent of the
variation in core inflation," the IMF said.
 Sri Lanka's consumer prices on a new index rose to a record
21.6 percent in February, having climbed from 7.3 percent in
January 2006.
 Despite record high inflation, the central bank held its
key policy rates steady in February, keeping the overnight
repurchase rate at 10.5 percent and reverse repurchase rate at
12 percent.
 Analysts say however those rates are so artificially low
they are meaningless, and banks base their own lending rates on
short-term treasury bill rates, which are around 18.5 percent.
 The central bank has said it wants to contain inflation
between 10-11 percent by end this year and to curb it to 5
percent in medium term. However, the central bank would not
give any defined time frame for 'medium' term.
 The IMF report covered the period from Jan. 2006 to Dec.
2007. Consumer prices on the new index for December 2007 hit
18.8 percent.
 (Reporting by Shihar Aneez; Editing by Lincoln Feast)

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