IMF cautions on aggressive monetary easing

International Monetary Fund (IMF) said they were very concerned about the aggressive monetary policy easing pursued by the Lankan authorities to spur growth amid looming inflationary pressures.

The IMF also expressed concern over the possibility of repeating the credit cycle the country had to undergo during post war period which led to a credit bubble and a Balance of Payment crisis ultimately costing as much as US $ 2.0 billion in reserves.

“We would be very cautious about being too aggressive in relation to loosening monetary policy both in terms of its costly effects on exchange rates, interest rates and especially we worry about starting another credit cycle and perhaps boosting imports once again,” IMF Resident Representative, Dr.Koshy Mathai said.

The authorities had to bring in a very painful policy package and had to tighten monetary and fiscal fronts and adopt a flexible exchange rate regime to rein in the overheating economy during the first quarter of 2012.

 “Inflation is still far too high,” Mathai remarked at a panel discussion recently.

After two rounds of monetary easing since last December which cut the repurchase and the reverse repurchase rate by 75 basis points, the Central Bank governor, Ajith Nivard Cabraal last month expressed the possibility of further easing by September or October in an interview with Wall Street Journal. (DK)