The proposed Flexible Inflation Targeting (FIT) regime will ensure the independence of the Central Bank in managing inflation, through an institutional framework whilst keeping inflation consistently low and stable, says the governor of the Central Bank of Sri Lanka, Dr. Indrajit Coomaraswamy. According to the Central Bank’s 2018 road map, the Monetary Authority is working towards implementing a FIT framework by 2020 to conduct monetary policy in a data-driven, proactive and forward-looking manner.
“In the past monetary policy was subservient to fiscal deficits. When the government ran fiscal deficits, the Central Bank printed money and gave it to them by taking on Treasury Bills. However, we are building a framework in which that cannot happen. The government can’t load its paper onto the Central Bank as it is highly inflationary,” the governor said.
Speaking at the Industrial Excellence Awards 2017 ceremony organized by the Sri Lanka Chamber for Small and Medium Industry last week, Dr. Coomaraswamy said the Central Bank has taken steps to implement the FIT regime through a legal and accountability framework which gives a target for inflation.
“The target is currently 4 to 6%. In some countries, if they don’t meet the inflation targets, the Central Bank governor has to resign. That’s a good discipline to have,” he pointed out.
According to the governor, inflation is an extremely regressive tax on the poor and the vulnerable. “Rich people have assets which they can hedge against inflation. Their assets go up in value with inflation so they are able to hedge. But poor people, there is no such hedge and therefore vulnerable,” he said. According to the 2018 Road Map, the FIT framework is built upon three main pillars namely strong fiscal policy support, effective monetary policy conduct, and strong central bank mandate and credibility. The government has also endorsed this move to adopt a FIT regime as stated in its Vision 2025 policy document.
“To successfully implement the FIT framework, we have formulated a road map outlining several milestones to be completed by the government and the Central Bank, including the necessary legislative, institutional and operational changes. The International Monetary Fund has also recognised our move towards FIT by giving us necessary technical assistance on capacity building,” the governor said.