Lanka should introduce inflation targeting - IMF

Sri Lanka should introduce an inflation targeting framework and a flexible exchange rate which would put a check on inflation, the head of IMF's Western Hemisphere Department, Anoop Singh said, in Colombo yesterday.

He said that this would help to stabilise the economy and both the Central Bank and Governments to work together in this regard.

"It means that there is to be regular communication to markets by the Central Bank and what they are doing to bring the inflation down."

Countries that adopted inflation targeting have been able to reduce the level of inflation and reduce the variability of inflation.

"Research shows that inflation targeting has worked rather well in many other countries," he said.

India, which now has an informal inflation target of less than 5 per cent, reported 3.01 per cent inflation last week.

"Inflation targeting generally works only in a floating exchange rate because either is if you adopted inflection targeting you should be targeting inflation and not targeting the exchange rate," Singh.

Singh says a country can move to inflation targeting without all the pre-conditions being "very perfect" such as full monetary instrument independence and low public debt.

In Sri Lanka there have been growing calls to adopt legislated inflation targeting, where the Parliament gives a low inflation target of less than five percent a year for the Central Bank to achieve.

Singh says many countries moved to floating rates and inflation targeting after the Asian currency crises.

Since 1995, under the direction of former Central Bank Governor A. S. Jayewardene, Sri Lanka moved towards inflation targeting.