Sri Lanka's central bank among top inflators in Asia in 2017

ECONOMYNEXT - Sri Lanka's central bank is among top three emerging and developing Asia in 2017 just after Tonga and Mongolia, both countries also suffered currency collapses in 2015/2016 data from the International Monetary Fund shows.

Sri Lanka generated 7.1 percent inflation in the year to December 2017 after a currency collapse in 2015 and 2016 and continued to depreciate in 2017, while well-managed Asian nations appreciated their currencies as oil prices rose and the dollar weakened.

Mongolia's central bank generated 7.2 percent inflation. Mongolia's tugrik collapsed from 1,878 to the US dollar in December 2014 to 2,432 in December 2017 and has since started to strengthen.

Mongolia's central bank has generated double digit inflation and balance of payments troubles in earlier years.

Toga's Pa'anga has collapsed from 1.97 to the US dollar in December 2014 to 2.25 in May 2016 and has since stabilized at around 2.2 to the US dollar.

Sri Lanka's rupee collapsed from 131 to the US dollar in December 2014 to 149 by December 2016 and has continued to collapse to 155.5 since then.

Central banks' of better managed Asian nations including China and Malaysia has sharply appreciated the currencies, helping improve Sri Lanka's Real Effective Exchange Rate, despite Sri Lanka generating much higher levels of inflation.

Bank Negara Malaysia generated 3.5 percent inflation, People's Bank of China 1.8 percent.

In South Asia, Bangladesh's central bank generated 5.9 percent inflation, and the Reserve Bank of India 4.7 percent. Bhutan which is pegged to the Indian rupee had 4.5 percent inflation.

Pakistan generated 3.9 percent inflation, but the central may be heading for balance of payments trouble.

Sri Lanka's 7.1 percent inflation came despite global monetary conditions being relatively benign allowing with the US Fed starting to tighten policy as domestic credit and economic activity picked up.

Argentina, a chronic currency depreciator like Sri Lanka, but with a much worse record Sri Lanka, generated 24.8 percent inflation. The Argentinian peso fell from 8.5 to the US dollar to 17.6 to the US dollar by December 2017.

Since then the Peso has collapsed to 20.18 to the US dollar.

Central Banks in ex-Soviet Union nations which are relatively new and practice less prudent monetary policy than even Sri Lanka managed to generate inflation of over 10 percent.

In general a country which pegs to the US dollar (intervenes in forex markets and collects dollars or sells), will generate higher levels of inflation that the anchor currency when it depreciates.

Sri Lanka generated inflation of around 20 percent in the 1980s with high budget deficits and a collapsing currency when it was caught in a self-feeding depreciation-inflation vicious cycle partly in a bid to push exports by destroying worker wages.

The cycle was broken by then central bank Governor A S Jayewardene in 1995. (Colombo/Apr21/2018)

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