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Home Business & Finance Economic Policies

Bolivia central bank running with US$50mn liquid reserves todayheadline

January 9, 2025
in Economic Policies
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ECONOMYNEXT – Sri Lanka’s central bank will revise its current open market operations system to inject liquidity into banks to “effectively” implement the “monetary policy” under the single policy interest rate mechanism, according its 2025 policy agenda.

The central bank is currently barred by law from printing money through direct market operations to create forex shortages and external instability but under ‘instrument independence’ it is free to inject money through other means.

The central bank recently announced a single policy rate, similar to the ‘Monetary Policy Rate’ adopted earlier by defaulting African nations and Argentina, dropping the corridor system which puts more onus to banks to manage their liquidity without depending on printed money from the central bank.

The ceiling rate tends to serve as a penalty, above market ‘lender of last resort’ rate rather than the ‘first resort’ rate of ‘assured’ liquidity, critics say.

The Central Bank said it plans to transition to a more “market-friendly system for Open Market Operations (OMOs) in 2025, with a view to effectively implementing the monetary policy under the single policy interest rate mechanism.”

“Accordingly, an OMO auction schedule is expected to be announced this year to create certainty
on liquidity management among market participants.

“In addition, the Central Bank will enhance the liquidity forecasting framework and explore alternative approaches to manage money market liquidity in line with the Flexible Inflation Targeting framework.”

The move will also “adapt to evolving domestic and global developments,” the policy agenda said.

Analysts had warned against technical advice from the International Monetary Fund for “monetary policy modernization” involving more effective ways to print money allowing banks to lend without deposits, especially in the context of reserve collecting central banks.

Transplanting operating frameworks from clean floating central bank which trigger asset price bubbles like stock market and housing bubbles and leads to currency crises and external default, much faster in countries with reserve collecting central banks, they have warned.

Indiscriminate open market operations were accidentally discovered by the Federal Reserve in the 1920s, leading to a massive peacetime asset price and economic bubble which ended in the Great Depression and ushering in what some classical economists call the ‘age of inflation’.

“Further, during 2025, the Central Bank expects to review and streamline the eligible counterparties of monetary policy operations for the purpose of improving the effectiveness of OMOs and Standing Facilities.”

Sri Lanka’s central bank already has won a legal right to push up cost-of-living by 5 percent a year under a new IMF backed monetary law, which had led to serial currency crises and external default.

Amid deflationary policy, the central bank has missed the target for now, providing a strong foundation for an economic recovery and interest rates to fall without inflationary policy from being deployed through open market operations aggressively.

Millions of Sri Lankans have left the country to work in countries with monetary stability, especially after the IMF’s Second Amendment to its articles which left the country without a credible anchor for money. (Colombo/Jan08/2025)


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