RPT-Domestic factors behind record S.Lanka inflation-IMF

By Shihar Aneez
COLOMBO, March 30 (Reuters) - Sri Lanka's record high inflation is due mainly to loose fiscal and monetary policies, rather than high oil prices, the International Monetary Fund said.
Sri Lanka has been battling rampant inflation, with soaring oil prices being blamed by the central bank in its monthly monetary policy reviews for the past few months.
But the IMF said the oil price impact was just one of a number of other factors including expansionary fiscal policy and monetary policy that is not tight enough.
"Increases in oil prices in the recent past, a common shock to most economies in the region, cannot explain most of the increase in inflation in Sri Lanka," the IMF said in its latest report on the island nation's inflation released on Saturday.
"External shocks appear to explain about 25 percent of the variation in consumer prices and about 32 percent of the variation in core inflation," the IMF said.
Sri Lanka's consumer prices on a new index rose to a record 21.6 percent in February, having climbed from 7.3 percent in January 2006.
Despite record high inflation, the central bank held its key policy rates steady in February, keeping the overnight
repurchase rate at 10.5 percent and reverse repurchase rate at 12 percent.
Analysts say however those rates are so artificially low they are meaningless, and banks base their own lending rates on short-term treasury bill rates, which are around 18.5 percent.
The central bank has said it wants to contain inflation between 10-11 percent by end this year and to curb it to 5 percent in medium term. However, the central bank would not give any defined time frame for 'medium' term.
The IMF report covered the period from Jan. 2006 to Dec.
2007. Consumer prices on the new index for December 2007 hit 18.8 percent.