Financial Times

Wage pressures could spur inflation -CB Asst.Governor

The plantation sector’s protracted salary negotiations with workers and increases in public sector salaries have raised some concerns for the Central Bank (CB) as wage pressures may drive up inflation.

In an interview with the Sunday Times FT earlier this week, Assistant Governor of the CB P.N. Weerasinghe said the CB is a little concerned about the salary increases and the negative impact it might have on the economy. “In a low inflation environment, we don’t see why salaries in the private and public sectors should be increased by a large amount,” he said. Dr. Weerasinghe explained that when inflation is running low in single digits, wage increases of anywhere from 20% to 40% are not realistic.
He pointed out that during the first eight months of 2009, the nominal wage rate of public sector employees increased by 10.3% while the real wage rate (adjusted for inflation) increased by 6% as a result of sharp deceleration in inflation. “If there are large wage increases which are higher than the inflation expectation, this will create some pressure on inflation.”

Dr. Weerasinghe said the CB expects inflation to remain in single digits throughout 2009 as well as into 2010. “We are confident we can maintain low inflation in the next year or so due to our monetary policy.” He added that inflation which has remained around 1% over the last few months is too low for a country like Sri Lanka. In the next three to four months, there will most likely be a gradual increase in inflation to around 3% or 4%. By 2010 and beyond, he said inflation will remain around 5% or 6%.

Dr. Weerasinghe said the second tranche of the International Monetary Fund’s (IMF’s) US$2.6 billion stand-by arrangement, amounting to US$322.2 million will most likely be released in mid October, subsequent to the findings of the IMF’s fact finding mission that is currently in Colombo. The mission is here for two weeks for its first review of the CB’s performance and to determine if targets set for the end of July 2009 have been met. “We have comfortably met all the targets,” Dr. Weerasinghe said. The IMF mission is also looking into what will likely happen with the end September 2009 targets. The fact finding mission will subsequently report to the relevant IMF departments and other stakeholders according to standard procedure. Dr. Weerasinghe said a report will be compiled and sent to the IMF’s executive board. Upon approval of the board, the next tranche will be immediately released.

With foreign reserves having surpassed US$4 billion, a secure fiscal position and low inflation, the IMF has fully agreed to give the CB a free hand in monetary policy. “This is due to the credibility of the CB,” Dr. Weerasinghe said. “We have shown that we have done the right thing.” He explained that most conditions in IMF programmes require countries to tighten their monetary policy and strict inflation targets are set. “We have nothing like that. Looking forward, the IMF has endorsed Sri Lanka’s economic programme for the next 2 to 3 years.” Dr. Weerasinghe added that indicative targets have to be set for end December 2009 and the coming year.

When asked about recent statements made by the Opposition on the CB having sold confiscated gold from the JVP seized some time ago without Cabinet approval, Dr. Weerasinghe declined to respond as he was unaware of the specifics of the Opposition’s statements. Generally speaking however, Dr. Weerasinghe did say the CB has a significant stock of gold in its international reserve portfolio as one if its reserve assets. It is a practice in most Central Bank’s in their reserve management strategies. He added that the CB has the right to sell its gold and replace gold assets with other external assets for reserve management purposes under the provisions of the Monetary Law Act.

The Opposition also recently stated publicly that a US fund called Templeton Fund had invested in rupee denominated bonds worth US$800 million although a public announcement for the bond issue was never made. Dr. Weerasinghe said he does not know what the Templeton Fund is and added that it is illegal for the CB to publicly announce the names of investors without their permission. “We opened the government securities market to foreigners in 2006 and then in 2007, first at 5% and then 10%,” he said. Dr. Weerasinghe explained that over that time, there have been several small and big investors including hedge funds that have invested large amounts of money.

“There are thousands of transactions,” he said. “When investors bring in or take money out, we never reveal their names and there is no requirement for us to publish their names. All the transactions were within the announced limits and within those limits, there are thousands of names coming in and going out.”

Dr. Weerasinghe said the CB is in the process of selecting lead managers and bookrunners for the US$500 million bond which will be announced shortly. Lead managers and bookrunners conduct road shows, introduce investors to the bonds and promote the bondissue. He explained that banks such as HSBC and JP Morgan are not investing in the bonds but are taking the issue to the market and facilitating the process for a small fee.

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