CB warns against  public sector borrowings, wage increases


The Central Bank has warned that wage increases could fuel inflation while a spike in international commodity prices and fiscal slippages continue to worry the monetary authority. It has urged the government to limit domestic borrowings to budgeted levels so that monetary policy would have the desired affect on the economy.

"Any upward adjustment to wages without a corresponding increase in productivity could lead to an upside risk to inflation. If wage increases outstrip productivity improvements this could lead to cost push inflation. Therefore, any wage adjustment should be in-line with productivity increases, to prevent the emergence of wage induced inflationary pressures," the Central Bank said in a recent report.

Headline inflation picked up to 9.5 percent in November 2012, after easing from 9.8 percent in July to 8.9 percent in October.

"Inflation is likely to moderate in the balance period of 2012 and is forecast to stabilise at single digit levels during 2013. Monetary policy actions to maintain monetary growth at sustainable levels supplemented by fiscal policies and continuing actions to strengthen domestic supply conditions would be instrumental in lowering inflation. However, the likely threat of a rise in international commodity prices including crude oil prices, which however is expected to be less volatile, are some areas of concern. On the other hand, any crop failure due to adverse weather conditions both locally and abroad could have an adverse impact on food prices," the Central Bank said.

It had also said it was concerned about the government’s fiscal performance.

"The expansion of credit to the public sector, which includes the government and public corporations remains a concern. Being less sensitive to changes in interest rates, net credit to government depends on the budget deficit and the government’s strategy to finance the deficit, while credit to public corporations depends mainly on the operational losses they incur," the Central Bank said in its recent report ‘Recent Economic Developments: Highlights of 2012, Prospects for 2013’ released last month.

"It is essential that public sector borrowing from the banking sector is restricted to the budgeted levels, in order for the monetary authority to maintain monetary expansion at the targeted level, which is essential for the success of monetary policy implementation," it said.

In 2009, the Central Bank had warned the government against increasing public sector wages on the back of what it called a ‘precarious’ fiscal position. The budget deficit that year ballooned to 9.9 percent of GDP but improved significantly since then.

However, this year the government’s fiscal performance has a gone awry, with the deficit reaching 6.44 percent of GDP by the end of September 2012 as against the full year target of 6.2 percent.

The government has also exceeded its borrowing limits for this year.

Total outstanding government debt grew by Rs. 1,128.6 billion during the first nine months of this year. According to the 2012 budget, the government’s borrowing target for the full year is Rs. 1,104 billion.

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