Economy

Sri Lanka keeps policy rates unchanged, CB wants market interest to fall

Tuesday January 23, 2024 7:33 am

ECONOMYNEXT – Sri Lanka central bank kept its policy rate unchanged at 10 percent in the first monetary policy meeting in 2024 saying market rates should fall further.

The central bank has operated largely deflationary policy (selling down its Treasury bills portfolio against dollar inflows), preventing pressure on the currency and building reserves (running balance of payments surplus).

Over the past month, the exchange rate has appreciated, which may also help offset a 3 percent hike in value added tax in traded commodities, analysts say.

“The Board took note of the effects of the recent developments in taxation and supply-side factors that are likely to pose upside pressures on inflation in the near term,” a statement said.

“However, the Board viewed that the impact of these developments would not materially change the medium-term inflation outlook.”

The central bank said it expected rates to fall further.

“In particular, the Board anticipates a broadbased reduction in overall market lending interest rates in line with the monetary policy easing measures effected since June 2023.

“The Monetary Policy Board will continue to assess risks to inflation projections, among others, and stand ready to take appropriate measures to maintain domestic price stability in the period ahead while supporting the economy to reach its potential.”

The Central Bank of Sri Lanka maintains policy interest rates at their current levels

The full statement is reproduced below:

The Monetary Policy Board of the Central Bank of Sri Lanka, at its meeting held on 22 January 2024, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 9.00 per cent and 10.00 per cent, respectively. The Board arrived at this decision following a comprehensive assessment of domestic and international macroeconomic developments in order to maintain inflation at the targeted level of 5 per cent over the medium term, while enabling the economy to reach its potential.

The Board took note of the effects of the recent developments in taxation and supply-side factors that are likely to pose upside pressures on inflation in the near term.

However, the Board viewed that the impact of these developments would not materially change the medium-term inflation outlook. Further, the Board noted the space created by past monetary policy easing measures and the decline in the risk premia attached to government securities for further downward adjustment in market lending interest rates.

The Board underscored that the envisaged benefit of further reduction in market lending interest rates needs to be adequately and swiftly passed on to the businesses and individuals by financial institutions.

Inflation is expected to stabilise at the desired levels as the effects of the recent tax adjustments and supply side disruptions are expected to dissipate in the near term

Headline inflation, as measured by the year-on-year change in the Colombo Consumer Price Index (CCPI, 2021=100), was recorded at 4.0 per cent in December 2023, compared to 3.4 per cent in November 2023. Following five consecutive months of deflation, the food category recorded inflation (year-on-year) in December 2023 reflecting mainly the weather-related disruptions, while non-food inflation (year-on-year) moderated compared to the previous month.

Despite the recent acceleration, headline inflation remains closer to the inflation target of the Central Bank and is in line with the envisaged inflation projections of the Central Bank. Meanwhile,core inflation (year-on-year) continued to moderate in December 2023, compared to the previous month, reflecting the subdued demand pressures in the economy.

Headline inflation is projected to record an upward movement in the near term, as expected, driven mainly by domestic price adjustments due to the increase in the Value Added Tax (VAT) and the elimination of certain VAT exemptions effective 01 January 2024, disruptions to the domestic food supply, and the dissipation of the favourable statistical base effect. However, this acceleration of inflation in the near term is expected to be short-lived, and the spillover effects of such one-off adjustments are likely to be muted due to subdued underlying demand conditions. Therefore, over the medium term, headline inflation is expected to gradually stabilise around the targeted level of 5 per cent (year-on-year), supported by appropriate policy measures.

A further decline in market lending interest rates is expected in the period ahead

Market interest rates continued to adjust downwards in line with eased monetary policy and administrative measures taken to reduce overall market lending interest rates. Moreover, yields on government securities continue to decline supported by falling risk premia. The Monetary Policy Board of the Central Bank of Sri Lanka is of the view that there is further space for market interest rates, especially the lending interest rates and yields on government securities to decline in the period ahead, in line with the reduction in policy interest rates effected in the recent past.

Meanwhile, reflecting the transmission of the relaxed monetary policy stance, outstanding credit to the private sector by the banking sector continued to expand notably on a month-on-month basis in November as well as December 2023. The expansion in credit to the private sector is expected to be sustained in the period ahead, supported by the further easing of monetary conditions.

Domestic economic activity is expected to sustain the recovery over the medium term

The Sri Lankan economy recorded an expansion in the third quarter of 2023, following six consecutive quarters of economic contraction. Accordingly, the economy is estimated to have grown by 1.6 per cent, year-on-year, in the third quarter of 2023, as per the GDP estimates published by the Department of Census and Statistics (DCS). This was a broad-based expansion in economic activity supported by expansions recorded in Agriculture, Industry and Services sectors, on a year-on-year basis. The rebound in domestic economic activity is expected to be sustained, supported by the faster passthrough of relaxed monetary policy to broader market interest rates and the resultant firming of credit demand, improvements in business and investor sentiments, improvements in supply conditions and the gradual rebound expected in external demand conditions.

The external sector is expected to remain resilient in the period ahead

The merchandise trade deficit is estimated to have moderated during 2023 in comparison to 2022. This, coupled with the notable recovery in trade in services, mainly earnings from tourism, and the strong momentum of workers’ remittances, is expected to have resulted in a surplus in the current account balance of the balance of payments for 2023.

Gross official reserves (GOR) improved notably to US dollars 4.4 billion by end December 2023, which include the swap facility from the People’s Bank of China (PBOC). This strong rebound of GOR was supported by the notable net purchases by the Central Bank from the domestic forex market and the proceeds from multilateral agencies. The Sri Lanka rupee, which appreciated by around 12 per cent against the US dollar in 2023, continued to show an appreciation so far in 2024.

Policy interest rates are maintained at their current levels

In consideration of the current and expected macroeconomic developments highlighted above, and in keeping with the forward guidance provided at the last monetary policy review in November 2023, the Monetary Policy Board of the Central Bank of Sri Lanka, at its meeting held on 22 January 2024, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 9.00 per cent and 10.00 per cent, respectively.

The Board was of the view that there is space for market interest rates to continue to adjust downwards in line with past monetary policy easing measures and the falling risk premia attached to government securities. In particular, the Board anticipates a broadbased reduction in overall market lending interest rates in line with the monetary policy easing measures effected since June 2023. The Monetary Policy Board will continue to assess risks to inflation projections, among others, and stand ready to take appropriate measures to maintain domestic price stability in the period ahead while supporting the economy to reach its potential

Cancel reply

1 Sri Lanka balance of payments surplus US$1.3bn by April 2024

2 Maldives overtakes UK as second largest tourist source amid VFS Global visa controversy

3 Vietnam Truc Lam Monastery in Sri Lanka takes meditation to all communities

4 IMF Board to take up Sri Lanka program review on June 12

5 Support for AKD drops to SP's level while RW makes gains, Sri Lanka poll shows

Politics

UNP gen secy defends call for postponing Sri Lanka poll, claims opposition silent

The UNP party headquarters in Pitakotte/EconomyNext

Monday June 3, 2024 1:59 pm

ECONOMYNEXT — United National Party (UNP) General Secretary Palitha Range Bandara has defended his call for postponing Sri Lanka’s presidential election by two years, claiming that his proposal was not undemocratic nor unconstitutional.

Speaking to reporters at the UNP headquarters Monday June 03 morning, Bandara also claimed that neither opposition leader Sajith Premadasa nor National People’s Power (NPP) leader Anura Kumara Dissanayake have spoken against his proposal.

“I have made no statement that’s undemocratic. My statement was in line with provisions of the constitution,” the former UNP parliamentarian said.

He quoted Section 86 of Chapter XIII of the constitution which says: “The President may, subject to the provisions of Article 85, submit to the People by Referendum any matter which in the opinion of the President is of national importance.”

Sections 87.1, 87.2 also elaborates on the matter and describes the parliament’s role, said Bandara.

“I spoke of a referendum and parliament’s duty. Neither of this is antidemocratic or unconstitutional. As per the constitution, priority should be given to ensuring people’s right to life,” he said.

“Some parties may be against what I proposed. They may criticse me. But what I ask them is to come to one position as political parties and make a statement on whether they’re ready to continue the ongoing economic programme,” he added.

Bandara claimed that, though thee has been much criticism of his proposal for a postponement of the presidential election, President Wickremesinghe’s rivals Premadasa and Dissanayake have yet to remark on the matter.

“I suggested that [Premadasa] make this proposal in parliament and for [Dissanayake] to second it. But I don’t see that either Premadasa nor Dissanayake is opposed to it. To date, I have not seen nor heard either of them utter a word against this. I believe they have no objection to my proposal which was made for the betterment of the country,” he said. (Colombo/Jun03/2024)

Accidents

300 of 100,000 trees in Colombo considered high risk: state minister

Monday June 3, 2024 1:05 pm

ECONOMYNEXT – Trees in Sri Lanka’s capital Colombo are being monitored by the municipal council, Army and Civil Defense Force as the severe weather conditions continue, State Minister for Defense Premitha Bandara Tennakoon said.

“Within the Colombo Municipal Council city limits, there are 100,000 trees. Of these, around 300 are considered high risk,” Tennakoon told reporters at a media conference to raise awareness about the current disaster management situation.

Not all trees required to be cut down he said. “We can trim some of the branches and retain them.”

The problem was that buildings in the vicinity of the tree had cut branches on one side, causing it to become unbalanced, the minister said.

New laws would be brought in so provincial/municipal institutions could strengthen enforcement of building codes.

“We don’t have a single institution that can issue a warning about a tree. Not one to tell us what trees can or cannot be planted near a road.

“Trees should be suitable for the area. Some trees have roots that spread and damage roads, buildings. When the roots can’t go deep, they tend to topple over.

“Now Environment Day is coming up, and anyone can go plant a tree by the road. We have to take a decision about this. We have to enforce laws strongly in future.” (Colombo/June3/2024)

Politics

Support for AKD drops to SP’s level while RW makes gains, Sri Lanka poll shows

Monday June 3, 2024 12:47 pm

ECONOMYNEXT — Support for leftist candidate Anura Kumara Dissanayake dropped six percentage points to 39 percent in April, levelling with opposition leader Sajith Premadasa, while support for President Ranil Wickremesinghe increased three points to 13 percent in a presidential election voting intent poll.

The Sri Lanka Opinion Tracker Survey (SLOTS) conducted by the Institute for Health Policy showed that, according to its Multilevel Regression and Poststratification (MRP) provisional estimates of presidential election voting intent, National People’s Power (NPP) leader Dissanayake and main opposition Samagi Jana Balawegaya (SJB) lader Premadasa were now neck and neck while United National Party (UNP) leader Wickremesinghe had made some gains. A generic candidate for the ruling Sri Lanka Podujana Peramuna (SLPP) had the support of 9 percent of the people surveyed, up 1 percentage point from March.

These estimates use the January 2024 revision of the IHP’s SLOTS MRP model. The latest update is for all adults and uses data from 17,134 interviews conducted from October 2021 to 19 May 2024, including 444 interviews during April 2024. According to the institute, 100 bootstraps were run to capture model uncertainty. Margins of error are assessed as 1–4% for April.

SLOTS polling director and IHP director Ravi Rannan-Eliya was quoted as saying: “The SLOTS polling in April suffered from a lower response rate owing to the New Year holidays, and we think this may have skewed the sample in favour of SJB supporters. The early May interviews partly compensated for this, and it’s possible that our June interviews may result in further revisions
to our model estimates.

Rannan-Eliya also noted that a number of other internet polls may be overestimating support for the NPP or its main constituent party the Janatha Vimukthi Peramuna (JVP) by about 10 percent.

“We’ve been asked about some other recent internet polls that showed much higher levels of support for the NPP/JVP. We think these over-estimate NPP/JVP support. SLOTS routinely collects data from all respondents on whether they have internet access, and whether they are willing to participate in an internet survey. These data show that NPP/JVP supporters are far more likely to have internet access and even more likely to be willing to respond to internet surveys, and this difference remains even after controlling for past voting behaviour. Our data indicates internet polls may overestimate NPP/JVP support by about 10 percent, and for this kind of reason we have previously decided that the time is not right to do internet polling,” he said.

According to the IHP, its SLOTS MRP methodology first estimates the relationship between a wide variety of characteristics about respondents and their opinions – in this case, ‘If there was a Presidential Election today, who would you vote for?’– in a multilevel statistical model that also smooths month to month changes. It then uses a large data file that is calibrated to the national population to predict voting intent in each month since October 2021, according to what the multilevel model says about their probability of voting for various parties (‘post-stratification’) at each point in time. The multilevel model was estimated 100 times to reflect underlying uncertainties in the model and to obtain margins of error, the institute said. (Colombo/Jun03/2024)