Sri Lanka holds rates as economy banks on govt reforms, IMF bailout

0
53

Picture used for illustrative purposes.

Sri Lanka’s central bank held policy rates steady on Thursday, saying monetary conditions remain “sufficiently tight” after a massive rate-hike campaign earlier in the year as the crisis-hit nation grapples with red-hot inflation and shortage of dollars.

As widely expected, the Standing Lending Facility rate was held steady at 15.50 per cent while the Standing Deposit Facility Rate was kept unchanged at 14.50 per cent.

The South Asian island of 22 million people is battling its worst economic strife since independence from Britain in 1948, as a debt crisis led to an acute dollar shortage to pay for essential imports of food, fuel and medicine, a plunge in the rupee currency and runaway inflation.

Nine out of 14 economists and analysts polled by Reuters had forecast rates to remain unchanged, after the Central Bank of Sri Lanka’s (CBSL) aggressive tightening campaign saw rates raised by a total 950 basis points so far in 2022.

“Monetary conditions remain sufficiently tight to achieve the envisaged disinflation path in the period ahead,” CBSL said in its statement.

“The contractionary fiscal policies would complement the effects of tight monetary policy measures already in place, helping to mitigate any build-up of aggregate demand pressures, thereby anchoring inflation expectations and bringing down headline inflation to the targeted level of 4-6 per cent over the medium term,” they added.

Governor P Nandalal Weerasinghe said the bank needs to keep rates high to bring down inflation, adding prices are expected to slow in December and January. “The biggest challenge for the economy is inflation, businesses are struggling because input costs have risen steeply,” he said.

Inflation remains uncomfortably high, hitting a record of 68.9 per cent in September year-on-year with food inflation up 93.7 per cent, exacerbated by the rupee currency’s dive and a global surge in commodity prices.

“The key factor ahead is the 2023 budget and tax proposals which will support demand pressure, but also impact growth momentum to some extent,” said Lakshini Fernando, a senior economist at investment firm Asia Securities.

Sri Lanka’s economy is in a deep slump, shrinking an annual 8.4 per cent in the June quarter in one of the steepest quarterly declines amid fertiliser and fuel shortages. The central bank is predicting an 8.7 per cent GDP contraction for 2022. Earlier this year, Sri Lanka defaulted on its foreign debt for the first time in history.

Fernando said the focus would be on the policies the government announces to bring down debt to sustainable levels, a key criteria for securing a bailout package from the International Monetary Fund.

“We know there are a number of tax measures coming up in the upcoming budget, but with real consumer spending already impacted with high inflation, further tax increases will dampen economic momentum to some extent,” Fernando added.

Sri Lanka expects the IMF board to approve a $2.9 billion loan by year-end, officials from the country’s central bank told investors during a virtual presentation in late September, sources participating in the event said.

Weerasinghe reiterated the IMF board approval for bailout funds could come in as early as December.

“Sri Lanka is expecting to get financial assurances from creditors by November and if so we can get a board level agreement from the IMF in December. If financing assurances are delayed, then the IMF programme could also be delayed,” he said.

Meanwhile a key measure of Sri Lanka’s consumer inflation surged to an annual record 69.8 per cent in September, official data showed on Friday, highlighting the challenge for the central bank as the island reels under its worst financial crisis in seven decades.

The Colombo Consumer Price Index (CCPI), a leading indicator that gauges inflation in Sri Lanka’s biggest city, accelerated past the previous all-time year-on-year high of 64.3 per cent in August.

Policymakers closely track the CCPI for their monetary assessments.

Earlier this month, Sri Lanka’s other main inflation measure, the National Consumer Price Index (NCPI), which captures broader retail price inflation, also touched a record 70.2 per cent in August.

The South Asian island of 22 million people has been grappling with a dramatic surge in inflation for nearly a year as volatile global prices and a sharp depreciation in the value of its currency battered the economy.

Dwindling foreign exchange reserves to fund imports have intensified Sri Lanka’s crisis, causing shortages in essentials in a further blowout in the cost of living. Food prices continue to bear the brunt of the inflationary impact, climbing to 93.7 per cent, while prices of non-food items rose 50.2 per cent, the statistics office said.



LEAVE A REPLY

Please enter your comment!
Please enter your name here