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Tuesday April 23rd, 2024

IMF backs Sri Lanka’s reluctant policy rate hike

DEFLATIONARY POLICY: Sri Lanka is now running BOP surpluses amid private sector de-leveraging, indicating deflationary policy.

ECONOMYNEXT – Central Bank of Sri Lanka’s reluctant decision to hike rates at time when the it is running clearly deflationary policy with an ad hoc peg, has drawn praise from the International Monetary Fund.

Sri Lanka’s central bank said a 100 basis point rise in the policy rate was made as the last prior action of an IMF deal amid “some differences between the CBSL and IMF staff on the inflation outlook”.

“CBSL’s decision to raise the policy rate is appropriate and in line with its objectives set under the inflation targeting framework,” Peter Breuer, Senior Mission Chief for Sri Lanka, and Masahiro Nozaki, Mission Chief for Sri Lanka said in a statement.

“It reflects CBSL’s commitment to the inflation target and is an important part of the disinflation strategy in the EFF program, which is fully committed by the Sri Lankan authorities and supported by the IMF.”

Central Bank of Sri Lanka’s reluctant decision to hike rates at time when the agency is running clearly deflationary policy with an ad hoc peg, has drawn praised from the International Monetary Fund.

Analysts however have pointed out that Sri Lanka does not operate an inflation targeting framework as it does not have a clean float, which is why the country had serial currency crises in 2015/16, 2018 and 2020-22 and eventually defaulted on external debt.

Of late the central bank has been running clearly deflationary policy, reporting a balance of payments surplus, which is also possible only if there is a pegged exchange rate.

A floating exchange rate central bank with an inflation target to determine the expansion of reserve money cannot change its net international reserves.

Central Bank Governor Nandalal Weerasinghe said the agency brought 308 million US dollars from the market this week after a surrender rule was reduced amid deflationary policy and the rupee started to appreciate. The surrender rule will be removed from next week.

Sri Lanka’s 12-month inflation hit around 70 percent in 2022, as a flexible exchange rate pushed down by a surrender rule collapsed from 200 to 370 to the US dollar. Twelve month inflation has since eased to 50 around percent.

“Sri Lanka’s inflation is declining but remains at a very high level, which has been disproportionally hurting the poor,” the IMF statement said.

“Upside inflation risks could reverse the trend and lead to persistently high inflation which is extremely costly to the economy.

“Therefore, CBSL’s decision to raise the policy rate shows its commitment to reduce inflation more quickly and firmly towards the single-digit target.

“Durable disinflation would help boost market confidence, reduce excessive risk premia and ease the financing conditions for the corporates, especially the small and medium enterprises, which supports recovery.”

Changes in consumer price indices are a lagged effect (usually about 1.5 years) of inflationary policy of a central bank.

But effects of inflationary policy in a pegged exchange rate bank is seen with a lag as short as four to six weeks through forex shortages, according to analysts. That is why hard pegs without policy rates have neither high inflation nor high interest rates.

In Sri Lanka, traded goods have generally stopped rising partly helped by tighter US policy, as central bank Governor Nandalal Weerasinghe imposed a guidance peg putting in place a partially credible anchor for monetary policy with two-way interventions in mid 2022.

Purchases of dollars have exceeded sales for around four months and banks have also settled pent up foreign payments.

The food index in Sri Lanka’s of a revised Colombo Consumer Price Index, which peaked at 246.9 points in September 2022, shortly after the central bank stopped sterilizing interventions made with Indian ACU money fell absolutely to 234.7 points in February.

With negative private credit (de-leveraging) the central bank no longer has the ability drive inflation up through the policy rate as market rates are also twice that.

One remaining tool the central bank has to generate inflation is through depreciation of the currency.
But liquidity created from dollar purchases – to stop the appreciation of Sri Lanka’s now ad hoc exchange rate peg – are absorbed in overnight liquidity shortages in the banking system.

Large injections through open market operations or through encouraging the use of privately sterilized money parked in the central bank can also created demand, but that can be done at any rate.

Market interest rates which determine what happens in the real economy, are around 29 percent compared to the policy rate of 16.5 percent. (Colombo/Mar04/2023)

Comments (2)

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  1. K.wijesuriya says:

    Market interest rates should come down quickly.
    We cannot understand why central bank bank raised
    the interest rates 100 points giving a negative signal
    to the market.
    We do not think this decision will give a practical result.
    Because even now bankers are gradually forced to reduce
    interest rates. Market interest rates should come down around 18 % at least.
    Because bankers cannot sustain without giving loans to the local market. Lending to the government could not continue
    further.
    Therefore central bank must have strategically accepted this
    IMF proposal knowing it will fail in the market conditions.

    K.Wijesuriya ,

  2. Sriyani Mangalika says:

    I read in the media within 2 days that China is still on the stand to offer a two-year moratorium regarding loan structuring, which has been inadequate for IMF. In such a case we cannot say all negotiations to obtain IMF commitment are complete. I need to get clarification at this critical juncture from Central Bank Governor Mr Nandalal that whether the above information is wrong and whether all negotiations are complete.

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Comments (2)

Cancel reply

Your email address will not be published. Required fields are marked *

  1. K.wijesuriya says:

    Market interest rates should come down quickly.
    We cannot understand why central bank bank raised
    the interest rates 100 points giving a negative signal
    to the market.
    We do not think this decision will give a practical result.
    Because even now bankers are gradually forced to reduce
    interest rates. Market interest rates should come down around 18 % at least.
    Because bankers cannot sustain without giving loans to the local market. Lending to the government could not continue
    further.
    Therefore central bank must have strategically accepted this
    IMF proposal knowing it will fail in the market conditions.

    K.Wijesuriya ,

  2. Sriyani Mangalika says:

    I read in the media within 2 days that China is still on the stand to offer a two-year moratorium regarding loan structuring, which has been inadequate for IMF. In such a case we cannot say all negotiations to obtain IMF commitment are complete. I need to get clarification at this critical juncture from Central Bank Governor Mr Nandalal that whether the above information is wrong and whether all negotiations are complete.

Iran President to open Sri Lanka $514mn irrigation, hydro power project

MULTIPURPOSE: Uma Oya multipurpose development project is the largest since the end of the Mahaweli projects.

ECONOMYNEXT – Iran President Seyyed Ebrahim Raisi will inaugurate an irrigation and hydropower project that was designed and built by Iranian engineering firm and was also initially financed before international sanctions hit the project.

The Uma Oya (River) project will irrigate 4,500 acres of new agricultural land, generate 290 Gigawatt hours of electricity and also provide drinking water, a government statement said.

Sri Lanka had awarded an engineering, procurement, construction (EPC) to Iran’s FARAB engineering group to design and construct the 514 million dollar multipurpose project in 2010.

The project was funded until 2013 with a million US dollar credit from the Export Development Bank of Iran but international sanctions prevented the country from continuing financing, a government statement said.

The project continued with funding from Sri Lanka. Sri Lanka had since repaid 19.3 million dollars of the credit and 35.2 million remains outstanding.

The Uma Oya project has a 120MW of hydro power generators, which can generate 290 Giga Watt hours of energy.

Each year 145 million cubic metres of water will be taken from Uma Oya to the Kirindi Oya river valley after generating electricity in an underground power station.

It will irrigate 1,500 hectares of existing agricultural and 4,500 hectares of new land in the Moneragala district, where crops can be cultivated in both the Maha and Yala seasons.

About 39 million cubic meters of water will be used for drinking and industrial purposes.

Two reservoirs built at Dyraaba and Puhulpola in Uma Oya basin is connected by a 3.98 kilometre conveyance tunnel and water is taken through a 15.2 kilomtre headrace tunnel to an underground power station. A tailrace tunnel takes water from the power station to the Kirindi Oya basin.

The project was originally expected to be completed in 2015, but due to financing delays and later water leaking into the headrace tunnel and the Covid pandemic had delayed it. The project completion date was extended to March 31, 2024 and defect liability date to March 31, 2025.

(Colombo/April23/2024 – CORRECTED Iran President Seyyed Ebrahim Raisi will inaugurate an irrigation and hydropower project that was designed and built by Iranian engineering firm.)

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Sri Lanka state oligopoly allowed to import some black gram

ECONOMYNEXT – Sri Lanka has allowed the import of some black gram, by three state agencies, according to a gazette notice issued under the hand of President Ranil Wickremesinghe.

Import licenses will be given for 2,000 metric tonnes of the seed classified under HS Code 7312.31.22 and 29.

Sri Lanka State Trading Corporation, National Food Promotion Board and Sri Lanka Hadabima Authority is to be given import licenses.

Traders have resorted to smuggling some types of black gram (ulundu) mis classified as chick peas, to get over high taxes and import restrictions.

Tamil legislators have also protested the import controls, which they go into several key ethnic foods they consume. (Colombo/Apr23/2024)

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Sri Lanka Foreign Ministry consular division shifted to Battaramulla

ECONOMYNEXT – Sri Lanka’s Foreign Ministry said it consular division would be shifted to the Suhurupaya building in Subuthipura, Battaramulla from May 02, 2024.

Document authentication services provided by the Consular Affairs Division in Colombo will be suspended on 29 and 30 April 2024 held transfer the Electronic Document Authentication System (e-DAS) to the new premises at Suhurupaya.

Urgent applications for authentication to the Consular Division in Colombo, or any Regional Consular Offices by 4.15 pm on 26 April 2024, the Foreign Ministry said.

Regional Consular Offices in Jaffna, Trincomalee, Kurunegala, Kandy and Matara will remain open to accept applications.

Authenticated documents will be delivered to the applicants only on Thursday, 02 May 2024.

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