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Tuesday November 29th, 2022

Moody’s forecasts Sri Lanka growth to weaken, slow recovery

ECONOMYNEXT – Sri Lanka’s economic growth will slow sharply in the second quarter of this year after April’s suicide bombings with its growth momentum interrupted in 2019 before picking up the next year, Moody’s Investors Service said.

“We expect Sri Lanka to face a marked cooling in Q2, reflecting a slump in tourism following the terrorist bombing in April,” the rating agency said in a new report that lowered growth forecasts for most of 16 economies it rates in Asia.

Weak output in the year-to-date and deteriorating outlook for trade drive lower growth forecasts across Asia, the report said.

“Spill-overs from an uncertain operating environment are most apparent in softer capital formation, although some signs of trade and investment diversion are emerging,” it said.

It also forecast stable private and public consumption to be sustained on account of monetary and fiscal policy accommodation.

Moody’s said Sri Lanka’s economic growth is forecast to slow to 2.6 percent in 2019 and pick up again to 3.4 percent in 2020, having grown 3.2 percent in 2018 and 3.4 percent in 2017.

More trade reliant economies will see a greater deterioration in growth through the export channel, with more advanced G 20 economies growing below potential, the rating agency said.
Moody’s said the G 20 broad based below potential growth has wide implications for trade reliant Asia.

Global trade hubs like Singapore and Hong Kong and large manufacturing and commodity exporters are most sensitive to the weaker G 20 growth outlook, with economies like India and Sri Lanka less so, the report showed.

It noted that growth has generally slowed across the Asian region with the uncertain operating environment weighs on investment.

“Externally oriented economies have experienced a sharper slowing in the first half of 2019,” Moody’s said.

“Domestic factors have had a greater influence in India, Japan (consumption tax hike) and the Philippines (budget delay).

“Hong Kong and Singapore have been particularly weak this year, with very large deteriorations in real GDP growth when compared with first half of 2018.”

Moody’s said softer capital formation has mirrored the weakening in exports, especially for trade reliant economies such as Korea and Hong Kong, with weakening in the latter also reflecting political developments.

“Separately, the delay in the passing of the government budget in the Philippines has disrupted its infrastructure building plans , while fiscal tightening has posed similar drags in Malaysia and Sri Lanka.”

Moody’s noted that monetary easing has kick-started the policy response to slowing growth in most countries.

Reserve Bank of India has been most active in cutting rates in support of growth in 2019 up to 23 August, followed by Sri Lanka which cut rates Friday.

Moody’s also said that generally healthy balance sheets and fiscal positions across the region, with the exceptions of India, Malaysia, Mongolia and Sri Lanka, provide space to pursue countercyclical fiscal policies.
(COLOMBO, 23 August, 2019)


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A new Sri Lanka monetary law may have prevented 2019 tax cuts?

ECONOMYNEXT – A new monetary law planned in 2019, if it had been enacted may have prevented the steep tax cuts made in that year which was followed by unprecedented money printing, ex-Central Bank Governor Indrajit Coomaraswamy said.

The bill for the central bank law was ready in 2019 but the then administration ran out of parliamentary time to enact it, he said.

Economists backing the new administration slashed taxes in December 2019 and placed price controls on Treasuries auctions bought new and maturing securities, claiming that there was a ‘persistent output gap’.

Coomaraswamy said he keeps wondering whether “someone sitting in the Treasury would have implemented those tax cuts” if the law had been enacted.

“We would never know,” he told an investor forum organized by CT CLSA Securities, a Colombo-based brokerage.

The new law however will sill allow open market operations under a highly discretionary ‘flexible’ inflation targeting regime.

A reserve collecting central bank which injects money to push down interest rates as domestic credit recovers triggers forex shortages.

The currency is then depreciated to cover the policy error through what is known as a ‘flexible exchange rate’ which is neither a clean float nor a hard peg.

From 2015 to 2019 two currency crises were triggered mainly through open market operations amid public opposition to direct purchases of Treasury bills, analysts have shown.

Sri Lanka’s central bank generally triggers currency crises in the second or third year of the credit cycle by purchasing maturing bills from existing holders (monetizing the gross financing requirement) as private loan demand pick up and not necessarily to monetize current year deficits, critics have pointed out.

Past deficits can be monetized as long as open market operations are permitted through outright purchases of bill in the hands of banks and other holders.

In Latin America central banks trigger currency crises mainly by their failure to roll-over sterilization securities. (Colombo/Nov29/2022)

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Sri Lanka cabinet clears CEB re-structure proposal: Minister

ECONOMYNEXT – Sri Lanka’s cabinet has cleared proposals by a committee to re-structure state-run Ceylon Electricity Board, Power and Energy Minister Kanchana Wijeskera said.

“Cabinet approval was granted today to the recommendations proposed by the committee on Restructuring CEB,” he said in a message.

“The Electricity Reforms Bill will be drafted within a month to begin the unbundling process of CEB & work on a rapid timeline to get the approval of the Parliament needed.”

Sri Lanka’s Ceylon Electricity Board finances had been hit by failure to operate cost reflective tariffs and there are capacity shortfalls due to failure to implement planned generators in time. (Colombo/Nov28/2022)

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Sri Lanka new CB law to cabinet soon as IMF prior action

ECONOMYNEXT – Sri Lanka’s new central bank law will be submitted to the cabinet as a prior action of International Monetary Fund with clauses to improve governance and legalize ‘flexible’ inflation targeting, Central Bank Governor Nandalal Weerasinghe said.

Under the new law members of the monetary board will be appointed by the country’s Constitutional Council replacing the current system of the Finance Minister making appointments.

“It will be a bipartisan approach,” Governor Weerasinghe told an investor forum organized by CT CLSA Securities, Colombo-based brokerage.

“The central bank’s ability to finance the budget deficit will be taken out. Thirdly the flexible inflation targeting regime will be recognized in the law as the framework.”

The law will also make macro-prudential surveillance formally under the bank.

There will be two governing boards, one for the management of the agency and one to conduct monetary policy.

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