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Monday February 6th, 2023

Prime lending rate in Sri Lanka drops 38-bp in a week

ECONOMYNEXT – Sri Lanka’s average prime lending rate has dropped 38 basis points in the week to June 07, the central bank data showed, following a 50 basis point rate cut a week earlier.

The average weighted prime lending rates fell to 11.44 percent, the central bank said from 11.82 percent on May 31. In the week to May 31, the AWPLR had fallen 11 basis points.

Central Bank Governor Indrajit Coomaraswamy has asked banks to cut lending rates, and has warned of price controls if rates are not brought down quickly.

Price controls have already been imposed on customers, giving higher-than-market profits to banks. Banks however are seeing higher bad loans after monetary instability in 2018 from a soft-pegged exchange rate.

The central bank has also cut the statutory reserve ratio, making banks more efficient in the one good outcome of the 2018 bout on instability.

In bond markets where a freer market operates, with secondary market trading leading to price discovery, rates have fallen faster after private credit turned negative in the first quarter and capital flight stopped. Gilt yeilds have risen after the rate cut.

On June 07, the central bank cut its floor policy rate, which is now active after a private credit slowdown from 8.00 to 7.50 percent and started to mop up excess liquidity from money markets around 8.0 percent of lower, allowing short term rates to fall.

Unlike in 2018, the central bank is not printing money (injecting liquidity) to artificially enforce a pro-cyclical rate cut (of its ceiling rate or a mid-corridor rate) as credit demand increased and the economy recovered but is allowing market rates to fall, by lowering the rate at which excess liquidity is mopped up.

You may also read:

Sri Lanka should phase out term repo deals and allow rates to fall: Bellwether

Sri Lanka banks warned of price controls on lending

Excess liquidity was generated mostly in April by a peg with the US dollars which is now at the strong side of its convertibility undertaking due to weak credit (the central bank is buying dollars to enforce a peg, preventing the appreciation of the rupee and is generating new money).

The central bank was mopping up one week money at rates of over 8.50 percent keeping short term rates, artificially above market in the run up to the rate cut.

Without a rate cut, overnight rates can now fall to 7.50 percent, if the peg continues to be on the strong side, and there are no persistent outflows.

However analysts had welcomed the cautious stance, in the wake of Easter bomb attacks and the tendency of the rupee to fall in May in earlier years, after a spike in reserve money in April.

After the April bomb blast however some outflows were expected.

The rate cut may also prompt outflows, analysts have said, which requires caution. (Colombo/June10/2019)

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Sri Lanka to address SME tax problems at first opportunity: State Minister

ECONOMYNEXT – Problems faced by Sri Lanka’s small and medium enterprises from recent tax changes will be addressed at the first opportunity, State Minister for Finance Ranjith Siyambalapitiya said.

Business chambers had raised questions about hikes in Value Added Tax, Corporate Income Tax and the Social Security Contribution Levy (SSCL) that’s been imposed.

It should be explored on how to amend the Inland Revenue Act, Siyamabalapitiya said, adding that the future months should be considered as a period where the country is being stabilized.

Both the VAT and SSCL are effectively paid by customers, but the SSCL is a cascading tax that makes running businesses difficult.

In Sri Lanka SMEs make up a large part of the economy, accounting for 80 per cent of all businesses according to according to the island’s National Human Resources and Employment Policy.

(Colombo/ Feb 05/2023)

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Sri Lanka revenues Rs158.7bn in Jan 2023 up 51-pct

ECONOMYNEXT – Sri Lanka’s government revenues were 158.7 billion rupees in January 2023 but expenditure and debt service remained high, Cabinet spokesman Minister Bandula Gunawardana said.

In January 2022 total revenues were Rs104.5 billion according to central bank data.

Sri Lanka’s tax revenues have risen sharply amid an inflationary blow off which had boosted nominal GDP while President Ranil Wickremesinghe has also raised taxes.

Departing from a previous strategy advocated by the IMF expanding the state and not cutting expenses, called revenue based fiscal consolidation, he is attempting to do classical fiscal consolidation with spending restraint.

President Ranil Wickremesinghe has presented a note to cabinet requesting state expenditure to be controlled, Gunawardana told reporters.

State Salaries cost 87.4 billion rupees.

Pensions and income supplements (Samurdhi program) were29.5 billion rupees.

Other expenses were 10.8 billion rupees.

Capital spending was   21 billion rupees.

Debt service was 377.6 billion rupees for January which has to be done with borrowings from Treasury bills, bonds and a central bank provisional advance of 100 billion rupees, Gunawardana said.

Interest costs were not separately given. (Colombo/Feb05/2023)

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Sri Lanka’s Ceylon Tea prices down for second week

ECONOMYNEXT – Sri Lanka’s Ceylon Tea prices fell for the second week at an auction on January 31, with teas from all elevations seeing a decline, data showed.

“In retrospect, the decline in prices would be a price correction owing to the overall product quality and less interest from some key importers due to the arrival of cargo at destinations ahead of schedule,” Forbes and Walker tea brokers said.

The weekly sale average fell from 1475.79 rupees to 1465.40 rupees from a week ago, according to data from Ceylon Tea Brokers.

The tea prices are down for two weeks in a row.

High Growns

The High Grown sale average was down by 20.90 rupees to 1380.23 rupees, Ceylon Tea Brokers said.

High grown BOP and BOPF was down about 100 rupees.

“Ex-Estate offerings which totalled 0.75 M/Kg saw a slight decline in quality over the previous week” Forbes and Walker said.

OP/OPA’s in general were steady to marginally down.

Low Growns

In Low Grown Teas, FBOP 1 was down by 100 rupees and FBOP was down by 50 rupees while PEK was up by 150 rupees.

The Low Growns sale average was down by 8.55 rupees to 1547.93 rupees.

A few select Best BOP1s along with Below Best varieties maintained.

OP1                     Select Best OP1’s were steady, whilst improved/clean Below Best varieties maintained.   Others and poorer sorts were easier.

PEKOE                 Well- made PEK/PEK1s in general were steady, whilst others and poorer sorts were down.

Leafy and Semi Leafy catalogues met with fair demand,” Forbes and Walker brokers said.

“However, the Small Leaf and Premium catalogues continued to decline.

“Shippers to Iran were very selective, whilst shippers to Türkiye and Russia were fairly active.”

This week  2.2 million Kilograms of Low Growns were sold.

Medium Growns

Medium Grown BOP and BOPF fell by around 100 rupees

The Medium Growns sale average was down by 33.40 rupees to 1199.4 rupees.

“Medium CTC teas in the higher price bracket witnessed a similar trend, whilst teas at the lower end were somewhat maintained subject to quality,” Forbes and Walker brokers said.

“Improved activity from the local trade and perhaps South Africa helped to stabilize prices to some extent.”

OP/OPA grades were steady while PEKOE/PEKOE1 were firm, while some gained 50-100 rupees at times.

Well-made FBOP/FBOPF1’s were down by 50-100 rupees per kg and more at times.

(Colombo/Feb 5/2023)

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