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Sri Lanka central bank cuts rates 50 basis points to 9.50-pct

ECONOMYNEXT – Sri Lanka’s central bank has cut its policy corridor by 50 basis points to 8.50 percent (floor) and 9.50 percent (ceiling) citing stable external conditions and low inflation.

Subdued aggregate demand , the lesser-than-expected impact of the recent SriLanka taxes, cut in electricity prices, well-anchored inflation expectations and the absence of excessive external sector pressures made the rate cut possible, the central bank said in its March monetary policy statement.

The central bank itself by allowing the exchange rate to appreciate in the wake of deflationary policy has helped mitigate the effect of a valued added tax hike on traded goods, and also made possible an electricity price cut, analysts say.

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Sri Lanka central bank mainly responsible for electricity price cut: Minister

Since external monetary stability was restored by the central bank in September 2022, index measured inflation in Sri Lanka had increased by only 5.9 percent over 17 months.

The central bank said it was also taking off a directive on ceiling interest rates (price control) on rupee denominated credit, but wanted market interest rates to fall further.

A restriction on depositing excess liquidity in the central bank by banks will also be removed from April 01.

Recent interest ates have not been enforced by inflationary open market operations, allowing the balance of payments to remain in surplus and the continuation of deflationary monetary policy.

Extracts from the statement are reproduced below.

The Central Bank of Sri Lanka further reduces policy interest rates

The Monetary Policy Board of the Central Bank of Sri Lanka, at its meeting held on 25 March 2024, decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points (bps) to 8.50 per cent and 9.50 per cent, respectively.

The Board arrived at this decision following a comprehensive assessment of current and expected domestic and international economic developments, to maintain inflation at the targeted level of 5 per cent over the medium term, while enabling the economy to reach its potential. In arriving at this decision, the Board took note of, among others, subdued aggregate demand conditions, the lesser-than-expected impact of the recent changes to the tax structure on inflation, favourable near-term inflation dynamics due to the recent adjustment to electricity tariffs, well-anchored inflation expectations, the absence of excessive external sector pressures and the need to continue the downward trajectory in market interest rates.

The Board observed that the possible upside risks to inflation in the near term would not materially change the medium-term inflation outlook, as economic activity is projected to remain below par for an
extended period.

The Monetary Policy Board underscored the need for a swift and full passthrough of monetary easing measures to market interest rates, particularly lending rates, by the financial institutions, thereby accelerating the normalisation of market interest rates in the period ahead.

Download data table from here

Inflation is expected to converge to the targeted level in the period ahead

Headline inflation, as measured by the year-on-year change in the Colombo Consumer Price Index (CCPI, 2021=100), decelerated to 5.9 per cent in February 2024 from 6.4 per cent in January 2024, mainly driven by the deceleration in non-food inflation.

Although food inflation accelerated on a year-on-year basis in February 2024, a month-on-month deflation was recorded, reflecting the easing of food prices. Core inflation that reflects underlying demand pressures in the economy remained subdued at 2.8 per cent in February 2024. Moreover, realised inflation for the first two months of 2024 indicates that the impact of the Value Added Tax (VAT) amendments
effected in January 2024 on inflation may not be as large as initially envisaged.

Further, compared to the previous projections, headline inflation is anticipated to moderate in the forthcoming months, as the effects of the temporary uptick in inflation driven by the VAT amendments are expected to be partly offset by the recent downward revision to the electricity tariff and the moderation in food prices.

However, inflation is expected to eventually converge to the targeted level in the period ahead and remain around the target over the medium term, supported by appropriate policy measures.

The recovery in domestic economic activity is expected to continue

As per the GDP estimates published by the Department of Census and Statistics (DCS), the economy is estimated to have grown by 4.5 per cent, year-on-year, in the fourth quarter of 2023, following the moderate expansion of 1.6 per cent (year-on-year) recorded in the third quarter of 2023.

Favourable growth outcomes recorded in the second half of the year helped limit the overall contraction of the economy to 2.3 per cent in 2023, compared to the contraction of 7.3 per cent (revised) recorded in 2022. This growth momentum is expected to continue in the upcoming quarters.

A further decline in market interest rates is warranted in the period ahead

The overall market interest rate structure has adjusted downwards in response to the monetary policy easing measures implemented thus far and the reduction of risk premia attached to yields on government securities following the implementation of the domestic debt optimisation (DDO) operation. However, the pace of reduction of market interest rates, particularly lending rates, slowed in recent months, and yields on government securities, which recorded a notable downward adjustment in the first two months of the year, have shown some reversal.

Meanwhile, credit extended to the private sector by Licensed Commercial Banks (LCBs), which was in an expansionary phase since June 2023, witnessed a contraction of outstanding credit in January 2024, partly due to the valuation effects arising from the appreciation of the Sri Lanka rupee against the US dollar and possible post festive season settlements.

However, credit growth resumed to some extent, as reflected by the preliminary data for February 2024. The prevailing accommodative monetary policy stance along with the reduction of policy interest rates effected\ today are expected to induce a further reduction in market lending rates and encourage the
expansion of credit to the private sector by LCBs in the period ahead.

The external sector continued to maintain a positive momentum

The merchandise trade deficit is estimated to have widened in January 2024 compared to the same period in 2023, driven by a higher increase in imports. However, trade in services, mainly earnings from tourism, recovered significantly during the two months ending February 2024, while the positive momentum of workers’ remittances continued.

Gross official reserves (GOR) improved to US dollars 4.5 billion by end February 2024, which include the swap facility from the People’s Bank of China. The reserve buildup was supported by considerable net purchases by the Central Bank from the domestic foreign exchange market amidst increased foreign currency
inflows compared to outflows.

The Sri Lanka rupee, which appreciated by 12.1 per cent against the US dollar in 2023, continued to show an appreciation of 6.7 per cent thus far in 2024, in spite of notable foreign exchange purchases by the Central Bank. Meanwhile, the authorities reached a Staff Level Agreement on economic policies with the International Monetary Fund (IMF) following the second review of Sri Lanka’s Extended Fund Facility (EFF) arrangement and the 2024 Article IV consultation.

Policy interest rates are further reduced in view of the stable inflation outlook over the
medium term and subdued demand pressures

In consideration of the current and expected macroeconomic developments highlighted above, the Monetary Policy Board of the Central Bank of Sri Lanka, at its meeting held on 25 March 2024, decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 bps to 8.50 per cent and 9.50 per cent, respectively.

The Board viewed that the reasons for the recent and expected changes in inflation in the upcoming months were propelled by supply-driven and administratively determined prices, while noting that inflation expectations remained well anchored.

The Board was of the view that a further easing of monetary policy would provide the required space for market interest rates, particularly lending rates, to adjust downwards further to levels conducive to continued expansion of credit to the private sector, thus supporting the ongoing revival of economic activity.

In addition, the Monetary Policy Board was of the view that the MLA Order No. 01 of 2023 on Maximum Interest Rates on Rupee Denominated Lending Products issued in August 2023 contributed to reducing the overall market lending interest rates and therefore yielded the expected results.

Given that the limits specified in the said Order are no longer relevant in the context of further monetary policy easing since its implementation, and with a view to moving away from administrative measures towards market-based instruments as the economy normalises, the Board decided to repeal the Monetary Law Act Order No. 1 of 2023 with immediate effect.

Lastly, the Board noted the improvements in domestic money market activity alongside the improvement in liquidity conditions and decided to remove the remaining restrictions on the usage of the Standing Deposit Facility (SDF) of the Central Bank with effect from 01 April 2024.

This would further support market-based transmission of monetary policy adjustments.

The Board stressed the need for all financial institutions to take swift measures to reduce market lending interest rates to ensure that the benefits of the series of monetary policy easing measures are adequately passed on to businesses and households.

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Sri Lanka power outages from falling trees worsened by unfilled vacancies: CEB union

HEAVY WINDS: Heavy rains and gusting winds have brought down trees on many location in Sri Lanka.

ECONOMYNEXT – Sri Lanka’s power grid has been hit by 300,000 outages as heavy winds brought down trees, restoring supply has been delayed by unfilled vacancies of breakdown staff, a union statement said.

Despite electricity being declared an essential service, vacancies have not been filled, the CEB Engineers Union said.

“In this already challenging situation, the Acting General Manager of CEB issued a circular on May 21, 2024, abolishing several essential service positions, including the Maintenance Electrical Engineer in the Area Engineer Offices, Construction Units, and Distribution Maintenance Units,” the Union said.

“This decision, made without any scientific basis, significantly reduces our capacity to provide adequate services to the public during this emergency.

“On behalf of all the staff of CEB, we express our deep regret for the inconvenience caused to our valued customers.”

High winds had rains have brought down trees across power lines and transformers, the statement said.

In the past few day over 300,000 power outages have been reported nationwide, with some areas experiencing over 30,000 outages within an hour.

“Our limited technical staff at the Ceylon Electricity Board (CEB) are making extraordinary efforts to restore power as quickly as possible,” the union said.

“We deeply regret that due to the high volume of calls, there are times when we are unable to respond to all customer inquiries.

“We kindly ask consumers to support our restoration teams and to report any fallen live electrical wires or devices to the Electricity Board immediately without attempting to handle them.

The union said there were not enough workers to restore power quickly when such a large volume of breakdowns happens.

“We want to clarify that the additional groups mentioned by the minister have not yet been received by the CEB,” the union said.

“Despite the government’s designation of electricity as an essential service, neither the government, the minister in charge, nor the CEB board of directors have taken adequate steps to fill the relevant vacancies or retain current employees.

“We believe they should be held directly responsible for the delays in addressing the power outages due to the shortage of staff.”

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Melco’s Nuwa hotel to open in Sri Lanka in mid-2025

ECONOMYNEXT – A Nuwa branded hotel run by Melco Resorts and Entertainment linked to their gaming operation in Colombo will open in mid 2025, its Sri Lanka partner John Keells Holdings said.

The group’s integrated resort is being re-branded as a ‘City of Dreams’, a brand of Melco.

The resort will have a 687-room Cinnamon Life hotel and the Nuwa hotel described as “ultra-high end”.

“The 113-key exclusive hotel, situated on the top five floors of the integrated resort, will be managed by Melco under its ultra high-end luxury-standard hotel brand ‘Nuwa’, which has presence in Macau and the Philippines,” JKH told shareholders in the annual report.

“Melco’s ultra high-end luxury-standard hotel and casino, together with its global brand and footprint, will strongly complement the MICE, entertainment, shopping, dining and leisure offerings in the ‘City of Dreams Sri Lanka’ integrated resort, establishing it as a one-of-a-kind destination in South Asia and the region.”

Melco is investing 125 million dollars in fitting out its casino.

“The collaboration with Melco, including access to the technical, marketing, branding and loyalty programmes, expertise and governance structures, will be a boost for not only the integrated resort of the Group but a strong show of confidence in the tourism potential of the country,” JKH said.

The Cinnamon Life hotel has already started marketing.

Related Sri Lanka’s Cinnamon Life begins marketing, accepts bookings

(Colombo/May25/2024)

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Sri Lanka to find investors by ‘competitive system’ after revoking plantations privatizations

ECONOMYNEXT – Sri Lanka will revoke the privatization of plantation companies that do not pay government dictated wages, by cancelling land leases and find new investors under a ‘competitive system’, State Minister for Finance Ranjith Siyambalapitiya has said.

Sri Lanka privatized the ownership of 22 plantations companies in the 1990s through long term leases after initially giving only management to private firms.

Management companies that made profits (mostly those with more rubber) were given the firms under a valuation and those that made losses (mostly ones with more tea) were sold on the stock market.

The privatized firms then made annual lease payments and paid taxes when profits were made.

In 2024 the government decreed a wage hike announced a mandated wage after President Ranil Wickremesinghe made the announcement in the presence of several politicians representing plantations workers.

The land leases of privatized plantations, which do not pay the mandated wages would be cancelled, Minister Siyambalapitiya was quoted as saying at a ceremony in Deraniyagala.

The re-expropriated plantations would be given to new investors through “special transparency”

The new ‘privatization’ will be done in a ‘competitive process’ taking into account export orientation, worker welfare, infrastructure, new technology, Minister Siyambalapitiya said.

It is not clear whether paying government-dictated wages was a clause in the privatization agreement.

Then President J R Jayewardene put constitutional guarantee against expropriation as the original nationalization of foreign and domestic owned companies were blamed for Sri Lanka becoming a backward nation after getting independence with indicators ‘only behind Japan’ according to many commentators.

However, in 2011 a series of companies were expropriation without recourse to judicial review, again delivering a blow to the country’s investment framework.

Ironically plantations that were privatized in the 1990s were in the original wave of nationalizations.

Minister Bandula Gunawardana said the cabinet approval had been given to set up a committee to examine wage and cancel the leases of plantations that were unable to pay the dictated wages.

Related

Sri Lanka state interference in plantation wages escalates into land grab threat

From the time the firms were privatized unions and the companies had bargained through collective agreements, striking in some cases as macro-economists printed money and triggered high inflation.

Under President Gotabaya, mandating wages through gazettes began in January 2020, and the wage bargaining process was put aside.

Sri Lanka’s macro-economists advising President Rajapaksa the printed money and triggered a collapse of the rupee from 184 to 370 to the US dollar from 2020 to 2020 in the course of targeting ‘potential output’ which was taught by the International Monetary Fund.

In 2024, the current central bank governor had allowed the exchange rate to appreciate to 300 to the US dollar, amid deflationary policy, recouping some of the lost wages of plantations workers.

The plantations have not given an official increase to account for what macro-economists did to the unit of account of their wages. With salaries under ‘wages boards’ from the 2020 through gazettes, neither employees not workers have engaged in the traditional wage negotiations.

The threat to re-exproriate plantations is coming as the government is trying to privatize several state enterprises, including SriLankan Airlines.

It is not clear now the impending reversal of plantations privatization will affect the prices of bids by investors for upcoming privatizations.

The firms were privatized to stop monthly transfers from the Treasury to pay salaries under state ownership. (Colombo/May25/2024)

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