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Wednesday July 24th, 2024

Sri Lanka central bank hikes policy rate 100bp to counter forex crisis

ECONOMYNEXT – Sri Lanka’s central bank has hiked interest rates 100 basis points in a bid to reduce money printing as forex shortages worsened even as tourism recovered.

The central bank said the rate at which new money is printed would be raised 100 basis points to 7.50 percent.

The rate is still half the 15.1 percent inflation in February 2022.

The central bank said that, considering the severity of external problems and disruptions to domestic economic activity, “a comprehensive policy package containing both traditional and non-traditional measures, along with other initiatives that have an impact on the overall economy, is essential to counter such economic headwinds.”

Forex shortages – a problem related to pegged exchange rates – is a result of excess demand, including from domestic credit driven by liquidity injections made by a central bank to enforce a policy rate or finance deficits.

The private sector is a net saver in Sri Lanka and cannot create forex troubles on its own, unless the savings are recycled through credit to generate imports.

The central bank has printed money to keep interest rates artificially low, undermining the exchange rate and triggering parallel exchange rates as the excess money tried to rush out of the country.

The central bank is now printing money after giving reserves for imports. More money is also printed in a quasi-fiscal activity to give incentives to remittances after money printing and tightened exchange controls created parallel exchange rates.

A float, after domestic credit is slowed can end sterilised interventions and also unify the parallel exchange rates.

The central bank also proposed a series of other measures which would increase revenues and reduce the deficit and domestic credit.

The agency said “as its Economic and Financial Advisor, the Central Bank wishes to advise the Government to diligently consider:

a) introducing measures to discourage non-essential and non-urgent imports urgently based on the previous recommendation made by the Central Bank

b) increasing fuel prices and electricity tariffs immediately, to reflect the cost

c) incentivising foreign remittances and investments further

d) implementing energy conservation measures, while accelerating the move towards renewable energy

e) increasing government revenue through suitable tax increases on a sustained basis

f) mobilising foreign financing and non-debt forex inflows on an urgent basis

g) monetising the non-strategic and underutilised assets, and

h) postponing non-essential and non-urgent capital projects.

The full statement is reproduced below

The Central Bank of Sri Lanka further tightens the Monetary Policy Stance

Global economic growth to moderate, while inflation to remain higher

As per the January 2022 update of the World Economic Outlook (WEO) of the International Monetary Fund (IMF), the global economy is expected to moderate from 5.9 per cent in 2021 to 4.4 per cent in 2022. The recovery in the global economic activity is expected to weaken due to the spread of the Omicron COVID-19 variant, supply chain disruptions and geopolitical tensions in Eastern Europe. Global inflation is expected to remain high and persistent due to elevated energy prices and continuing supply chain disruptions, prompting stronger monetary policy responses by central banks globally.

Global and domestic developments have posed challenges to the recovery of the Sri Lankan economy

The domestic economy is expected to make headway underpinned by the successful COVID-19 vaccination drive of the Government and relaxed mobility restrictions. However, economic activity is somewhat affected by recent adverse developments in the global front, in terms of supply chain disruptions and rising commodity prices, as well as in the domestic front, particularly in the form of power and supply interuptions. These disruptions have to be addressed immediately to ensure the continuation of uninterrupted domestic production and the momentum in exports, while continuing with the efforts to strengthen the production economy through well-targeted growth policies.

External sector faces heightened challenges

Although earnings from merchandise exports continued to record over US dollars 1 billion for the eighth consecutive month in January 2022, expenditure on imports continued to increase at a higher pace. Tourist arrivals increased noticeably thus far during the year, although recent geopolitical tensions may affect the tourism industry to some extent.

Meanwhile, a rebound in workers’ remittances is expected in the period ahead as worker migrations have increased notably and due to the measures taken to combat illegal money transfers, while encouraging remittances through formal channels via several incentives.

The Sri Lanka rupee was maintained broadly stable, while the gross official reserves as of end January 2022 are provisionally estimated at US dollars 2.4 billion, equivalent to 1.3 months of imports. At the same time, the Government and the Central Bank have been avidly pursuing avenues to attract fresh foreign exchange inflows while facilitating continued domestic economic activity. 2

Market interest rates are trending upwards

The expansion of domestic credit, particularly credit to the public sector was robust. Nevertheless, some slowdown in the growth of broad money (M2b) was observed due to the decline in net foreign assets (NFA) of the banking system. Following the monetary tightening measures, market interest rates are adjusting upwards.

However, the adjustment in deposit interest rates remains sluggish, which has been inadequate to attract deposits into the banking system from the excessive currency in circulation. Therefore, banks and financial institutions are urged to make the required adjustments to deposit interest rates in order to promote savings. Meanwhile, yields on government securities have also increased notably to reflect market conditions in view of the higher financing requirement of the Government.

Supply side factors have contributed to price pressures, while the build-up of aggregate demand pressures is also visible

Supply side disruptions, increasing global commodity prices and associated domestic administrative price adjustments, and food supply disruptions have been the key drivers of rising inflationary pressures domestically.

The acceleration in core inflation also reflects the firming up of aggregate demand conditions in the economy propagated by the accommodative monetary conditions and fiscal measures that were in place since the onset of the pandemic. While inflationary pressures are expected to remain elevated in the near term, the pressures emanating from the build-up of aggregate demand require proactive measures to anchor inflation expectations and retrace inflation to the desired levels over the medium term.

A policy package to support greater macroeconomic stability

Considering the severity of the external shocks and continued disruptions to domestic economic activity, the Monetary Board was of the view that a comprehensive policy package containing both traditional and non-traditional measures, along with other initiatives that have an impact on the overall economy, is essential to counter such economic headwinds.

Accordingly, after carefully considering the current and expected macroeconomic developments both globally and domestically, the Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 03 March 2022, decided to reinforce its stance adopted in January 2022, and decided to:

a) increase the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 100 basis points each, to 6.50 per cent and 7.50 per cent, respectively;

b) revise upwards the caps imposed on interest rates applicable to credit cards to 20 per cent per annum, on pre-arranged temporary overdrafts to 18 per cent per annum, and on pawning facilities to 12 per cent per annum. Directions to effect these regulated interest rates will be issued shortly.

The Monetary Board was of the view that the above measures will dampen the possible build-up of underlying demand pressures in the economy, which would, in turn, help ease pressures in the external sector, thus promoting greater macroeconomic stability.

At the same time, concerted efforts will need to be urgently taken by the Government to complement the efforts taken by the Central Bank to overcome the present economic challenges. Therefore, as

its Economic and Financial Advisor, the Central Bank wishes to advise the Government to diligently consider;

a) introducing measures to discourage non-essential and non-urgent imports urgently based on the previous recommendation made by the Central Bank

b) increasing fuel prices and electricity tariffs immediately, to reflect the cost

c) incentivising foreign remittances and investments further

d) implementing energy conservation measures, while accelerating the move towards renewable energy

e) increasing government revenue through suitable tax increases on a sustained basis

f) mobilising foreign financing and non-debt forex inflows on an urgent basis

g) monetising the non-strategic and underutilised assets, and

h) postponing non-essential and non-urgent capital projects.

The above measures would ensure that a coordinated approach is adopted to overcome the challenging economic circumstances faced by the country and to prudently exit the COVID-related policy accommodation.

The Central Bank will continue to closely monitor the emerging macroeconomic and financial market developments, both globally and domestically, and will stand ready to take further measures as appropriate, with the aim of achieving stability in the fronts of inflation, the external sector and the financial sector, thereby supporting real economic activity on a sustained basis.

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Sri Lanka presidential candidate cash deposits not updated in 43 years: MP

MP Dullas Alahapperuma

ECONOMYNEXT — The cash deposits Sri Lanka’s presidential candidates are required to pay have not been revised in 43 years, opposition MP Dullas Alahapperuma said, calling for a significant increase in order to save money and to prevent proxy candidates.

Alahapperuma told parliament on Wednesday July 24 that, as per the Presidential Elections Act No. 15 of 1981, a candidate nominated by a recognised political party has to deposit only 50,000 rupees while an independent candidate, or a candidate nominated by any other party or by an elector, must pay only 75,000 rupees.

The MP said the cabinet of former president Gotabaya Rajapaksa had approved an amendment to the act to increase these amounts.

“The election commission proposed that this be increased to 2.5 million rupees for political parties and 3 million for independent candidates. This was a pertinent proposal. There were 35 candidates who contested the last election,” he said.

The Act notes that “Where the number of votes polled by any candidate does not exceed one-eighth of the total number of votes polled at the election, the deposit made in respect of such candidate shall be declared forfeit and shall be transferred by the Commissioner from the deposit account to the Consolidated Fund, and in every other case the deposit shall be returned to the person who made the deposit, as soon as may be after the result of the election is declared.”

At the 2019 presidential election, said Alahapperuma, the deposits made by all candidates besides the top two contenders were transferred to the Consolidated fund.

“The number of candidates might be 80 or 85 this election. Many candidates have no basis for contesting, and it costs a vast sum of money to print ballots and other expenses, not to mention the time consumed for counting votes. This is not just to prevent proxy parties from contesting but also to save a lot of national wealth,” he said.

Leader of the House Susil Premajayantha responding to Alahapperuma said, however, that it would not be possible to pass the proposed amendment in time for the 2024 presidential election.

“The election commission made this proposal some time ago. But we know that to gazette a bill, we need to first draft the bill, the cabinet has to decide on it, send it back to the Legal Draftsman, and receive clearance from the Attorney General. So there is no time to bring this amendment for the upcoming presidential election. You can propose it at the next one,” he said. (Colombo/Jul24/2024)

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Sri Lanka deaf driver license project to be expanded islandwide

ECONOMYNEXT – A pilot project that allowed hearing-impaired persons to obtain light-vehicle driving licenses has been successful and will be rolled out island-wide, Sri Lanka’s Motor Traffic Department said.

The project was implemented in the Gampaha District initially where 50 licenses were provided to drivers who qualified.

The project was expanded to the Kurunegala District, where 150 drivers obtained licences. The drivers were given a probation period.

“Actually, this was a very successful project. It has been almost a year and we haven’t received a single complaint yet,” Motor Traffic Department Commissioner – Driving Licence Wasantha Ariyarathna told reporters on Wednesday.

“We plan to roll it out to all 25 districts islandwide.”

The issuance of driver’s licenses to hearing impaired persons will be done on a bi-annual renewal basis.
(Colombo/Jul24/2024)

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Sri Lanka election commission to announce poll date before weekend

File photo of polling booth

ECONOMYNEXT — Sri Lanka’s Election Commission will announce the date of the election before the end of this week, commission chairman R M L Ratnayake told a private news network.

Ratnayake told the privately owned NewsFirst Wednesday July 24 morning that the gazette notification in this regard would be published before the weekend.

“As I stated before, we will announce the date before the end of this week. There is no backtracking at all. We have selected a date that is nearest and most suitable after September 17 for the election,” he said.

Ratnayake told the media at a press conference on July 16 that the commission will publish the notice announcing nomination and election dates before the end of July.

“Our first task is to publish the notice on the election. From the day the notice is published, nominations have to be accepted between 16 and 21 days. The election should be held within four to six weeks of from the day of accepting nominations,” said Ratnayake.

“The candidates must have enough time to do their campaigns after handing over nominations. Time is also needed to cast postal votes and carry out other duties. The election date should also be convenient for the voters. For the acceptance of nominations, we have to consider cultural factors unique to a country like Sri Lanka. Some people consider things like the Rahu period. So we have to find a date that is suitable for everyone,” he said.

Ratnayake said the election commission intends to issue the notice before the end of July.

“This notice will contain the nominations date and the election date. We plan to then hold the election on the most suitable day after September 17.

“Some people had suggested that we have delayed this to end July to the benefit of one party or another. I want to point out that we can delay we can extend it to August 20 if needed,” he said. (Colombo/Jul24/2024)

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