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Tuesday April 23rd, 2024

Sri Lanka central bank hikes rates 100bp despite falling inflation on IMF pressure

ECONOMYNEXT – Sri Lanka’s central bank said it had raised policy rates by 100 basis points to 16.50 percent effective from March 03 due to International Monetary Fund requirements.

“There have been some differences between the CBSL and IMF staff on the inflation outlook,” the central bank said in its February monetary policy review.

“Given the necessity of fulfilling all the ‘prior actions’ in order to move forward with the finalisation of the IMF Extended Fund Facility (EFF) arrangement, the Monetary Board and the IMF staff reached consensus to raise the policy interest rates, in a smaller magnitude, compared to the adjustment, which was envisaged during the initial stage of negotiations.

The full statement is reproduced below:

The Central Bank of Sri Lanka raises the Policy Interest Rates

The Monetary Board of the Central Bank of Sri Lanka (CBSL), at its meeting held on 03 March
2023, decided to raise the Standing Deposit Facility Rate (SDFR) and the Standing Lending
Facility Rate (SLFR) of the Central Bank by 100 basis points to 15.50 per cent and 16.50 per
cent, respectively, effective from the close of business on 03 March 2023.

The CBSL and the staff of the International Monetary Fund (IMF) have been engaging
continuously in intensive negotiations on the monetary policy stance amidst extraordinarily high
inflation and a high degree of uncertainty surrounding inflation projections and the near term
outlook. There have been some differences between the CBSL and IMF staff on the inflation
outlook. Given the necessity of fulfilling all the ‘prior actions’ in order to move forward with the
finalisation of the IMF Extended Fund Facility (EFF) arrangement, the Monetary Board and the
IMF staff reached consensus to raise the policy interest rates, in a smaller magnitude, compared
to the adjustment, which was envisaged during the initial stage of negotiations.

This decision demonstrates Sri Lanka’s commitment to the IMF-EFF arrangement, which has
been pursued by the Government in order to ensure stability in the economy on multiple fronts.
The finalisation of the IMF-EFF arrangement is expected to benefit all stakeholders and bolster
confidence, which would help restore stability in the economy on a sustained basis. This will
incentivise more foreign exchange flows in the period ahead that would aid the economy to
overcome the prevailing economic crisis. The Board was of the view that the economy has
already traversed through the most difficult and unprecedented times with tremendous resilience
and strongly believes that today’s decision would pave way for a faster-than-expected
deceleration of inflation.

The Monetary Board anticipates that this monetary policy action would help lower the spread
between policy interest rates and high market interest rates. This spread is expected to be further
reduced with the reduction in market interest rates in the period ahead, especially the yields on
government securities, reflecting the easing of risk premia as the debt restructuring process
progresses.

The Board urges all stakeholders to remain hopeful and reiterates its commitment to ensuring price and economic stability, and financial system stability, thereby assuring the normalisation of the interest rate structure no sooner the price pressures are sufficiently contained in the period ahead.

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Sri Lanka single borrower limits cut to 25-pct of bank capital, SOEs also included

ECONOMYNEXT – Sri Lanka’s central bank has issued directions limiting loans to a singe borrower or a group of connected customers to 25 percent of Tier I capital, with state enterprises which turned out to be the biggest borrowers, also included.

In a 2007 direction, banks were allowed to give loans up to 30 percent of capital for a single customer and 33 percent for a group but the rules were widely violated in the case of state enterprises, which were used as off-budget vehicles to give energy and other subsidies.

Banks will have to limit exposures to 25 percent starting from January 2026.

According to transitional provisions published in the direction seems to indicate that some banks may have single borrower exposures of 85 percent or more.

They will be required to bring exposures down to 60 percent by 2027 and 25 percent by 2028.

Download the direction from here Sri-Lanka-single-borrow-limit-direction-2024

Energy utilities were made to borrow from state banks to run off-budget subsidies under plan avoid a price formula during the Rajapaksa regimes.

Sri Lanka’s state banks ended up with large debts to Ceylon Petroleum Corporation partly due to flexible inflation targeting (printing money to cut rates as soon as inflation fall triggering forex shortages) even when fuel was market priced in 2018, analysts have shown.

When rates were cut with inflationary open market operations, triggering forex shortages, CPC was barred from buying dollars and forced to get suppliers’ credit denominated in dollars.

The suppliers’ credits were later converted to dollar loans from state bank loans, usually after the currency collapsed from the inflationary rate cuts or inflationary open market operations to sterilize interventions or both, analysts have shown.

The CPC loans have since been taken over by the government.

Banks have also funded roads and other state projects.

“Licensed banks shall gradually reduce the exposures to Public Corporations to meet the maximum limit,” by December 2030 according to the direction.

“Public corporation shall mean any corporation, board or other body which was or is established by or under any written law other than the Companies Act, with funds or capital wholly or partly provided by the Government.”

Many of the newer state enterprises however have been suddenly set up under the Companies Act, unlike earlier where a specific act was passed by the parliament to set up corporation or a statutory authority.

Borrowings of CPC and CEB eventually hit the financial stability of state banks while actual bad loans were under-reported. Now the bad loans are being covered with a state capital injection.

Under an International Monetary Fund and World Bank backed program, the so-called ‘sovereign bank nexus’ is being severed to protect the banking system.

Government securities, central bank sterilization securities, loans guaranteed by multilateral lenders or high rated foreign banks are excluded. (Colombo/Apr23/2024)

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Sri Lanka exceeds tax revenue target by 6% in first quarter

ECONOMYNEXT – Sri Lanka’s revenue collecting bodies have outperformed and exceeded tax revenue target by 6 percent for the first quarter ended on March 31, State Revenue Minister Ranjith Siyambalapitiya said.

“After many years of difficult challenges, it has been possible to exceed the expected state revenue in the first quarter of 2024,” he said in a statement.

The government expects a revenue collection of 4,106 billion rupees in 2024.

“The reason for the economic crisis in the past period was the reduction in the level of government revenue. Considering the achievement of higher than the target in the first quarter of this year and the revenue pattern, the 2024 will become a year in which the revenue targets can be achieved,” he said.

The three tax revenue collecting bodies – Sri Lankan Customs, Excise Department, and Inland Revenue Department have collected 834 billion Sri Lanka rupees in the first quarter.

“It is a 6% higher than the expected revenue target of 787 billion rupees,” Siyambalapitiya said.

He said the Inland Revenue Department exceeded its target by 13 percent to 430 billion rupees compared to the target of 381 billion rupees in the first quarter of 2024.

He also said Customs Department has managed to reach the target of 353 billion rupees and the Excise Department has also achieved 96% of the revenue requests and earned 51 billion rupees in the first quarter.

The island nation has raised Value Added Tax (VAT), imposed new taxes, and increased personal income taxes to boost the revenue under an International Monetary Fund-backed reforms in return of a $3 billion External Fund Facility.

People have started to grumble over the government’s higher taxes without reducing some of the state expenditures. The government has been in the process to privatize some key state-owned enterprises. However, that process faced delays amid gradually rising protests against the move. (Colombo/April 22/2024)

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Air Asia, SriLanka’s FITS, Hayleys bid for SriLankan Airlines

ECONOMYNEXT – Malaysia’s AirAsia group, FITS Aviattion of Sri Lanka and Hayleys are among bidders for state-run SriLankan Airlines, a statement from the State-owned Enterprises Restructuring Unit said.

Dharshaan Elite Investment Holding (Pvt) Ltd, . Sherisha Technologies Private Limited and Treasure Republic Guardians Limited are the other bidders.

The responses will be evaluated to choose qualified investors.

International Finance Corporation, as Transaction Advisors for the divestiture of SriLankan Airlines Limited, will continue to advise the government, the statement said. (Colombo/April22/2024)

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