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Sunday June 23rd, 2024

Sri Lanka central bank to price control lending rates, policy rate unchanged

ECONOMYNEXT – Sri Lanka’s central bank said it was holding policy rates, but will direct banks to cut lending rates, as they were too far above the policy rate.

“The Monetary Board took note of the downward adjustment of market interest rates in response to monetary policy easing measures implemented thus far and the need to allow space for further adjustment of market interest rates swiftly,” the central bank said in its August monetary policy statement.

“However, the Board observed that market interest rates of certain lending products remain excessive and are not in line with the current monetary policy stance.

“Moreover, the Board anticipates a faster reduction in overall market lending interest rates in line with the recent monetary policy easing measures.

“Accordingly, the Board decided to adopt targeted administrative measures to reduce specific lending interest rates that it considered to be excessive and direct the licensed banks to reduce overall rupee lending interest rates by an appropriate margin in the period ahead.”

Analysts have pointed out that reserve collecting central banks have no real control over interest rates and any artificial policy rate cuts enforced with open market operations will lead to reserve losses and currency depreciation, with consequent negative effects on energy SOEs, budget deficits and debt.

Under an IMF reserve target interest rates have to be higher than required to keep the external sector in balance (Balance of payments neither in surplus or deficit).

RELATED Sri Lanka interest rates are dictated by the IMF reserve target, not inflation

All central banks that violate the rule, which are most central banks in Latin America and Africa and in South Asia and a few remaining ones in East Asia like Laos, will experience balance of payments trouble and will go the IMF again and again, analysts say.

Meanwhile the central bank said bank lending rates were also not in line with falling deposit rates.

..[T]he downward adjustment in market lending interest rates has been disproportionate to the reduction effected in market deposit interest rates.

A cut in the reserve ratio has also allowed banks to lend more money and improved their margins, the central bank said.

The liquidity released has been already mopped up through sell-downs of central bank held securities, giving profits to banks (in Sri Lanka statutory reserve ratio money is unremunerated) and not triggering any forex shortages as credit recovers.

Banks however has large volumes of bad loans, where the deposits concerned have to be financed with remaining performing loans.

Unlike in past currency crises, banks bought Treasury bills did not buy heaving into bonds, due to domestic re-structure fears, denying some of the capital gains that offsets the bad loans coming in the wake of the currency crisis and also pushing up bond yields to high levels.

Authorities by avoiding a broader DDR have sharply improved confidence in government securities, allowing yields to fall. Inflation has virtually stopped in its tracks, supported by broadly deflationary open market operations, a currency appreciation and US monetary tightening.

There was still no ‘sustained recovery in private credit’ yet the central bank said.

In the past, the central bank has missed IMF reserve targets with rates cuts enforced by open market operations, claiming that inflation is low even as budget deficits are cut and fuel is market priced.

RELATED Sri Lanka to miss IMF forex reserve target; seek waiver

As stabilization policies are re-imposed to stop balance of payments crisis, the resulting output shock reduces tax revenues and the country misses the fiscal target in the next year. The debt to GDP ratio and net debt after reserves also tends to go up.

RELATED Sri Lanka misses 2019 budget deficit, forex reserve targets in IMF program

The full statement is reproduced below:

The Central Bank of Sri Lanka maintains policy interest rates at their current level

The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 23 August 2023, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 11.00 per cent and 12.00 per cent, respectively. The Board arrived at this decision following a careful analysis of current and expected developments in the domestic as well as the global economy, while noting the significant easing of monetary conditions effected since June 2023.

The Monetary Board took note of the downward adjustment of market interest rates in response to monetary policy easing measures implemented thus far and the need to allow space for further adjustment of market interest rates swiftly. However, the Board observed that market interest rates of certain lending products remain excessive and are not in line with the current monetary policy stance. Moreover, the Board anticipates a faster reduction in overall market lending interest rates in line with the recent monetary policy easing measures. Accordingly, the Board decided to adopt targeted administrative measures to reduce specific lending interest rates that it considered to be excessive and direct the licensed banks to reduce overall rupee lending interest rates by an appropriate margin in the period ahead.

The disinflation trend continues, with headline inflation reaching single digit levels

Headline inflation, measured by the year-on-year change in the Colombo Consumer Price Index (CCPI, 2021=100), decelerated to 6.3 per cent in July 2023, reaching single digit levels for the first time since November 2021. Following a similar trend, headline inflation, based on the National Consumer Price Index (NCPI, 2021=100), also decelerated to 4.6 per cent in July 2023 (year-on-year). The moderation in headline inflation was mainly driven by the softening of energy and food inflation, along with the favourable statistical base effect. Meanwhile, CCPI and NCPI based core inflation, which reflects underlying demand pressures in the economy, moderated to 6.1 per cent and 6.3 per cent, respectively, in July 2023 (year-on-year). Headline inflation is expected to moderate further over the next few months and stabilise around mid-single digit levels over the medium term.

Domestic economic activity is expected to recover in the second half of 2023 and gradually reach the potential level of economic growth over the medium term

Economic activity is projected to recover gradually during the second half of 2023 and reach its potential level thereafter, supported by the normalisation of monetary conditions, improvements in business confidence, enhancements in supply conditions and the relaxation of import restrictions, and the impact of growth promoting structural reforms. Leading indicators of economic activity point to a lower contraction in GDP in the second quarter of 2023, compared to the previous projections, while the second half of 2023 is expected to record a positive growth, compared to the same period in 2022. However, the impact of weather related disruptions and modest external demand conditions could weigh on expected growth in the near term.

The external sector remains resilient, allowing a gradual relaxation of balance of payments restrictions

The trade deficit decreased notably during the seven months ending July 2023 with a significant decrease in merchandise imports, despite the decrease in merchandise exports. Earnings from tourism and workers’ remittances, which improved considerably from January to July 2023, in comparison to the corresponding period in the previous year, are expected to improve further in the period ahead.

Despite some recent outflows from the government securities market, net foreign investment inflows remained positive during the seven months ending July 2023. In view of the improvements in the balance of payments conditions and the need to support the recovery of activity, the Government relaxed import restrictions related to 638 HS codes, including those of commercial vehicles, since June 2023.

Although a significant share of import restrictions has already been relaxed, demand for imports continued to remain subdued, reflecting the tight financial conditions. The Sri Lanka rupee recorded an appreciation of around 12 per cent against the US dollar thus far during the year. The level of gross official reserves was estimated at around US dollars 3.8 billion as at end July 2023, including the swap facility from the People’s Bank of China, while measures were also taken to repay a part of the swap facility with Bangladesh Bank, in addition to the repayment of maturing debt of multilateral lending agencies.

Market interest rates continue to adjust downward, although disparities in adjustments remain

Reflecting the impact of monetary policy easing measures effected since June 2023 as well as the decline in the risk premia with the announcement of the domestic debt optimisation (DDO) operation, market interest rates have declined to a certain extent. A notable reduction was also observed in the yields on government securities.

However, the downward adjustment in market lending interest rates has been disproportionate to the reduction effected in market deposit interest rates. Furthermore, despite the considerable easing of monetary conditions, interest rates on certain lending products of some financial institutions continue to remain excessively high posing hardships for individuals and businesses, particularly small and medium scale enterprises.

The reduction in the Statutory Reserve Ratio (SRR) from mid-August 2023 is expected to have eased liquidity strains of licensed commercial banks (LCBs) and lowered their cost of funds, facilitating a further downward adjustment in lending interest rates. Meanwhile, based on data available until July 2023, a sustained recovery in credit extended to the private sector by LCBs is yet to be observed.

Therefore, it is essential that market lending interest rates are lowered by financial institutions in line with the eased monetary policy stance of the Central Bank, thereby boosting credit flows to the economy, which in turn would help the revival of economic activity.

Policy interest rates are maintained at their current levels, while measures are introduced to accelerate the reduction of market lending interest rates

In consideration of the current and expected macroeconomic developments highlighted above, the Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 23 August 2023, was of the view that it is appropriate to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 11.00 per cent and 12.00 per cent, respectively.

The Members noted that the Central Bank has eased its monetary policy stance considerably since early June 2023 by reducing its key policy interest rates by 450 basis points, while reducing SRR by 2.0 percentage points to inject additional liquidity into the financial markets. Further, the announcement of the DDO strategy also helped reduce the risk premium of yields on government securities, with spillovers to other market interest rates. However, considering the presence of excessive interest rates on certain lending products and the inadequate downward adjustment in market lending interest rates relative to that of deposits, the Board was of the view that the downward rigidity in lending interest rates of certain financial institutions needs to be addressed through administrative measures. Such administrative measures would also ensure the swift transmission of previous monetary policy easing measures to all sectors of the economy.

Accordingly, the Board decided to impose caps on interest rates on pawning facilities at 18 per cent, per annum; on pre-arranged temporary overdrafts at 23 per cent, per annum; and on credit cards at 28 per cent, per annum, for all licensed banks.

Further, the Board was of the view that penal interest rates need to be capped at 2 percentage points over the regular interest rates charged on the relevant credit facility. In addition to the above, the Board noted that other market lending interest rates on rupee loans and advances should also adjust downwards further, in line with the relaxed monetary policy

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India supports Sri Lanka Coast Guard to boost maritime security

ECONOMYNEXT – India has given 1.2 million US dollars’ worth spare parts to Sri Lanka’s Coast Guard to be used in a vessel also gifted to the Indian Ocean Island on an earlier occasion, the Indian High Commission in Colombo said.

“Handing over of the large consignment of spares symbolizes India’s commitment to support capability building towards addressing the shared challenges of Maritime Security in the region,” the Indian High Commission said

The spare parts were brought to Sri Lanka on the Indian Coast Guard Ship Sachet, an offshore patrol vessel that was on a two-day visit to the island.

The spares were formally handed over to the Sri Lanka Coast Guard Ship Suraksha which was gifted to Sri Lanka in October 2017 by India.

India has gifted spare parts for the ship in June 2021 and April 2022 and also provided assistance in refilling of Halon cylinders in January 2024. (Colombo/June23/2024)

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Sri Lanka Water Board makes profits, tax-payers inject Rs28bn

ECONOMYNEXT – Sri Lanka’s state-run National Water Supply and Drainage Board has made a profit of 5.2 billion rupees in the year to December 2023, after a tariff increase despite not getting money for 25 percent of its water it pumps out.

Total revenues went up to 61.8 billion rupees in 2023 from 35.4 billion rupees, a Finance Ministry report said.

Water revenue surged to 58.5 billion rupees from 33.1 billion rupees, cost of sales also went up to 32.8 billion rupees from 23.14 billion rupees, helping boost gross profits from 12.3 billion rupees to 29.0 billion rupees.

Finance costs surged to 14.9 billion rupees from 3.9 billion rupees,

NSWD reported net profits of 5.2 billion rupees for the year, against a loss of 2.7 billion rupees a year earlier.

The Treasury had given 28 billion rupees from tax payer money to settle loans.

During the Rajapaksa administration, macroeconomists who ran the Finance Ministry made state enterprises borrow money from banks through Treasury guarantees listing them as ‘contingent liabilities’, claiming they were ‘off balance sheet’.

The Road Development Authority, which had no revenues to speak of borrowed large amounts of money from banks which were listed as ‘contingent liabilities’ though they were a responsibility of the state from day one, allowing macroeconomists to understate both the budget deficit and national debt, critics say.

The water tariffs were raised by 81 percent after macroeconomists printed money to supress interest rates for flexible inflation targeting/potential output targeting. The currency collapsed after macroeconomists tried to float the rupee with a surrender rule in place.

Non-revenue water for which no money is collected was 25.2 percent. The agency was supposed to reduce non-revenue water. In some districts religious establishments are responsible for non-revenue water, according to an official who said it on condition of anonymity.

The water board is also unable to collect money from some services like common toilets for underserved communities. (Colombo/June23/2024 – Update II)

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Sri Lanka will expedite Indian projects: President

ECONOMYNEXT – Sri Lanka will expedite Indian-backed projects in the island, President Ranil Wickremesinghe told Indian business people after a visit by Indian External Affairs Minister S Jaishankar this week.

“I discussed with Prime Minister Modi the need to accelerate the joint program that we have decided, agreed on. So the major ones are identified, and Foreign Minister Jaishankar came down today [20] to have a discussion. Now this will show the new path we are taking,” president Ranil Wickremesinghe said.

“It won’t be individual projects. We’ve discussed a fair number of them. First is the grid interconnection between Sri Lanka and India, so that sustainable energy can be transmitted to India.

“We have the Sampur solar power project, which is a Government to Government (G2G) project, and a three island project, which is where we hope the ground breaking can take place in July,” he told Indian business people at the 31st All India Partner’s Meet 2024 (AIPM 2024), held at ICT Ratnadipa in Colombo.

The AIPM 2024 which was organised by KPGM Sri Lanka and India provided a platform for both countries to reaffirm their commitment to collaborative projects that promise to redefine bilateral relations and propel socio-economic growth.

“It’s a great pleasure and a privilege to have you in Sri Lanka, in Colombo, holding this meeting. It shows on one hand the close friendship that our two countries have, and on the other hand, the confidence that you have in Sri Lanka.

“Having now survived two difficult years, I must acknowledge that this was possible because India gave us a loan of $3.5 billion. All that will be repaid.”

Cooperation between the two nations needed to be enhanced, particularly in the energy sector, aiming to foster new development for the Northern region, Wickremesinghe said.

“We are looking at developing Palk Straight for wind energy and solar energy, both countries to get together and have a large farm for solar energy, for renewable energy. It also means that we will have a new economy for the northern province, which was worst affected by the war.”

Several Indian-backed projects in Sri Lanka have stalled due to protests from some parties, with some going to courts.

India is helping expand the Kankesanturai port, and is discussing development of the Palali and Colombo airports.

The National Livestock Development Board of Sri Lanka, in collaboration with India’s Amul Dairy Company, is involved in a project to enhance liquid milk production in the country.

The two nations are also considering establishing land connectivity.

Discussions have also taken place regarding expediting the Trincomalee Development Project, which encompasses industrial investment zones and tourist areas.

“Plans are underway to construct a multi-product oil pipeline from Nagapatnam to Trincomalee, pending the final observation report. Trincomalee is poised to become a hub for oil refining, with the development of ports and investment zones, transforming Trincomalee Port into a significant hub on the Bay of Bengal.

“Today, the entire East Coast is being opened up for tourism, with additional land earmarked for hotels in Galle and southern areas. Moreover, there are plans to establish more investment zones across the country, alongside expanding our professional training programs. In these endeavours, we are collaborating closely with India.” (Colombo/Jun22/2024)

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