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Friday December 9th, 2022

Sri Lanka cuts policy rate 50bp after liquidity disruptions

ECONOMYNEXT – Sri Lanka has cut its policy interest rate 50 basis points to 7.0 percent shortly after unusual volatility in the aggregate overnight balance of the banking system and a weakening of the rupee.

"Although economic growth is expected to recover gradually towards its potential in the medium term, domestic and global headwinds are likely to delay this recovery," the central bank said it a monetaray poliycy statement on August 23.

"Therefore, it is essential that the available policy spaces are utilised to support productive economic activity without disrupting the improvements achieved in relation to macroeconomic stability."

Sri Lanka has cut its floor policy rate to 7.0 percent at which excess liquidity is withdray from 7.50 percent, and ceiling rate at which liquidity is injected to 8.00 percent from 8.50 percent.

In recent days the central bank has loaned newly minted cash in the market near the policy deposit rate, before and after a disruptive fall in excess liquidity in the banking system.

Bond yeilds also tightened ahead of the rate cut, thought it is not clear whether liquidity disruptions or a pick in credit is the reason. In 2018 the central bank triggered runs on the rupee with rate cuts enforced by term reverse repo injections as credit picked up.

The rate cut comes after a sudden spike in credit in June. But in July private credit was flat at 5,604 billion rupees, data released today showed.

The full statement is reproduced below.

Monetary Policy Review: No. 5 – 2019

The Central Bank of Sri Lanka Reduces its Policy Interest Rates

The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 22 August 2019, decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points to 7.00 per cent and 8.00 per cent, respectively. The Board arrived at this decision following a careful analysis of current and expected developments in the domestic economy and the financial market as well as the global economy, with the aim of further supporting the revival of economic activity in the context of low inflation prevailing at present and the medium term inflation outlook, which is well anchored in the desired 4-6 per cent range.

Slowing global economic activity has prompted many countries to relax their monetary policies
Amidst weakening global demand due to uncertainties arising from trade tensions and geopolitical developments, many central banks in advanced and emerging market economies have reduced policy interest rates to support domestic economic growth, and have signalled that their stances will remain accommodative in the near term. Muted inflation and inflation outlook in these economies have acted in favour of such decisions.

Inflation is expected to remain in mid-single digit levels in the medium term

Headline inflation and core inflation, as measured by the year-on-year changes in both Colombo Consumer Price Index (CCPI) and National Consumer Price Index (NCPI), remained low in recent 2

months, partly driven by subdued food prices. Although recent upward adjustments to fuel prices as well as administratively determined prices of certain commodities could exert some transitory price pressures in the near term, inflation is likely to remain around the lower bound of the desired inflation target range of 4-6 per cent during the remainder of 2019. Along with well anchored inflation expectations and appropriate timely policy measures, inflation is expected to be maintained within this desired range over the medium term.

Economic growth is likely to be hampered by adverse domestic and global developments

Prevailing economic conditions and the developments observed in leading indicators point to modest economic growth during 2019 as well. Although economic growth is expected to recover gradually towards its potential in the medium term, domestic and global headwinds are likely to delay this recovery. Therefore, it is essential that the available policy spaces are utilised to support productive economic activity without disrupting the improvements achieved in relation to macroeconomic stability.

External sector remains resilient supported by an improved trade balance

The trade deficit continued to improve during the first half of 2019 with the sustained growth of exports and the notable contraction in the growth of imports. Tourist arrivals, which were impacted by the Easter Sunday attacks, continued to recover from the month of June. Workers’ remittances recorded a marginal growth in June, although a cumulative moderation was observed during the first half of the year. Foreign financial flows, in the meantime, have been mixed with a net outflow from the Government securities market and a net inflow to the stock market, including primary inflows, thus far during the year. The Sri Lankan rupee appreciated against the US dollar by 2.4 per cent so far during the year, although some depreciation pressure was experienced during the past few days. The depreciation pressure, mainly driven by foreign withdrawals from the Government securities market by a few investors, is expected to be short-lived. Meanwhile, gross official reserves are estimated at US dollars 8.3 billion at end July 2019, providing an import cover of 5.0 months.

Monetary and credit aggregates moderated further

The year-on-year growth of credit disbursed to the private sector by licensed commercial banks continued to decelerate during the first seven months of 2019. Accordingly, the absolute increase in private sector credit remained far below the levels observed in the corresponding period of 2018. As per the Quarterly Survey on Loans and Advances to the private sector by licensed commercial banks, the year-on-year growth of credit towards agriculture, industry and services decelerated further in the second quarter of 2019, while the growth of personal loans and advances accelerated. The 3

deceleration in credit extended to the private sector caused a slowdown in the growth of overall monetary aggregates during the period as well.

A speedy reduction in market lending rates is needed to revive economic activity

Responding to the reduction of policy interest rates by 50 basis points in May 2019 and the improvement of liquidity conditions through the reduction of the Statutory Reserve Ratio (SRR) by 2.50 percentage points in two steps in November 2018 and March 2019, the Average Weighted Call Money Rate (AWCMR) has shown a notable decline. Yields on Government securities also declined substantially during the year, although some increase was observed in the past few days. The imposition of caps on deposit interest rates of financial institutions that was intended to expedite monetary policy transmission, along with the decline in the AWCMR, also resulted in a sharp decline in the cost of funds of these institutions. However, although the Average Weighted Prime Lending Rate (AWPR) declined considerably, all market lending rates, including the AWPR, are yet to show a downward adjustment commensurate to the decline observed in deposit interest rates. It is essential that market lending rates are lowered by bank and non-bank financial institutions in response to their reduced cost of funds, thereby boosting credit flows to productive sectors, and in turn help the revival of the economy.

The monetary policy decision is expected to ensure a faster reduction in market lending rates

In consideration of the current and expected macroeconomic developments as summarised above, the Monetary Board, at its meeting held on 22 August 2019, was of the view that a reduction of policy interest rates of the Central Bank is warranted. Accordingly, the Monetary Board decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points to 7.00 per cent and 8.00 per cent, respectively. Supported by this decision, the Central Bank expects all market lending rates to reduce in line with the reduction already observed in deposit interest rates. The Central Bank will continue to closely monitor the developments in market lending rates and recommend the imposition of appropriate caps on market lending rates of financial institutions if the intended reduction is not realised within specified timelines. Such timelines and measures will be announced shortly in consultation with relevant stakeholders.

Monetary policy has been accommodative with two SRR reductions totalling 2.50 percentage points and two downward adjustments to policy interest rates, which have resulted in the lowering of the policy rate corridor from 8.00 – 9.00 per cent to 7.00 – 8.00 per cent. The Monetary Board intends 4

to review the impact of these measures as well as the fiscal performance and global developments, prior to deciding upon the future trajectory of monetary policy going forward.

Monetary Policy Decision: Policy rates reduced and SRR unchanged

Standing Deposit Facility Rate (SDFR)     7.00%
Standing Lending Facility Rate (SLFR)     8.00%
Statutory Reserve Ratio (SRR)     5.00%


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Sri Lanka shares fall on profit taking after nine sessions

ECONOMYNEXT – Sri Lanka shares slipped on Friday after gaining for nine straight sessions reverting from its highest gain in more than seven weeks on profit taking, brokers said.

“Bourse regressed to red ending the 9-day winning streak as investors resorted to book profits in blue chip counters,” First Capital Market Research said in it’s daily note.

The main All Share Price Index (ASPI) closed 0.54 percent or 47.84 points lower at 8,843.90.

The market witnessed a turnover of 1.6 billion rupees, lower than this year’s daily average turnover of 2.9 billion rupees.

The market saw a net foreign inflow of 1 million rupees. The total net foreign inflow stood at 22 billion rupees so far for this year.

The Paris Club group of creditor nations has proposed a 10-year debt moratorium on Sri Lankan debt and 15 years of debt restructuring as a formula to resolve the island nation’s prevailing currency crisis.

The government is in discussions with Asian Development Bank (ADB) and World Bank to get loans of 1.9 billion US dollars after a reform program with the International Monetary Fund is approved.

A policy loan now being discussed with the World Bank may bring around 700 million US dollars, Coomaraswamy told a business forum organized by CT CLSA Securities, a Colombo-based brokerage.

The Asian Development Bank may also give around 1.2 billion US dollars most of which will be budget support, he said.

In the last few sessions, market gained after the Central bank governor said interest rates should eventually ease despite the fears of a domestic debt restructuring as inflation falls, increased liquidity in dollar markets, and the inter-bank liquidity improves.

The more liquid index S&P SL20 closed 0.59 percent or 16.77 points lower at 2,827.72.

So far in December ASPI gained 2.2 percent.

The ASPI gained 0.5 percent in November after losing 13.4 percent in October.

It has lost 27.6 percent year-to-date after being one of the world’s best stock markets with an 80 percent return last year when large volumes of money were printed.

John Keells Holdings pulled the index down to close at 1.5 percent lower at 147 rupees.

Aitken Spence lost 2.0 percent to close at 141 rupees and Commercial Bank closed 1.4 percent down at 50.50 rupees a share. (Colombo/Dec09/2022)


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Sri Lanka bond yields end higher, kerb dollar Rs370/371

ECONOMYNEXT – Sri Lanka bonds yields ended up and the T-bills eased on active trade on Friday, dealers said.

The US dollar was 370/371 rupees in the kerb.

“The bond rates went up, however more interest was seen in the short term bills by the investors” dealers said.

A bond maturing on 01.05.2024 closed at 31.90/32.20 percent on Friday, up from 31.25/70 percent at Thursday’s close.

A bond maturing on 15.05.2026 closed at 30.30/31.30 percent steady from 30.30/31.00 percent.

The three-month T-bills closed at 30.75/31.30 percent, down from 32.00/32.25 percent.

The Central Bank’s guidance peg for interbank transactions was at 363.18 rupees against the US dollar unchanged.

Commercial banks offered dollars for telegraphic transfers between 371.78 and 372.00 for small transactions, data showed.

Buying rates are between 361.78 – 362.00 rupees. (Colombo/Dec 09/2022)

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Foreign minister, US ambassador discuss future assistance to crisis-hit Sri Lanka

ECONOMYNEXT — In a meeting in Colombo, Sri Lanka Foreign Minister Ali Sabry and US Ambassador to Sri Lanka Julie Chung discussed ways in which the United States can continue to support Sri Lanka going forward, the Ambassador said.

Chung tweeted Friday December 09 afternoon that the two officials had reflected on the “twists and turns” of 2022, at the meeting.

Minister Sabry was recently in Washington D.C. where he US Secretary of State Antony Blinken.

A foreign ministry statement said the two officials held productive discussions at the Department of State on December 02 on further elevating bilateral relations in diverse spheres, including the 75th anniversary of diplomatic relations which will be marked in 2023.

Incidentally, Sri Lanka also celebrates the 75th anniversary of its independence from the British in 2023, and President Ranil Wickremesinghe has given himself and all parties that represent parliament a deadline to find a permanent solution to Sri Lanka’s decades-long ethnic issue.

The US has been vocal about Sri Lanka addressing concerns about its human rights record since the end of the civil war in 2009 and was a sponsor of the latest resolution on Sri Lanka passed by the United Nations Human Rights Council. Unlike previous resolutions, this year’s iteration makes specific reference to the country’s prevailing currency crisis and calls for investigations on corruption allegations.

In the lead up to the UNHRC sessions in Geneva, Minister Sabry Sri Lanka’s government under then new president Wickremesinghe does not want any confrontation with any international partner but will oppose any anti-constitutional move forced upon the country.

On the eve of the sessions on October 06, Sabry said countries such as the United States and the United Kingdom, who led the UNHRC core group on Sri Lanka, are greatly influenced by domestic-level lobbying by pressure groups from the Sri Lankan Tamil diaspora.

These pronouncements notwithstanding, the Wickremesnghe government has been making inroads to the West as well as India and Japan, eager to obtain their assistance in seeing Sri Lanka through the ongoing crisis.

The island nation has entered into a preliminary agreement with the International Monetary Fund (IMF) for an extended fund facility of 2.9 billion dollars to be disbursed over a period of four years, subject to a successful debt restructure programme and structural reforms.

Much depends on whether or not China agrees to restructure Sri Lanka’s 7.4 billion dollar outstanding debt to the emerging superpower. Beijing’s apparent hesitance to go for a swift restructure prompted Tamil National Alliance MP Shanakiyan Rasamanickam to warn of possible “go home, China” protests in Colombo, similar to the wave of protests that forced the exit of former pro-China President Gotabaya Rajapaksa.

The TNA will be a key player in upcoming talks with the Wickremesinghe government on a solution to Sri Lanka’s ethnic issue. (Colombo/Dec09/2022)

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