An Echelon Media Company
Thursday December 1st, 2022

Sri Lanka cuts policy rates 50bp to boost credit

ECONOMYNEXT – Sri Lanka’s central bank has cut policy rate 50 basis points, to lower market interest rates and boost credit amid an uptick in deposit rates after price controls were lifted and Treasuries yields gained after taxes were slashed.

“This decision supports a continued reduction in market lending rates, thereby facilitating the envisaged recovery in economic activity given the favourable medium term outlook for inflation, which is well anchored within the 4-6 per cent range,” the central bank said in its January monetary policy statement.

The central bank cut the ceiling of its policy corridor at which money is injected from 8.0 percent to 7.50 percent and the floor rate at which money is taken out from 7.00 percent to 6.50 percent.

Overnight money has ranged around 7.50 percent.

Sri Lanka’s deposit rates have picked up after price controls were lifted and Treasury bill yields have also picked up after the government cut value added tax, raising prospects of higher domestic borrowings.

“In response to monetary and regulatory measures taken by the Central Bank, market lending rates adjusted downwards, but the pace of reduction has decelerated,” the central bank said.

“The reduction in lending rates thus far, except for the Average Weighted Prime Lending Rate (AWPR), has been less than envisaged.”

Banks have loaned 58 billion rupees in new credit to private borrowers in December up from 47 billion rupees in November.

Sri Lanka’s private credit fell after a collapse of the rupee in 2018 from 152 to 182 to the US dollar in the wake of corrective policies needed to stop further falls and loss of reserves.

Sri Lanka’s soft-peg with the US dollar generally runs into currency troubles as rates are cut and liquidity injections are made to enforce them, as either private credit, government borrowing or both pick up.

Amid weak credit the rupee has been stable, though there were liquidity disruptions after July. There has been inflows to bond markets in January.

Analysts have pointed that credit tends to contract after the central bank prints money triggers a collapse in the soft-dollar peg but the economy recovers after about 18 months.

In the previous eight months, banks only loaned a net 42 billion rupees in credit following a collapse of the rupee and corrective policies required to halt a further falls.

Private credit volumes have been positive since August and banks have loaned a total of 149 billion rupees in of new credit in the past four months requiring more deposits to be raised.

The central bank also lifted price controls in deposit rates slapped earlier in the year.

“With the removal of caps on deposit interest rates offered by banks, new deposits rates have increased since September 2019,” the central bank said.

” Yields on Treasury bills have trended upwards at recent auctions. If not addressed, these trends could result in an undesirable turnaround in market lending rates.”

Sri Lanka has slashed value added taxes, raising fears over domestic borrowings in 2020, while private credit also picks up.

In December credit to government surged to 64.9 billion rupees, from a negative 26 billion rupees in November.

State enterprises had also borrowed another18 billion rupees in December central bank data shows, adding further pressure to the credit system.

Sri Lanka’s CEB has been operating thermal generators and selling power at a loss, driving up losses.

Up the end of December however the rupee has been stable, and there had also been inflows in bond markets in January.

The central bank expects inflation to be below 5 percent in 2020.

“In spite of such short term fluctuations, the near term forecast suggests that inflation will hover below 5 per cent in 2020, and stabilise between 4-6 per cent thereafter, assisted by appropriate policy measures and underpinned by well anchored inflation expectations.”

The central bank said economic growth will pick up in 2020, with tax cuts, improved business confidence and ‘monetary measures’.

“The economy is expected to reach its full capacity over the medium term, benefitting from the low and stable inflation environment, a competitive exchange rate, low lending rates as well as improved consumer and investor sentiment,” the statement said.

“The growth momentum of the economy is expected to be sustained through the implementation of appropriate structural reforms designed in line with the policy priorities of the government.” (Colombo/Jan30/2020)

Leave a Comment

Your email address will not be published. Required fields are marked *

Leave a Comment

Leave a Comment

Cancel reply

Your email address will not be published. Required fields are marked *

Sri Lanka’s inflation eases to 61-pct in November

ECONOMYNEXT – Sri Lanka’s 12-month inflation in the capital Colombo fell to 61 percent in November 2022 from 66 percent in October as price stabilized after interest rates were allowed to go up and the exchange rate was pegged around 360 to the US dollar.

The widely watched Colombo Consumer Price Index fell absolutely 0.5 percent to 242.6 points in November after falling .04 percent in the October.

Food prices fell 1.5 percent after falling 2.0 percent a month earlier. The sub-index containing gas fell 0.5r percent and transport fell 3.6 percent.

But some services continued to go up, as relative prices adjusted to the steep fall in the currency after two years of money printing to suppress rates.

Health costs went up 5.7 percent. Furnishing and routine maintenance rose 0.4 percent.

Sri Lanka’s central bank hiked policy rates to 15.5 percent in April and pulled back on longer term money printing, allowing market rates to go to around 30 percent.

The exchange rater is pegged around 363 rupees with a surrender rule where banks are forced to sell dollars to the central bank for new liquidity.

The ongoing currency and inflation crisis is the worst in the history of the central bank.

Sri Lanka’s Latin America style central bank was set up in 1950 giving powers to the country’s macro-economists the power to mis-target rates, create currency crisis and high inflation. (Colombo/Nov30/2022)

Continue Reading

Sri Lanka shares close at one-month high

ECONOMYNEXT – Sri Lanka shares closed at one month high on Wednesday gaining for the fourth session on news that government is in talks with ADB and World Bank to get a 1.9 billion dollar loan facility, brokers said.

The main All Share Price Index (ASPI) closed 3.3 percent or 276.02 points higher at 8,651.23, highest index gain in since November 01.

“Investor participation improved on the back of confirmed talks with multilateral and bilateral lenders including world banks and ADB for USD 1.9Bn after IMF board level agreement is reached,” First Capital Market Research said in it’s daily note.

Former Central Bank Governor Indrajit Coomaraswamy said in a forum on Monday that the government is in discussion with ADB and World Bank to get loans of 1.9 billion US dollars after a reform program with 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.

The market witnessed a turnover of 3.3 billion rupees, higher than this year’s daily average turnover of 2.9 billion rupees. This is the highest turnover generated since October 04.

In the last few sessions market gained after Central bank governor said market 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.

In the past sessions, the index continued to fall on the speculation of a local debt restructuring although no proper decision has been taken so far.

The market saw a foreign inflow of 39 million rupees. The total net foreign inflow stood at 18.33 billion rupees so far for this year.

The more liquid index S&P SL20 closed 3.4 percent or 89.78 points higher at 2,730.08.

The ASPI has fallen 0.5 percent in November after losing 13.4 percent in October.

It has lost 29.2 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.

Sampath Bank pushed the index up to close at 10.9 percent to 36.6 rupees.

Other top gainers were Browns Investment gained 15.4 percent to close at 7.5 rupees and LOLC gained 9.4 percent to close at 411.3 rupees.(Colombo/Nov30/2022)

Continue Reading

Sri Lanka bonds, T-bills ease, overall market dull

ECONOMYNEXT – Sri Lanka’s treasury bonds eased and T-bill yields fell on the speculation on talks with ADB and World Bank to obtain financial aid but the over all market was dull on Wednesday while the Central Bank’s guidance peg remained unchanged, dealers said.

“During the day, secondary market witnessed some buying interest on the back of speculations on yields easing while talks about financial aid from ADB and World Bank further strengthened interest,” First Capital Market Research said in it’s daily note.

A bond maturing on 01.05.2024 closed at 32.00/60 percent on Wednesday, down from 32.30/90 percent on Tuesday.

A bond maturing on 07.07.2025 bond closed at 30.80/31.30 percent up from 30.30/31.25 percent on Tuesday.

A bond maturing on 15.05.2026 closed at 31.00/30 percent down from 31.10/31.30 percent on Tuesday.

The three-month T-bills closed at 32.30/33.25 percent, down from 32.60/33.00 percent.

The Central Bank’s guidance peg for interbank transactions remained unchanged at 363.19 rupees against the US dollar.

Commercial banks offered dollars for telegraphic transfers between 371.79 and 372.10 for small transactions, data showed.

Buying rates are between 361.79 – 362.00 rupees. (Colombo/Nov 30/2022)

Continue Reading