An Echelon Media Company
Monday December 5th, 2022

Sri Lanka expects inflation to slow, rates unchanged

ECONOMYNEXT – Sri Lanka is maintaining current policy rates with inflation (the rate of increase in prices) expected to ease from the next few months, the Central Bank said.

According to the updated ‘fan chart’ published by the central bank, it is projecting a high probability that inflation will peak at around 75 percent before falling.

Sri Lanka has a policy rate of 15.5 percent but market rates are closer to 30 percent, with the central bank no longer printing large volumes of money to miss target rates to enforce the rate which worsens the currency crisis.

Higher rates had reduced private credit and are driving more money to the budget deficit.

The central bank is announcing a rate of 360 to the US dollar and is buying dollars through a surrender requirement but it has run out of reserves and cannot intervene on a net basis and sterilize the intervention with new money at the policy rate.

Several South Asian central banks that mi-targeted rates in a post-Covid recovery have sterilized interventions with new money, driven up credit and imports and busted their currencies.

Sri Lanka’s reserve money (as defined in Sri Lanka) is contracting on an absolute basis and broader money stocks are slowing indicating that the central bank has limited leeway to create fresh inflation through credit.

However the price structure of the country – especially services – have not yet fully adjusted to the currency fall.

“…[H]eadline inflation is expected to follow a disinflation path in the period ahead,” the central bank said.

“Subdued aggregate demand pressures resulting from tight monetary and fiscal conditions, expected improvements in domestic supply conditions, normalisation in global food and other commodity prices, and the timely passthrough of such reductions to domestic prices, along with the favourable statistical base effect, will be instrumental in bringing down inflation over the medium term.”

The full statement is reproduced below:

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

The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 05 October 2022, 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 14.50 per cent and 15.50 per cent, respectively.

In arriving at this decision, the Board considered the latest macroeconomic conditions, expected developments and macroeconomic projections. The Board noted the tight monetary conditions prevailing at present, the decelerating pace of inflation, and the envisaged disinflation path in the near term supported by both domestic and global factors. The Board was of the view that the monetary conditions remain sufficiently tight to achieve the envisaged disinflation path in the period ahead.

The contractionary fiscal policies would complement the effects of tight monetary policy measures already in place, helping to mitigate any build-up of aggregate demand pressures, thereby anchoring inflation expectations and bringing down headline inflation to the targeted level of 4-6 per cent over the medium term.

Domestic economic activity is expected to remain subdued during 2022, before recovering in 2023

As per the GDP estimates published by the Department of Census and Statistics (DCS), the real economy is estimated to have contracted by 4.8 per cent in the first half of 2022, on a year-on-year basis. The economy is expected to contract in the second half of 2022 as well, impacted by tighter monetary and fiscal conditions, along with the continuation of supply-side constraints and uncertainty surrounding the business environment amidst shortages of foreign exchange in the domestic foreign exchange market, among others. However, a recovery in economic activity is expected in 2023 with the envisaged improvements in the supply-side, along with the timely implementation of the required reforms.

Private sector credit continues to contract due to tight monetary and liquidity conditions

Market interest rates are continuously adjusting upwards reflecting the tight liquidity conditions in the domestic money market and the further passthrough of significant monetary policy tightening measures introduced thus far by the Central Bank. With relatively high deposit interest rates offered by licensed banks, a return of currency in circulation to the banking system is also observed.

In August 2022, outstanding credit extended to the private sector by commercial banks contracted for the third consecutive month in absolute terms, reflecting the impact of increased effective market lending interest rates, a moderation of economic activity, and measures to curtail non-urgent imports.

Accordingly, the current declining trend in the year-on-year growth of credit to the private sector is expected to continue during the remainder of the year, while a similar trend is expected in the growth of broad money (M2b) supply as well. Meanwhile, the need for further monetary financing is expected to reduce gradually, supported by the envisaged fiscal consolidation measures and planned reforms of major state owned business enterprises.

Headline inflation is expected to follow a disinflationary path in the near term

Headline inflation, based on the Colombo Consumer Price Index (CCPI), edged up in September 2022, driven mainly by the recent revision of electricity and water tariffs and the increase in Value Added Tax (VAT). However, headline inflation is expected to follow a disinflation path in the period ahead.

Subdued aggregate demand pressures resulting from tight monetary and fiscal conditions, expected improvements in domestic supply conditions, normalisation in global food and other commodity prices, and the timely passthrough of such reductions to domestic prices, along with the favourable statistical base effect, will be instrumental in bringing down inflation over the medium term.

Positive developments are observed in the external sector despite heightened challenges

The merchandise trade deficit contracted significantly during the eight months ending August 2022, compared to the same period in 2021, driven by an increase in export earnings, while also reflecting the impact of policy measures taken to curtail non-essential imports. An improvement in monthly workers’ remittances has been observed recently, while the tourism sector is anticipated to recover in the upcoming season. Foreign exchange liquidity in the domestic banking system recorded some improvements supported by increased inflows in the form of export proceeds and workers’ remittances.

Such improvements in foreign exchange liquidity conditions, despite underlying pressures in the foreign exchange market, are expected to facilitate the continuous provision of essential imports, including fuel, coal, and other commodities, in the period ahead. Meanwhile, the weighted average spot exchange rate remains unchanged since mid-September 2022 due to relatively low volume of transactions in the interbank spot market.

The gross official reserves are estimated at US dollars 1.8 billion as at end September 2022, including the swap facility from the People’s Bank of China, equivalent to around US dollars 1.4 billion, which is subject to conditionalities on usability. Subsequent to the staff-level agreement reached with the IMF on the Extended Fund Facility (EFF) arrangement, the authorities are expediting negotiations with the country’s external creditors, assisted by financial and legal advisors, to advance the debt restructuring process.

Policy rates are maintained at current levels

In consideration of the current and expected macroeconomic developments as highlighted above, the Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 05 October 2022, 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 14.50 per cent and 15.50 per cent, respectively. The Board was also of the view that the recently introduced tight fiscal policy measures would also help curtail any further build-up of demand pressures in the economy, complementing the effects of tight monetary policy already in place. However, the Central Bank will continue to monitor macroeconomic conditions and expected developments on the domestic and global fronts and stand ready to take measures swiftly and proactively, as appropriate. The Board reiterates its commitment to restoring price stability and remains confident that the already implemented tight monetary policy measures would help rein in any inflationary pressures, while supporting the economy to reach its potential over the medium term.

Comments (1)

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

  1. sacre blieu says:

    This is certainly not what the voters expected when they brought in the Rajapaksa regime, a life that took away even their basic privileges and simple lifestyle. The value of their life savings has been reduced to near zero and now they are compelled to live on a day-to-day survival in the most miserable way. The privileged, of which are a few, have seen their wealth virtually triple. This certainly is misery imposed deliberately and macabre. Even India, China, Bangladesh and even the difficult Pakistan have travelled ahead of us socially and economically. The agony is prolonged by the aid we get and we will not be allowed to get off the hook if the government does not improve and justice is ensured without delay. The government is illicit and issues, thereby, illegal orders. The spirit of the nominated list for persons of exceptional abilities is nakedly violated both spirit and deed. The rejected are back in control. Quo Vadis?

View all comments (1)

Comments (1)

Cancel reply

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

  1. sacre blieu says:

    This is certainly not what the voters expected when they brought in the Rajapaksa regime, a life that took away even their basic privileges and simple lifestyle. The value of their life savings has been reduced to near zero and now they are compelled to live on a day-to-day survival in the most miserable way. The privileged, of which are a few, have seen their wealth virtually triple. This certainly is misery imposed deliberately and macabre. Even India, China, Bangladesh and even the difficult Pakistan have travelled ahead of us socially and economically. The agony is prolonged by the aid we get and we will not be allowed to get off the hook if the government does not improve and justice is ensured without delay. The government is illicit and issues, thereby, illegal orders. The spirit of the nominated list for persons of exceptional abilities is nakedly violated both spirit and deed. The rejected are back in control. Quo Vadis?

Paris Club proposes 10-year moratorium on Sri Lanka debt, 15 years of debt restructuring

ECONOMYNEXT — 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, India’s The Hindustan Times reported.

While the Paris Club has yet to formally reach out to India and China, Colombo has yet to initiate a formal dialogue with the Xi Jinping regime, the newspaper reported on Saturday December 03, inferring that the chances of the International Monetary Fund (IMF) approving its 2.9 billion dollar extended fund facility for Sri Lanka in December now ranges from very low to nonexistent.

“This means that Sri Lanka will have to wait for the March IMF meeting of the IMF before any aid is extended by the Bretton Woods institution,” the newspaper reported.

“Fact is that for Sri Lanka to revive, creditors will have to take a huge hair cut with Paris Club clearly hinting that global south should also take the same cut as global north notwithstanding the inequitable distribution of wealth. In the meantime, as Colombo is still to get its act together and initiate a dialogue and debt reconciliation with China, it will need bridge funding to sustain the next three month before the IMF executive board meeting in March 2023. Clearly, things will get much worse for Sri Lanka before they get any better—both economically and politically,” the report said. (Colombo/Dec04/2022)

Continue Reading

Sri Lanka’s Ceylon tea prices up amid low volumes

ECONOMYNEXT – Sri Lanka tea prices picked up at the last auction in November amid low volumes, brokers said.

“Auction offerings continued to record a further decline and totalled 4.2 million Kilograms, of which Ex-Estate offerings comprised of 0.6 million Kilograms. There was good demand,” Forbes and Walker Tea brokers said.

“In the Ex-Estate catalogues, overall quality of teas showed no appreciable change. Here again, there was good demand in the backdrop of extremely low volumes.”

High Growns

BOP Best Westerns were firm to 50 rupees per kg dearer. Below best and plainer types were Rs.50/- per kg easier on last.

Nuwara Eliya’s were firm.

BOPF Best Westerns were firm to selectively dearer. Below best and plainer teas declined by 50 rupees per kg.

Uva/Uda Pussellawas’ were generally firm and price variances were often reflective of quality with the exception of Select Best Uva BOPF’s which were firm and up to 50 rupees per kilogram dearer.

CTC teas, in general, were mostly firm.

“Most regular buyers were active, with perhaps a slightly more forceful trend from the local trade,” brokers said.

Corresponding OP1’s met with improved demand. Well-made OP/OPA’s in general were fully firm, whilst the Below Best varieties and poorer sorts met with improved demand. PEK/PEK1’s, in general, were fully firm to selectively dearer.

In the Tippy catalogues, well-made FBOP/FF1’s sold around last levels, whilst the cleaner Below Best and cleaner teas at the bottom appreciated. Balance too were dearer to a lesser extent.

In the Premium catalogues, very Tippy teas continued to attract good demand. Best were firm to selectively dearer, whilst the Below Best and cleaner teas at the bottom appreciated

Low Growns

Low Growns comprised 1.8 million Kilograms. Market met with improved demand, in general.

In the Leafy & Semi Leafy catalogues, select Best BOP1/OP1’s were fully firm, whilst the Below Best/bolder BOP1’s were barely steady.

Low-grown teas, farmed mainly by smallholders and exported to the Middle East and Central Asia, are the most sought-after and expensive Ceylon Teas.

Low-grown CTC prices have gained this week to 982.80 per kilogram this week from 934.76 per kilogram last week.

Few Select best BOP1s maintained, whilst best and below best were irregularly lower. Poorer types maintained.

BOPF’s in general, firm market.

FBOPF/FBOPF1’s select best and best increased in value, whilst the below best and bottom held firm.

Selected best BOP1’s maintained, whilst best and below best were irregularly lower.Poorer types maintained.

OP1’s selects best together with best and below best were firm to dearer. Poorer sorts were fully firm.

Medium Growns

BOPF’s, select best gained by 50 rupees per kilogram. Others maintained.

BOP1’s select best dearer by 100 rupees per kg whilst all others moved up by 50 rupees per kg.

OP1: select best gained by 100 rupees per kg whilst all others dearer by 100 rupees per kg.

OP/OPA’s in general, dearer by 50 rupees per kg whilst the poorer sorts were firm.

PEK’s Select best gained by 50 rupees per kg whilst all others maintained. PEK1: In general, dearer by 50 rupees per kg. (Colombo/Dec 04/2022)

 

 

Continue Reading

Sri Lanka Ports Authority East Terminal contractor paid: Minister

ECONOMYNEXT – Sri Lanka’s Ports Authority had paid a deposit for a gantry crane and made the required payment for the contractor to complete building the East Container Terminal, Minister Nimal Siripala De Silva said.

The East Container Terminal, a part of which is already built is being completed as a fully SLPA owned terminal at a cost of 480 million dollars Ports and Shipping Minister de Silva said.

“ECT we are funding with money available in the ports authority,” he said.

“Up to now we have paid an advance for the gantry crane. And for the construction we have paid all the money agreed with the contractor. So that is going on well.”

Sri Lanka is undergoing the worst currency crisis in the history of the island’s soft-pegged (flexible exchange rate) central bank which has created difficulties in funding the project.

“Every penny we collect as dollars we are keeping them separately and utilizing that for the Eastern Terminal work,” Minister de Silva said.

“We are confident that the ECT will be completed within the envisaged time. It is a difficult task in view of the dollar problem.

Banks were also not releasing the dollar deposits of the SLPA earlier but are now doing so, he said.

“Our deposits in banks they have utilized for urgent other national purposes,” he said.

“So they are releasing that money slowly. I am happy that they are releasing that money little by little. So with that we will be able to manage that.”

Continue Reading