Economy

Sri Lanka holds rates; credit up amid sterilized forex interventions

Friday December 28, 2018 7:50 am

ECONOMYNEXT – Sri Lanka’s central bank held rates in December at 9.0 percent, while credit to the state and private sector accelerated amid money printed to enforce fixed interest rates after intervening in forex markets to maintain a soft-pegged exchange rate.

"In spite of the increased cost of funds and tight liquidity conditions, the year-on-year growth of credit to the private sector accelerated since September 2018, partly reflecting the private sector advancing its activities in anticipation of measures by the government and the Central Bank to curb excessive import growth," the soft-pegged central bank said in its December monetary policy statement.

Liquidity runs short when the central bank intervenes in forex markets to defend a peg when a run is triggered on the rupee.

In a soft-peg the central bank then prints money to fill the liquidity shortage (sterilize the intervention) and stop rates from going up and slowing credit, triggering ‘balance of payments’ pressure.

Private credit had expanded by 79 billion rupees to 5,509 billion rupees in November, growing at an annual rate of 16.2 percent, up from 16.1 percent a month earlier.

In November the central bank also dumped tens of billions of rupees in the banking system through a reserve ratio cut and expanded the ability of banks to give loans from future deposits.

A soft-pegged central bank’s monetary operations may appear as credit to government because Treasuries are used to print money into the banking system, despite budget deficits falling or not expanding.

Net credit to government from the banking system accelerated at an annual rate of 9.2 percent in October to 14 percent in November, data showed.

The SRR cut dumped 90 billion rupees in to the banking system in November to sterilize earlier interventions.

But interventions in the forex markets continued generating more shortages.

"The reduction of the Statutory Reserve Ratio (SRR) at the last monetary policy review in November 2018 released around Rs. 90 billion of rupee liquidity to the banking system," the monetary authority said.

"However, the liquidity deficit has widened thereafter, and the Central Bank continued its open market operations (OMOs) cautiously to manage liquidity on overnight, short term and long term basis as appropriate."

The central bank which was injecting printed money into banks at rates around 8.47 percent in the first week of November, injected new money at rates as low as 8.35 percent after a 50 basis point ‘rate hike’ to 9.0 percent from 8.50 percent and a cut in the reserve ration which dumped 90 billion rupees of liquidity in to the banking system.

Sri Lanka operates a highly unstable foreign reserve collecting soft-peg with the US dollar, involving a de facto external anchor with a shifting convertibility undertaking.

The regime suddenly shifts to a floating rate with a domestic anchor made up of a wide near-double-digit inflation target with unsterilized excess liquidity collected during the pegging period intact, sending the rupee sliding down forcing currency defence.

The central bank lost control of the peg in the first quarter of 2018, when the economy recovered, as it failed to mop up inflows (sterilize dollar purchases) and injected cash to generate excess liquidity in April.

Though the peg stabilized around July and August after falling sharply, unsterilized excess liquidity was against built up including through rupee dollar swaps, triggering a renewed period of pressure. The rupee has since fallen to 180 to the US dollar.

In November interventions topped 500 million dollars, amid a political crisis, which added to uncertainty.

When a soft-pegged central bank mops up inflows (liquidity from dollar purchases), the peg strengthens by squeezing credit and outflows.

But when it injects cash through open market operations, credit expands and imports grow beyond dollar inflows generating balance of payments pressure and forcing the currency down.

There have been calls to reform the central bank’s open market operations to make it more difficult for the central bank to generate monetary instability.

Critics have pointed out that the central bank cannot take the risks it did 15 or 20 years ago because Sri Lanka is now more exposed to international capital markets, and monetary instability is amplified by panicking foreign bond holders and credit downgrades, making it more difficult to recover from such periods.

The full statement is reproduced below:

Monetary Policy Review: No. 8 – 2018

The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 27 December 2018, decided to maintain policy interest rates at their current levels. Accordingly, the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) of the Central Bank will remain at 8.00 per cent and 9.00 per cent, respectively. The Board considered current and expected developments in the domestic economy and the domestic financial markets as well as the global economic environment, with the broad aim of stabilising inflation at mid single digit levels in the medium term to enable the economy to achieve its potential growth.

Subpar economic growth continued in the third quarter of 2018 as well

As per the provisional estimates of the Department of Census and Statistics (DCS), the Sri Lankan economy recorded a modest real GDP growth of 2.9 per cent, year-on-year, during the third quarter of 2018, compared to the revised growth of 3.6 per cent in the second quarter of 2018. As per the available economic indicators and other economic developments, real GDP growth is likely to be low in the fourth quarter of 2018 as well, before picking up gradually in 2019. The continued low economic growth reemphasises the need for implementing broad based structural reforms without further delay. 2

Notwithstanding the elevated market interest rates and rupee liquidity deficit, private sector credit growth accelerated

The reduction of the Statutory Reserve Ratio (SRR) at the last monetary policy review in November 2018 released around Rs. 90 billion of rupee liquidity to the banking system. However, the liquidity deficit has widened thereafter, and the Central Bank continued its open market operations (OMOs) cautiously to manage liquidity on overnight, short term and long term basis as appropriate. Given high credit growth and foreign exchange market developments, overnight interest rates in the money market have been maintained close to the upper bound of the policy rate corridor. Other market interest rates remained at elevated levels, both in nominal and real terms.

In spite of the increased cost of funds and tight liquidity conditions, the year-on-year growth of credit to the private sector accelerated since September 2018, partly reflecting the private sector advancing its activities in anticipation of measures by the government and the Central Bank to curb excessive import growth. Nevertheless, with the contraction in net foreign assets of the banking system, the year-on-year growth of broad money (M2b) remained within the expected levels.

Favourable outlook for inflation in the near term

Headline inflation, based on both the National Consumer Price Index (NCPI) and the Colombo Consumer Price Index (CCPI), remained in low single digit levels. Core inflation also remained subdued thus far in 2018. Recent downward adjustments to fuel prices and selected administratively determined prices, as well as the reduction of Special Commodity and telecommunication levies, along with the ongoing recovery in the agriculture sector are expected to impact favourably on inflation in the near term. Volatile global commodity prices, possible weather related disruptions to domestic supply chains due to unpredictable weather patterns, and the possible pass-through of the effect of the rupee depreciation in recent months to domestic prices pose risks to the inflation outlook. The current projections show that inflation, on average, will remain below 5 per cent in 2019 and stabilise in the range of 4-6 per cent thereafter with appropriate policy adjustments.

External sector continues to face international and domestic headwinds

The trade deficit widened further in the first ten months of 2018 with the expansion in import expenditure outpacing the growth of export earnings. However, a moderation in import expenditure is expected, in response to the measures adopted to curb imports of motor vehicles and non-essential goods as well as the impact of the depreciation of the rupee.

While earnings from tourism continued to grow, a slowdown in workers’ remittances was observed. In the financial account, both the government securities market and the Colombo Stock Exchange experienced net outflows of foreign investment, although marginal inflows have been observed in December.

The widening trade deficit, tight conditions in the global markets and excessive speculation in the domestic market exerted pressure on the exchange rate, and the Sri Lankan rupee depreciated by 15.9 per cent against the US dollar thus far during 2018 up to 27 December. Meanwhile, gross official reserves amounted to US dollars 7.0 billion at end November 2018, providing an import cover of 3.7 months.

Policy interest rates maintained at current levels

Although inflation remains subdued and economic growth remains below potential, the Monetary Board of the Central Bank was of the view that it is appropriate to continue the current monetary policy stance to stabilise overall economic conditions and domestic financial markets in a context where there has been an uptick in private sector credit as well as continued pressure on external reserves. Accordingly, the Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels.

Bonds & Forex

Sri Lanka sells Rs120bn in 2030, 2034 and 2037 bonds

Friday September 11, 2026 5:06 pm

ECONOMYNEXT – Sri Lanka has sold 120 billion rupees in 2030, 2034 and 2037 bonds, data from the public debt management office showed.

All offered 70 billion rupees of 01 August 2030 (LKB00530H016) bonds were sold at an average yield of 10.83 percent.

All offered 50 billion rupees of 15 October 2034 (LKB00934J156) bonds were sold at an average yield of 11.96 percent.

All offered 30 billion rupees of 01 July 2037 (LKB01237G019) bonds were sold at an average yield of 12.08 percent.

All 3 bonds are available on tap. (Colombo/Sep11/2026)

Markets

Sri Lanka stocks reverse morning losses to close up

Friday September 11, 2026 3:53 pm

ECONOMYNEXT – Sri Lanka’s Colombo Stock Exchange closed up on Friday trading, CSE data showed, with the benchmark All Share Price Index moving up 0.12 percent.

The ASPI was up 25.00 points at 21,382.74, while the more liquid S&P SL20 was up 0.19 percent, or 11.16 points, at 6,015.08.

Positive contributors to the ASPI were Haycarb (up 5.63 percent at 211.25 rupees), Cargills (Ceylon) (up 2.07 percent at 689.00 rupees), Sampath Bank (up 0.36 percent at 140.00 rupees), and LOLC Holdings (up 1.09 percent at 465.75 rupees).

Ceylinco Holdings (down 2.34 percent at 2,856.50 rupees), John Keells Holdings (down 0.52 percent at 19.30 rupees), Commercial Bank of Ceylon (down 0.24 percent at 204.50 rupees), and Hemas Holdings (down 0.64 percent at 31.10 rupees) were top negative contributors.

Market turnover was 333 million rupees. Capital goods led turnover with 89.85 million rupees.

Galle Face Capital Partners announced it received in-principle approval from the Colombo Stock Exchange for the listing of up to 4,060,218 new ordinary shares by way of a scrip dividend for the financial year ended March 31, 2026.

The Annual General Meeting has been scheduled for September 23, 2026, with the XD date set for September 24, 2026, subject to shareholder approval, and a record date of September 25, 2026.

Shares of Galle Face Capital Partners closed down 2.45 percent at 19.90 rupees. (Colombo/September11/2026)

Stocks & Companies

Sri Lanka Sampath Bank’s Rs10bn debenture issue rated ‘A(EXP)(lka)’ by Fitch

Friday September 11, 2026 1:31 pm

Fitch Ratings – Fitch Ratings has assigned Sampath Bank PLC’s (AA-(lka)/Stable) proposed Sri Lankan rupee-denominated Basel III-compliant subordinated debentures of up to LKR10 billion an expected National Long-Term Rating of ‘A(EXP)(lka)’.

The proposed debentures, which will mature in five and seven years, will be listed on the Colombo Stock Exchange. The bank plans to use the proceeds to supplement its Tier 2 capital base to maintain capital adequacy compliance as well as to support loan book growth.

The bank expects the proposed debentures to qualify as Basel III-compliant regulatory Tier 2 capital. The debentures include a non-viability clause that states they will convert to ordinary voting shares upon the occurrence of a trigger event, as determined by the Governing Board of the Central Bank of Sri Lanka.

The final rating is subject to the receipt of final documentation conforming to information already received.

Key Rating Drivers
Fitch rates the proposed Basel III Tier 2 debentures two notches below the bank’s National Long-Term Rating of ‘AA-(lka)’. This reflects Fitch’s baseline notching for loss severity for this type of debt and our expectations of poor recoveries. There is no additional notching for non-performance risks, as the proposed notes do not incorporate going-concern loss-absorption features.

Sampath’s National Long-Term Rating is used as the anchor rating for this instrument because the rating reflects the bank’s standalone financial strength and best indicates the risk of the bank becoming non-viable.

Fitch affirmed Sampath’s ratings on 17 August 2026. See our latest rating action commentary, Fitch Affirms Sampath Bank at ‘AA-(lka)’; Outlook Stable , for the key rating drivers and sensitivities.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A downgrade of the bank’s National Long-Term Rating will lead to a downgrade of the expected subordinated debt rating.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of the bank’s National Long-Term Rating will lead to an upgrade of the expected subordinated debt rating.

Bonds & Forex

Sri Lanka sells extra Rs8bn Treasury bills after auction

Friday September 11, 2026 12:44 pm

ECONOMYNEXT – Sri Lanka has sold 8,000 million rupees of treasury bills offered on tap at an average rate of 9.24 percent, the public debt management office said, bringing the total of bills sold this week to 88 billion rupees.

Total market subscription was 8,000 million rupees.

The debt office sold a 6-month bill at 9.24 percent.

On Wednesday (9) the debt office raised 80 billion rupees of 3, 6 and 12 month bills.

The 3-month and 6-month bills were later offered on tap. (Colombo/Sep11/2026)

Culture

17,000 applications flood Sri Lanka ministry for 500 state sector jobs

Friday September 11, 2026 12:00 pm

ECONOMYNEXT – Sri Lanka’s Ministry of Buddhasasana, Religious and Cultural Affairs had called for applications to fill 500 vacancies in 25 state institutions under it and received 17,000 applications, Minister Hiniduma Sunil Senevi told Parliament.

The public sector recruitment drive was to resolve labour shortages across the state institutions, he said, including the Central Cultural Fund and the Department of Archaeology.

“All 25 institutions under my ministry, including the Fund and the Department of Archaeology, are places facing severe vacancies,” Senevi said.

Recruitment is proceeding rapidly, with a large round of appointments ranging from executive grades downward recently conducted for both institutions.

The lack of recruitment over an extended period had created critical operational gaps across the cultural sector, he claimed such as a shortage of 850 watchmen in the Department of Archaeology.

Addressing staffing concerns raised regarding locations such as Gal Vihara, Senevi said the Archaeology Department mainly needs watchmen and work assistants to maintain operations.

“The closing date to recruit 500 work assistants was just the other day. Believe it or not, over 17,000 applications have been received,” Senavi said. (Colombo/Sep11/2026)

Fiscal

Sri Lanka officials undergo IMF-backed debt sustainability training

Friday September 11, 2026 11:36 am

ECONOMYNEXT – A 5-day training course on the Sovereign Risk and Debt Sustainability Framework (SRDSF), held in Colombo, focused on developing the technical skills of Sri Lankan officials and international participants.

The IMF South Asia Regional Training and Technical Assistance Center (SARTTAC) organized the training on the SRDSF at the Taj Samudra from September 7 to 11, as part of the IMF’s capacity development program.

The event brings together international participants alongside officials from several Sri Lankan institutions, including the Public Debt Management Office (PDMO) and the Central Bank of Sri Lanka.

“The training focuses on enhancing participants’ technical skills to assess sovereign risks, evaluate debt sustainability, and measure the impact of macroeconomic and financing shocks on public debt, while fostering knowledge sharing and the exchange of international best practices,” the Ministry of Finance said.

Director General of Public Debt Management Office, Sri Lanka highlighted the importance of robust analytical capabilities in guiding sound, evidence-based public debt decisions.

“The training offers a vital opportunity for local officials, particularly within the PDMO to adopt international approaches to debt sustainability analysis and Sovereign risk assessment.”

The expertise gained through the training will strengthen Sri Lanka’s ability to identify and manage emerging sovereign risks within a sustainable financial framework, the ministry said. (Colombo/Sep11/2026)