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Thursday June 1st, 2023

Sri Lanka inflation bigger threat to business than interest rates: CB Governor

ECONOMYNEXT – Steeply rising prices is a bigger threat to businesses than high interest rates which will have to be maintained for a time until inflation start to ease, Central Bank Governor Nandalal Weerasinghe said.

Sri Lanka was now experiencing the result of past money printing and if rates are cut now, runaway inflation could be the result, he said.

“Higher interest rates is a cost to business, but inflation drives up all costs,” Governor Weerasinghe explained in Sinhalese, addressing concerns of businesses.

“Interest rates are raised by a central bank as an independent decision taking into account economic conditions and inflation.

“In a business interest may be 4 to 5 percent of total costs. May even 7 to 8 percent. But 95 percent of the cost is raw materials, transport and salaries. They are going up due to inflation.

“If a small business think that if we cut the current interest rates by half, then the 5 percent of costs can become half. But the rest of the 95 percent of costs can double.

“If we cut rates, inflation can become 100 percent. Then salaries will have to be raised, raw materials will go up, the exchange rate can depreciate.

“By controlling inflation we are helping businesses. By controlling inflation we will control 95 percent of the costs of business. The main thing for manufacturers is to control inflation.”

Sri Lanka rupee fell from 200 to 360 to the US dollar in 2022 after two years of money printing to suppress rates and inflation has hit close to 70 percent by September. The central bank’s policy rate is 15.5 percent but market rates are around 25 to 30 percent.

“Interest rates were kept down for a time,” Governor Weerasinghe said. “In the recent past enough money was printed. We are seeing the result of that.”

“It the rates are kept low then in the future the same results will be repeated. There can be runway inflation.”

When rates are raised credit slows and economic activity slows. However the inflation also takes away purchasing power and if left unaddressed can turn into hyper inflation and even bigger collapse.

This year the economy is expected to contract around 8 percent of gross domestic product as investment and consumption falls as efforts are made to stabilize the economy compounded by lack of capital inflows due to weak confidence and banks also repay foreign credits.

Comments (2)

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  1. Ranjan Perera says:

    The Government’s comment that inflation is a bigger threat than interest rates, seems to contradict the President’s comment that deposit rate caps will be imposed to bring down interest rates.

  2. ANNECUNT says:

    FINALLY WE GOT A CAPABLE CB GOVERNOR
    HOPE HE DOES A GOOD JOB

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  1. Ranjan Perera says:

    The Government’s comment that inflation is a bigger threat than interest rates, seems to contradict the President’s comment that deposit rate caps will be imposed to bring down interest rates.

  2. ANNECUNT says:

    FINALLY WE GOT A CAPABLE CB GOVERNOR
    HOPE HE DOES A GOOD JOB

Sri Lanka cuts policy rates 250 basis points

ECONOMYNEXT – Sri Lanka cuts policy rates 250 basis points lowering the rate at which liquidity is injected to markets to 14.0 percent to from 16.50 percent, saying inflation was falling faster than expected.

“The Board arrived at this decision with a view to easing monetary conditions in line with the faster than expected slowing of inflation, gradual dissipation of inflationary pressures and further anchoring of inflation expectations,” the central bank said.

“The commencing of such monetary easing is expected to provide an impetus for the economy to rebound from the historic contraction of activity witnessed in 2022, while easing pressures in the financial markets.”

“Headline inflation (year-on-year), based on the Colombo Consumer Price Index (CCPI), continued the deceleration path, faster-than-projected earlier, supported by the lagged impact of tight monetary and fiscal policies, strengthening of the Sri Lanka rupee, reduction in fuel and gas prices, normalisation of food prices and the favourable impact of the statistical base effect.

“The full passthrough of the large appreciation of the exchange rate observed recently is yet to be
reflected in the price levels, and it would quicken the disinflation process, as the prices of
imported goods are expected to decline further in the period ahead.”

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Sri Lanka exports down in April, trade deficit up from March, rupee stronger

ECONOMYNEXT – Sri Lanka’s exports fell 12.6 percent from a year ago to 849 million US dollars in April 2023, amid weaker external demand, while imports were down 15.8 percent to 1,431 million Us dollars, central bank data showed.

Exports also fell 1,037 million dollars in March 2023, amid seasonal effects.

The trade deficit expanded to 583 million US dollars in April from 412 million US dollars in March 2023. Imports were at 1431 million US dollars in April from 1,450 million dollars in March.

Imports can pick as tourism, worker remittances and net inflows to government go up.

The rupee continued to appreciate.

“Exchange rate showed a notable appreciation during April 2023 with the continued improvement in liquidity in the domestic foreign exchange market, the discontinuation of the daily guidance on exchange rates,” the central bank said.

Up to April exports were down 9 percent to 3.8 billion rupees and imports were down 28 percent to 5.2 billion rupees and the trade deficit was 1.4 billion rupees.

Investment goods imports were down in April amid a contraction in credit.

“Almost all types of goods listed under the three main investment good categories, namely machinery and equipment, building material and transport equipment, recorded a decline,” the central bank said.

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Sri Lanka President discusses debt restructure, program progress with IMF

ECONOMYNEXT – Sri Lanka’s President Ranil Wickremesinghe has discussed progress of International Monetary Fund program and debt restructuring during a visit of Deputy Managing Director Kenji Okamura, statement said.

“The discussion primarily focused on the progress of the IMF program between Sri Lanka and the IMF,” a statement from President’s office said.

“Attention was also paid to the on-going debt restructuring negotiations.”

State Minister of Finance Shehan Semasinghe, Senior Advisor to the President on National Security and Chief of Presidential Staff Sagala Ratnayake was also in the meeting.

Secretary of the Ministry of Finance Mahinda Siriwardena, Central Bank Governor Nandalal Weerasinghe, Deputy Director of the International Monetary Fund Anne Marie Gulde, and Resident Representative IMF in Sri Lanka Sarwat Jahan, attended this event. (Colombo/June01/2023)

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