Sri Lanka keeps rates down as credit rages, rupee falls
ECONOMYNEXT – Sri Lanka’s central bank kept rates unchanged in November backed by heavy money printing while bank credit grew at a blistering pace, deficit spending continued unabated and the rupee fell to a new historic low.
In September private credit growth was up 22.2 percent in the year to September 2015 accelerating from 21.3 percent in August. Services sector credit growth was 40.6 percent and industry was 24.5 percent.
Central Bank Governor Arjuna Mahendran said Monday that Sri Lanka could not cut rates because India was cutting. But in India, credit growth has plummeted with industrial credit negative and anaemic growth in other sectors.
Broad money growth (defined as M2b) was up 16 percent in September 2015, down from 16.8 percent.
Sri Lanka’s consumer prices in Colombo rose 1.7 percent and a core inflation index which tracks mostly non-traded items rose 4 percent. A new country-wide index had measured inflation at 3.0 percent.
The central bank however said it was keeping interest rates frozen at 6.0 percent to withdraw liquidity and 7.5 percent to inject liquidity.
The monetary authority had been printing money heavily outside of the overnight open market operations buying up at least 3-month Treasury bills at rates below the 7.5 percent liquidity window to generate a balance of payments pressure.
The rupee had so far collapsed from 131 to the US dollar when the new administration took power to 143 to the US dollar on November 24.
In November reserves were boosted by the sale of a 1.5 billion US dollar bond from 6.8 billion US dollars to 8.0 billion US dollars. Though much of the bond proceeds were sterilized, a part of it was converted for fiscal spending.
During the month more money was printed by repaying maturing Treasuries with central bank credit, creating more demand and imports and a need to defend the peg.
A so-called ‘float’ of the currency in September had failed, amid continued money printing.
Long term watchers of the Central Bank say Sri Lanka’s monetary policy had deteriorated to a level not seen since 2004, when a so-called ‘Rata Perata’ economic policy was adopted.
Some analysts say the new administrations reform efforts could be derailed if the monetary policy stance of the central bank continues and labour unrest and hardship increase.
In the 1980s benefits of Sri Lanka’s economic reforms failed to reach the people allowing them to be partly reversed, because of weak macro-economic management. (Colombo/Nov24/2015)