Sri Lanka may get BOP trouble if rates are cut: CB Governor

ECONOMYNEXT – Sri Lanka could have balance of payments trouble if rates are cut when imports are expanding and the current account is widening, Central Bank Governor Indrajit Coomaraswamy said after holding rates at the June policy meeting.

"There is great pressure to loosen policy to boost economic activity when elections are coming," Governor Coomaraswamy told reporters.

However pumping money in to the economy was unwise when there were signs that imports are going up, he said.

Sri Lanka was also facing some emerging market outflows with US rates going up, and it was not a good idea to immediately narrow the rate gap, he said.

He said recent pressure on the exchange rate came from and underlying strengthening of the US dollar.

However there was an output gap, and inflation was also falling, which was favourable for a rate cut he said.

At the moment real interest rates were positive by about 5 percent with inflation around 4-5 percent, but real credit growth was also in excess of 10 percent, he said.

Sri Lanka had to make structural reforms to boost growth and not depend on pumping money which can only temporarily boost consumption, he said.

Pumping money could drive the country towards a balance of payments trouble, he said. Sri Lanka’s economy grew 3.2 percent in the first quarter, and the central bank is expecting 4.0 to 4.5 percent growth in 2018. (Colombo/July06/2018)
 

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