ECONOMYNEXT – Sri Lanka will focus policy on boosting growth with inflation ‘well-behaved’ Central Bank Governor W D Lakshman said, after keeping policy rates unchanged in November 2020.
“Given well-behaved inflation, economic growth continues to be the key concern that needs to be addressed urgently,” Governor Lakshman told reporters in an online media briefing.
“The ongoing and expected monetary and fiscal support will help the recovery.”
Sri Lanka’s 12-month inflation measured by the Colombo Consumer Price Index was 4 percent in October, unchanged from a month earlier and nation-wide inflation was 5.5 percent, down from 6.4 percent in September.
Sri Lanka’s economic growth is expected to be a negative 1.7 percent in 2020, after lockdowns in March followed by a strong recovery in the third quarter. But the Coronavirus flared again in October.
Governor Lakshman said falling deposit rates were a concern, but rates would be low until growth became ‘robust’.
“The (Monetary) Board’s consideration was that promotion of investments for the promotion of growth was very important.
“I am not saying it is more important than the deposit rates, but once growth picks up and then growth becomes robust over a period of time, then the consumers problems ought to be sorted out over time.”
Sri Lanka has a history of delaying rate rises – in April 2018 rates were cut and enforced with liquidity injections as credit picked up – triggering currency crises, followed by consumption and output collapses and credit downgrades.
The Central Bank’s Director of Economic Research Chandranath Amarasekera said the third quarter hit would be smaller, given that only parts of the country is in lockdown.
Sri Lanka is following a discretionary inflation targeting framework called ‘flexible’ inflation targeting coupled with a ‘flexible’ exchange rate.
In March the rupee was allowed to fall steeply towards 200 to the US dollar after ‘helicopter drops’ of liquidity injections and spike in credit, triggering a downgrade and import controls.
Private credit started to collapse from April and the rupee stabilized.
The rupee had been pegged around 185 to the US dollar with the central bank largely on the buying side (strong side convertibility), amid weak credit since then, though private credit started to pick up in September and October.
“In the absence of disruptive outflows the exchange rate was well-behaved except for some volatility before the budget was announced,” Governor Lakshman said.
“The speculation driven volatility had been addressed and the exchange rate has stabilized thereafter.”
Sri Lanka’s external current account and the trade deficit had fallen in recent months, and worker remittances had picked up he said.
A trade or current account deficit is a result of a savings investment gap, and weak credit will reduce investments and weak consumption will drive savings, making imports and economic growth fall.
The central bank had bought about 300 million dollars in 2020. Sri Lanka is also under import controls.
However a directed credit drive will begin, the central bank said. (Colombo/Nov20/2020)