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Sunday March 26th, 2023

Sri Lanka’s central bank holds rates watching tax cuts, budget deficit

ECONOMYNEXT – Sri Lanka is holding policy rates at current levels, amid a widening the budget deficit so far this year and recent tax cuts announced to stimulate economic activity, which need clarity, the central bank said.

“…[R]ecent tax revisions would support lower inflation and higher economic growth in the short term, but was of the view that greater clarity with regard to the medium term fiscal path of the government is required to assess the impact on the economy over the medium term,” the central bank said in it November monetary policy review.

Sri Lanka’s cabinet of ministers had announced a cut in value added tax from 15 to 8 percent and while a non-recoverable 2 percent tax on domestic goods and services will be dropped from December 01.

Other cuts have also been announced for personal income tax, a debit tax on financial transactions, a debt service levy on banks, removal of taxes from information technology, for which a date has not been set.

Officials have said a revival in economic activities would boost tax revenues eventually keeping the deficit at 5 percent of gross domestic product in 2020, while spending will be slashed.

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The central bank said there was a slight increase in deposit rates after price controls were lifted, but it still expected lending rates to fall further.

“Specifically, the Average Weighted Prime Lending Rate (AWPR) is expected to reduce by a further 70 basis points to 9.50 per cent by end 2019, while the Average Weighted Lending Rate (AWLR) is projected to decline by around 120 basis points to below 12.50 per cent by March 2020,” the central bank said.

“Interest rates on the stock of deposits continued to decline, while interest rates on new deposits, which declined notably until September 2019, showed some increase in the month of October 2019, following the removal of the cap on deposit interest rates of licensed banks.”

The central bank said private credit grew 26 billion rupees in October, state enterprises borrowed 34 billion rupees and credit to central government was flat.

The central bank is holding is policy rate at which printed money is injected to the market at 8.0 percent and the rate at which excess liquidity is removed at 7.0 percent.

However it can inject large volumes of excess liquidity at any time to keep overnight rates below 8.0 percent, especially when private or state domestic credit picks up.

The injections tend to de-stabilize a highly non-credible peg with the US dollar, which is labelled a ‘flexible exchange rate’.

Sri Lanka’s tax revenues were hit and private credit slowed in 2019, after the flexible exchange rate collapsed in 2018 as liquidity injections were made to target a call money rate, generating an output shock, worsening the deficit and pushing up bad loans, analysts have said.

Growth fell to 1.6 percent as suicide attacks on Easter Sunday added to the effects of the currency collapse.

“Economic growth is predicted to be modest during the remainder of the year, with likely subpar growth in Industry and Services activities as implied by leading indicators,” the central bank said.

“However, improved investor confidence, supported by political stability and fiscal stimulus driven boost to aggregate demand, is expected to drive short term growth.

“The introduction of an appropriate policy mix, which utilises the available limited policy space prudently, would support the economy to reach as well as enhance its potential over the medium term.”

Inflation is expected to be around 4-6 percent, the central bank said.

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Sri Lanka seeks to settle India ACU debt, credit lines over 5-years

ECONOMYNEXT – Sri Lanka has requested India to settle payments due to the country under the Asian Clearing Union mechanism and credit lines given in 2022 over 5 years, Indrajit Coomaraswamy, an advisor the island’s government said.

Sri Lanka is negotiating with India to settle the money over a 5-year period, Coomaraswamy, a former central bank governor told an online forum hosted by the Central Bank.

“Our request from the Indians is to settle it over five years,” he said. “That I think is still in the early stages of negotiation. The same with the one billion line of credit.”

Sri Lanka’s central bank owed the ACU 2.0 billion US dollars to the Asian Clearing Union according to a year end debt statement, issued by the Finance Ministry.

Sri Lanka owned India, 1,621 million dollars according to ACU data by year end, excluding interest.

India has given a 1 billion US dollar credit line to Sri Lanka as well a credit line for petroleum.

Sri Lanka in March 2024 has paid 121 million US dollar out of a 331 million US dollar IMF tranche to settle an Indian credit line.

Indian credits were given after the country defaulted in April 2022 as budget support/import when most other bilateral lenders halted giving money. (Colombo/Mar26/2023)

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Sri Lanka coconut auction prices up 1.16-pct

ECONOMYNEXT- Sri Lanka’s coconut auction prices went up by 1.16 percent from a week ago at an auction on Thursday, data showed.

The average price for 1,000 nuts grew to 83,219.45 from 82,260.58 a week earlier at the weekly auction conducted by Sri Lanka’s Coconut Development Authority on March 23.

The highest price was 92,500 rupees for 1,000 nuts up from the previous week’s 90,600 rupees, while the lowest was 76,500 also up from 70,000 rupees.

The auction offered 900,010 coconuts and 583,291 nuts were sold. (Colombo/Mar 26/2023)

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Sri Lanka in talks for billion dollar equivalent Indian rupee swap

ECONOMYNEXT – Sri Lanka is in talks with India for a billion US dollar equivalent Indian rupee central bank swap, to facilitate trade, Indrajit Coomaraswamy, ad advisor to the government said.

“The amount is still uncertain it could be up to the equivalent of a billion US dollars,” Coomaraswamy told an online forum hosted by Sri Lanka’s central bank.

The money will be used to facilate India Sri Lanka trade, he said.

India has been trying to popularize the use of Indian rupees for external trade and also encouraged Sri Lanka banks to set up Indian rupee VOSTRO accounts.

However the first step in popularizing a currency for external trade is to get domestic agents, especially exporters, to accept their own currency for trade, like in the case of the US or EU, analysts say.

India’s billion US dollar credit to Sri Lanka given during the 2022 crisis is settled in Indian rupees (transaction need).

However the Indian government itself has chosen to denominate it in US currency for debt purposes (future value).

In most South Asian nations, receivers of remittances are willing to accept domestic currencies, leading to active VOSTRO account transactions.

Sri Lanka is expected to repay a 400 million US dollar swap with the Reserve Bank of India next year under an International Monetary Fund backed program for external stability and debt re-structuring.

Central bank swap proceeds sold to banks, which are then sterilized with inflationary open market operations, can trigger forex shortages and currency crises, analysts warn.

Sri Lanka went to the International Monetary Fund after two years of inflationary monetary operations by the central bank’s issue department (money printed to suppress interest rates) triggered the biggest currency crisis in its history and external sovereign default.

Sri Lanka had gone to the IMF 16 times with similar external troubles except for the April 2003 extended fund facility under Central Bank Governor A S Jayewardene which was a purely reform-oriented program with the World Bank (PRGF/PRSP) program at a time when he was collecting reserves with deflationary monetary policy and perhaps the lowest inflation since the Bretton Woods collapsed. (Colombo/Mar26/2023)

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