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Thursday June 1st, 2023

Sri Lanka’s shares gain on hopes of securing IMF

ECONOMYNEXT – Sri Lanka’s stocks gained on Wednesday on positive sentiments as the final decision on the long delayed International Monetary Funds extended loan facility is expected in March, brokers said.

“The market is running on a rumors based on securing of an IIMF loan by the end of March as promised” an analyst said.

The All Share Price Index (ASPI) gained 0.37 percent, or 34.2 points, to reach 9,222.68.

The loan from the IMF was originally expected in December of last year, but it is now expected in the second quarter.

As creditors of the island nation, India and the Paris Club have given specific assurances to restructure the sovereign debt of Sri Lanka’s external borrowing.

Meanwhile, China has given a two-year moratorium and promised to restructure debt, but Sri Lanka has sought a more specific assurance in line with the IMF deal.

China has not yet given such assurances and has instead called for relief from the World Bank, Asian Development Bank, and the IMF, which are considered “senior debt” under current resolution frameworks and are insulated.

The market saw a Net foreign inflow of 34.2 million rupees and so far for 2023, the market has recorded a total Net foreign inflow of 2.3 billion rupees.

Meanwhile on Wednesday, rupee closed at 353.46/353.50 to the US dollar in the spot market Wednesday hitting the strong end of a guidance peg.

The central bank has been buying dollars steadily over week, market participants said.

As the rupee appreciates and the central bank buys dollars filling liquidity shortages in the banking system, interest rates tend to fall.

The most liquid index, S&P SL20, closed 0.31 percent, or 8.54 points, down at 2,805.26.

The market saw a turnover of 1.2 billion rupees on Wednesday, lower than this year’s daily average of 1.8 billion rupees and the 2022 average turnover of 2.9 billion rupees.

The top losers were John Keells Holdings, Hayleys Holdings and Sampath Bank. (Colombo/Mar 01/2023)

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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 in its May policy statement.

“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.”

Sri Lanka’s balance of payments has been surplus for several months and the central bank has allowed the rupee to appreciate. When the BOP is in surplus and as long as the central bank can buy dollars and generate liquidity rates can fall.

“With greater macroeconomic stability being achieved through corrective policy measures, particularly in terms of faster-than-expected deceleration of inflation thus far during 2023 and the benign inflation outlook and the easing of the BOP pressures, the Monetary Board of the Central Bank of Sri Lanka, upon carefully assessing the current and expected developments, decided to relax the stance of monetary policy and reduce the policy interest rates.”

Market rates however has been high amid expectations of a domestic debt re-structuring and mainly government borrowings, with private credit negative and state enterprises also cutting losses.

Loans from the Asian Development Bank has started to come. More funding is also expected from the World Bank further easing government funding. Foreign funding of the budget can widen the trade and current account deficit without harming the balance of payments.

In April the balance of payments was 883 million dollars in surplus after meeting payments including to the International Monetary Fund, slightly up from 858 million dollars in March.

The full statement is reproduced below:

The Central Bank of Sri Lanka relaxes its Monetary Policy Stance

The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 31 May 2023, decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 250 basis points to 13.00 per cent and 14.00 per cent, respectively.

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 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.

Inflation is projected to decelerate notably in the period ahead, reaching single digit levels
earlier than expected

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. The favourable statistical base effect due to large month-on-month inflation that materialised during the last year is expected to slow inflation significantly in the next few months as well. Accordingly, as per the latest projections of the Central Bank, headline inflation is forecast to reach single digit levels in early Q3-2023, and stabilise around mid single digit levels over the medium term

The external sector, which underwent an unprecedented setback in 2022, begins to
demonstrate improved performance

During the four months ending April 2023, the trade deficit decreased notably, compared to a year earlier, reflecting mainly the subdued import expenditure, which outweighed the impact of moderation of external demand for merchandise exports. Inflows to the domestic forex market remain robust following the approval of the Extended Fund Facility (EFF) from the International Monetary Fund (IMF). The significant revival of workers’ remittances and earnings from tourism continued to build resilience in the external sector.

The renewed foreign investor appetite for short term government securities has also helped improve forex liquidity in the recent months.

The exchange rate, which is allowed to be determined by market forces, continues to reflect positive market sentiments underpinned by the improvement in liquidity in the domestic forex market. The Central Bank has absorbed a sizeable amount of foreign exchange from the domestic forex market thus far in 2023, resulting in a steady increase in gross official reserves (GOR). As of end May 2023, the level of GOR is estimated to have surpassed US dollars 3 billion, including the swap facility from the People’s Bank of China.

Reflecting the improved balance of payments (BOP) conditions, the Central Bank relaxed the cash margin deposit requirements imposed on selected imports in May 2023, and further measures will be initiated to loosen capital flow restrictions in the period ahead. Further, the Monetary Board viewed that a gradual phasing out of the existing import restrictions would need to commence soon.

The continuation of the IMF-EFF supported programme, further financial assistance from international development partners, such as the Asian Development Bank (ADB) and the World Bank, and renewed investor appetite, coupled with the advances in the debt restructuring process, are expected to ease the BOP constraint significantly in the period ahead, supporting the recovery in domestic economic activity. (Colombo/June01/2023)

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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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