Monday, November 28, 2016

Sri Lanka maintains rates as credit growth decelerates

    Sri Lanka's central bank maintained its key policy rates, saying the growth of credit had decelerated as it had expected and demand pressures are expected to remain well contained so "inflation is expected to remain stable in mid-single digit level in the period ahead."
    The Central Bank of Sri Lanka has raised its two key rates by 100 basis points this year to slow the growth in private sector credit from commercial banks, which eased to annual growth of 25.6 percent in September from 27.3 percent in August and 28.5 percent in July.
    Nevertheless, broad money grew by an annual rate of 18.4 percent in September, up from 17.3 percent in August, as public sector borrowing expanded.
    Liquidity in the domestic money markets, however, have returned to a balanced level, the central bank said, adding this will help stabilize market rates at current levels.
    Sri Lanka's inflation rate rose to 4.2 percent in October from 3.9 percent in September, with changes in taxes - Value-Added Tax has been raised to 15 percent and a Nation Building Tax began on Nov. 1 - expected to have a one-off impact while the overall impact of the 2017 budget on inflation is seen as favorable.
   The central bank noted the trade deficit had contracted by 12 percent in September from the same month last year as export earnings grew for the second consecutive month while import expenditure declined.
   Gross official reserves were estimated at US$6.1 billion at the end of October, down from $6.5 billion end-September while the exchange rate of the Sri Lankan rupee was trading at 148.4 to the U.S. dollar today, down almost 3 percent since the start of this year.
    Economic activity in Sri Lanka in the second quarter of this year was hit by adverse weather, with growth decelerating to an annual rate of 2.6 percent from 5.2 percent in the first quarter.
    The central bank raised its two key rates, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) in February and July.    SLFR now stands at 7.0 percent and the SDRF at 8.50 percent.

    The Central Bank of Sri Lanka issued the following statement:
   "As envisaged, the growth of credit extended to the private sector by commercial banks decelerated considerably during September 2016, in response to monetary policy measures adopted by the Central Bank since end 2015. Accordingly, the year-on-year growth of private sector credit by commercial banks was recorded at 25.6 per cent in the month of September 2016 compared to 27.3 per cent in the previous month.
Despite the deceleration in credit extended to the private sector, broad money (M2b) growth accelerated to 18.4 per cent, year-on-year, in September 2016 in comparison to 17.3 per cent recorded in the previous month, as borrowings by the public sector from commercial banks expanded during the month. In the meantime, rupee liquidity conditions in the domestic money market have returned to a balanced level, which will help stabilise market interest rates at current levels.

Headline inflation as measured by both the National Consumer Price Index (NCPI) and Colombo Consumers’ Price Index (CCPI) remained stable around mid-single digit levels in October 2016. Further, core inflation based on both NCPI and CCPI remained unchanged in the month of October 2016 compared to the previous month. The adjustments made to the tax structure by the government are expected to have a one-off impact on inflation from November 2016 while the overall impact of the Budget 2017 on inflation is estimated to be favourable. Aggregate demand pressures are expected to remain well contained supported by the pre-emptive monetary policy measures coupled with the continuation of the envisaged fiscal consolidation process, and as a result, inflation is expected to remain stable in mid-single digit level in the period ahead.

On the external front, the deficit in the trade balance contracted by 12.0 per cent, year-onyear, in the month of September 2016 as export earnings recorded a growth for the second consecutive month amidst the contraction in expenditure on imports. Earnings from tourism were estimated to have increased by around 14.6 per cent during the first ten months of 2016, while workers’ remittances recorded a growth of 3.5 per cent during the same period. The gross official reserve position was estimated at US dollars 6.1 billion at end October 2016, while the Sri Lankan rupee depreciated by 2.6 per cent against the US dollar thus far during 2016. Meanwhile, Sri Lanka received the second tranche of the Extended Fund Facility (EFF) Programme with the International Monetary Fund (IMF) in November 2016, after the successful completion of the first review of the Programme by the IMF. The continuation of the EFF Programme is expected to strengthen the economy by facilitating medium to long term financial inflows in the period ahead.

Considering the above developments, the Monetary Board, at its meeting held on 28 November 2016, was of the view that the current monetary policy stance is appropriate, and decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 7.00 per cent and 8.50 per cent, respectively."

    Inflation rose to 4.2 percent in October from 3.9 percent in September
    Economic activity in the second quarter was hit by adverse weather, with growth decelerating to an annual rate of 2.6 percent from 5.2 percent in the first quarter.
    After remaining large stable from September 2013 to August last year, the rupee has been depreciating, with the pace picking up since September. The rupee was trading at 148.4 to the U.S. dollar today, down almost 3 percent since the start of this year.

COLOMBO, Nov 25 Sri Lanka's central bank is
expected to keep its key interest rates steady on Tuesday, a
Reuters poll showed, amid slowing inflation and credit growth
after past tightening measures.
    The central bank has already tightened its monetary policy
stance three times since December, to fend off pressure on a
fragile rupee currency and curb stubbornly high credit growth
that has pushed up inflation.
    Nine out of 13 economists surveyed in the poll expect the
central bank to keep both its standing deposit facility rate
(SDFR) and standing lending facility rate (SLFR) unchanged at
7.00 percent and 8.50 percent, respectively.
    One economist expected a 50-basis-point hike in both policy
rates while three expected a 25-bps hike. All 13 economists
expect the statutory reserve ratio (SRR) to stay at 7.50
    "With inflation still fairly low, we think there's a good
chance that rates will be left on hold again this month," said
Oliver Jones, assistant economist at Capital Economics Ltd.
    "But inflation is set to pick up now that value-added tax
(VAT) has been raised back to 15 percent, and the election of
Donald Trump in the U.S. arguably increases the chances of
fiscal loosening in the U.S., which might prompt the Fed to
raise interest rates aggressively next year, putting the rupee
under pressure."
    He said it will not be too long before the central bank
resumes its tightening cycle.
    But analysts said tight fiscal policies could mean the
central bank has room to hold off from raising interest rates
next year. 
    Meanwhile, the rupee has come under pressure because of
lower interest rates, higher imports, and foreign outflows from
government securities last year.
    The currency is under pressure due to dollar demand from
importers who fear the economic policies of U.S. President-elect
Donald Trump could lead to a rise in the greenback and interest
    Dealers said foreign investors might pull out of emerging
markets, including Sri Lanka, if the U.S. Federal Reserve raises
interest rates next month.
    The International Monetary Fund (IMF) said on Saturday that
Sri Lanka's macroeconomic and financial conditions have begun to
stabilise and the island nation's performance under its $1.5
billion loan programme is satisfactory.     
    The central bank has raised both the SDFR and the SLFR by 50
bps each in February and July. That followed an increase of 150
bps in commercial banks' SRR in December. 
    Following are poll forecasts for rates on Tuesday: 

On November 18, 2016, the 

Executive Board of the International Monetary Fund (IMF) completed the first review of Sri Lanka’s economic performance under the program supported by a three-year extended arrangement under the Extended Fund Facility (EFF) arrangement. Completion of the review enables the disbursement of the equivalent of SDR 119.894 million (about US$ 162.6 million), bringing total disbursements under the arrangement to the equivalent of SDR 239.788 million (about US$ 325.1 million).

Sri Lanka’s three-year extended arrangement was approved on June 3, 2016 in the amount of about SDR 1.1 billion (US$1.45 billion, or 185 percent of quota in the IMF at that time. See 

Press Release No. 16/262). The government’s reform program, supported by the IMF, aims to reduce the fiscal deficit, rebuild foreign exchange reserves, and introduce a simpler, more equitable tax system to restore macroeconomic stability and promote inclusive growth.

MBO, Nov 19 (Reuters) - The International Monetary Fund (IMF) on Saturday said Sri Lanka's macroeconomic and financial conditions have begun to stabilize and the island nation's performance under its $1.5 billion loan programme is satisfactory.
The global lender, after completing the first review of Sri Lanka's economic performance, also said inflation has trended down and the balance of payments has improved, though international reserves remain below comfortable levels.
The completion of the review enables the second IMF disbursement of $162.6 million under the loan, bringing the total disbursements to $325.1 million.
"Fiscal performance has been encouraging. The reinstatement of the amendments to the value added tax (VAT) will help boost revenues," the IMF said in a statement.
"The 2017 budget proposal aims to strengthen government finances through revenue mobilization, while guarding against revenue shortfalls by aligning spending with revenue on a quarterly basis."
It also said complementary structural reforms in tax administration, public financial management, and the governance and oversight of state-owned enterprises are critical for durable fiscal consolidation.
Budget proposals presented in Sri Lanka last week included revisions to corporate and withholding taxes to boost revenue and cut the 2017 fiscal deficit to 4.6 percent of GDP from this year's 5.4 percent.
The IMF has set a 4.7 percent budget deficit target next year.
The government also aims to boost its 2017 tax revenue by 27 percent to 1.82 trillion rupees ($12.35 billion) year on year, to meet a commitment given to the IMF in return for the loan.
Parliament last month passed a bill to raise VAT by 4 percent with effect from Nov. 1 in a move to boost government revenues, months after two court rulings delayed the move.
Facing both debt and a balance of payments crisis, Sri Lanka sought IMF loan early this year while expressing its willingness for fiscal reforms with an aim of reducing the budget deficit to 3.5 percent of the GDP in 2020.
Since the IMF approved the loan, the central bank has raised key monetary policy rates by 50 basis points and stopped defending the local rupee currency by selling dollars.

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nov. 10 (Xinhua) -- Sri Lanka's economic growth is likely to increase from 5.5 percent in 2016 to 6.3 percent in 2017, helped by a growth in tourism, information technology, logistics and Chinese investments, the central bank said on Thursday.
Releasing its half yearly publication, Recent Economic Developments: Highlights of 2016 and Prospects for 2017, the central bank said the higher growth potential is envisaged to be achieved mainly through productivity improvements supported by the adoption of new technology across production sectors as well as through the digitalisation of the economy, which would pave the way for increased market access and efficient information flow in the economy.
The medium term growth outlook would also be supported through the consolidation of investment activities with the participation of both the public and private sectors.
Foreign investments are expected to perform an enhanced role, particularly in areas where Sri Lanka has relative advantage, such as information technology, related services and logistics.
The rise in income levels from the expected developments in all sectors of the economy would help Sri Lanka graduate to upper middle income status, and per capita GDP is expected to rise to over 5,500 U.S. dollars by 2020, the bank said.


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