Sri Lanka’s monetary authority yesterday left the key policy rates unchanged though many expected the rates would be raised to curb pressure on the currency and to slow the foreign exit from bond markets. Both Standing Deposit Facility Rate and Standing Lending Facility Rate were kept steady at 6.50 percent and 8.0 percent respectively, while leaving the banks’ reserve ratio unchanged at 7.50 percent. In a much awaited monetary policy decision last eveningperhaps the last one before a fund arrangement with the International Monetary Fund– the Monetary Board held key rates steady as it believed there is a time lag in the monetary policy transition while the forthcoming fiscal consolidation measures too will cool down unwarranted monetary expansion.
“Going forward, the growth of monetary aggregates is expected to decelerate gradually over the remainder of the year, reflecting the impact of the upward movement in market interest rates, while the envisaged fiscal consolidation path is expected to support the moderation of monetary expansion,” the monetary policy statement said. The first of such fiscal reforms – the increase of personal and corporate income tax rates – is to be made effective from April 01, 2016 and the circular to that effect was issued yesterday
As announced by the Prime Minister, the concessionary corporate income tax has been raised to 17.5 percent from the earlier announced 15 percent while the earlier announced personal income tax free threshold of Rs.2.4 million was withdrawn and the employment income now made liable for tax from Rs.750,000 onwards. It is expected the increase of Value Added Tax to 15 percent from the current 11 percent will also be implemented soon. Meanwhile, the private sector credit in January 2016 expanded by 25.7 percent yearon- year or Rs.43.6 billion, slightly higher than 25.1 percent growth in December 2015.
However on an absolute term, the credit extended to the private sector narrowed to Rs.43.6 billion in January 2016 from Rs.44 billion a month earlier. With the bank’s lending rates already gone up by over 200 basis points during the last 3 months and a liquidity crunch biting the banks, the sector is now seeing a significant slowdown in demand for expensive bank credit. However the money supply in the economy measured by the broad money (M2b), has remained high at 19.1 percent in January 2016 in comparison to 17.8 percent a month ago. This is also expected cool down. The Central Bank does not want to grow private credit more than 15 percent this year but even the achievement of such growth is challenging once the full impact of the monetary and fiscal tightening measures feed through to the economy. The year 2015 saw private credit of Rs.691 billion – the highest recorded in the history. “In the monetary sector, market interest rates have risen, reflecting the tightening monetary conditions and the transmission of policy actions of the Central Bank,” the monetary policy statement noted. Meanwhile the core-inflation – the underlying inflation in an economy – remains a worrying sign as it registered a high 5.7 percent in February 2016, rising from 4.6 percent in January.
Rupee forwards decline for fifth session
REUTERS: Sri Lankan rupee forwards fell for a fifth straight session yesterday due to dollar demand by importers and foreign investors selling bonds amid low liquidity in the greenback. Dealers said importers were buying the greenback at record low levels.
The spot rupee, which has not been active since Jan. 27, did not trade. The Central Bank has fixed the spot trading price at 143.90 through moral suasion. One-week rupee forwards, which act as a proxy for the spot currency, were traded as low as 149.10 per dollar and ended at 149.00/15, down from Monday’s close of 148.10/30. The one-week forwards have fallen around 3.4 percent since they started to trade after Jan. 27. “We have seen some panic importer buying also, as importers expect the rupee to depreciate further,” said a currency dealer asking not to be named.
The steep fall comes ahead of the Central Bank’s key policy rates announcement later in the day. The rupee is under pressure due to foreign investors exiting from government securities amid speculation over further rate hike by the U.S. Federal Reserves and economic woes. Rising debts, rating downgrades and revisions by rating agencies, slowing economic growth, widening fiscal deficit, looming balance of payments crisis, and changes in budget proposals have dented investor sentiment. Finance Minister Ravi Karunanayaka said last week that Sri Lanka borrowed over 25 percent more last year than in 2014, blaming the high cost of refinancing loans raised by the previous government without parliamentary approval.
Analysts said short-term borrowing has gone up and the debt roll-over cycle is getting shorter. Borrowings are expected to increase and that could raise dollar borrowing rates in future unless remittances and exports grow. Foreign investors sold Rs.17.58 billion worth of government securities in the week ended March 23, data from the Central Bank showed, taking the total offloaded since Dec. 30 to Rs.83.7 billion ($570.16 million).
Sri Lanka to raiseUS $3bn in sovereign bonds this year
Sri Lanka is planning to raise US $ 3 billion through international sovereign bond issues this year, the Public Debt Department of the Central Bank said yesterday. “The issuances in single or multiple tranches would be in US Dollar and Chinese Renminbi (Panda / Dim Sum) with a fixed coupon and medium to long term maturities where non-resident investors will be eligible to invest at the primary issuance,” the Central Bank said.
Accordingly, the Central Bank invites proposals prepared by banks and investment houses for consideration to be appointed as Lead Managers/Book Runners on these issuances on or before April 11, 2016.