Cheap credit, low taxes fuel import bill
As widely expected, the Central Bank yesterday kept the policy rates steady for the second consecutive month after it made a surprise 50 basis cut in April 2015 amid credit to private sector picking up in the low inflation economy.
“In this background, the Monetary Board was of the view that the current monetary policy stance is appropriate,” the Central Bank said, releasing its June monetary policy.
As a result, the Standing Deposit Facility Rate (SDFR), the rate at which the Central Bank mop up excess liquidity, was left at 6 percent, while the Standing Lending Facility Rate (SLFR), the rate at which the liquidity is injected, was left at 7.5 percent.
The credit in the economy is seen picking up gradually as the total loans grew by 20.9 percent year-on-year (YoY) while the private credit grew by 15.2 percent, both picking up from 19.9 percent and 13.9 percent, respectively from a month ago.
The projected private credit growth for 2015 is 15.5 percent.
In absolute terms, the private credit has grown by Rs.25 billion a month on average up to April 2015.
“Meanwhile, the increase in net credit to the government and state-owned enterprises (SOEs) by the banking sector also contributed to the monetary expansion,” the Central Bank said. Broad money supply (M2b) recorded a YoY growth of 13.9 percent in April 2015, in excess of the projected 12 percent for 2015.
The Central Bank cut its policy rates in April in a bid to stimulate the slowing economy as well as to reduce the debt servicing costs largely tilted towards the domestic banking sector.
The Sri Lankan economy slowed to 6.4 percent in the first quarter, after growing at 7.6 percent in the same quarter in 2014 and 7.4 percent for the whole of 2014. The Central Bank in May cut its 2015 growth outlook to 7 percent from an earlier projected 8 percent, mainly due to the slowdown in state investments.
Due to the still benign inflation, the Central Bank’s monetary policy is weighing towards the easing side and it was only last week the Standard Chartered Bank said they expect another 50 basis points reduction in policy rates in the second half of this year due to low inflation and moderating growth.
The headline inflation edged up to 0.2 percent in May, after remaining below 1 percent for four consecutive months.
Central Bank Governor Arjuna Mahendran has recently said the current low interest rates are sustainable but the intervention in the foreign exchange market would be done away with.
Meanwhile, the combined impact of the cheaper bank credit translating into higher imports and the tax adjustments favouring the importation of lower engine capacity motor vehicles have resulted in increased imports, the Central Bank further said.
In the absence of strong dollar inflows, this is putting pressure on the Sri Lankan rupee.
Sri Lanka’s trade deficit (imports over exports) widened by 15.1 percent YoY in April to US $ 783 million while the first four months’ deficit expanded by 3.9 percent to US $ 2.7 billion.