Sri Lanka’s monetary easing space limited: Moody’s

Depreciation pressures weighing on the rupee and the private credit which is still running high will leave Sri Lanka’s policy makers with limited space for further easing of the monetary policy, Moody’s Investors Service said in its latest outlook on Asia Pacific sovereigns. Sri Lanka is compelled to ride on a tightening path when most of its Asia Pacific neighbours are easing their monetary policies. Sri Lanka ran loose monetary and fiscal policies, plunging the country into a balance of payment (BoP) and a debt crisis.

The Reserve Bank of India in early April trimmed its benchmark lending rate by 25 basis points after cutting the rate four times in 2015 as low inflation gave them more space to run accommodative monetary policy and so was China. The Bank of Japan yesterday maintained its negative rates set in January, although extra stimulus was largely expected to fight the deflation and spur the economy. “In Sri Lanka, high government debt and reliance on external financing leaves the authorities with limited fiscal and monetary policy space,” Moody’s said in a report which looks at how Asia Pacific sovereign quality would be played out by the leverage risk, rebalancing of China and policy effectiveness of those countries. Moody’s has a B1 rating with a Stable outlook on Sri Lanka’s sovereigns. The global rating agency also warned that, “the negative economic shocks such as renewed deterioration in the terms of trade or softer export demand,” could threaten economic growth. Sri Lanka’s economy grew 4.8 percent in 2015, lower than 4.9 percent in 2014 but the country’s Central Bank expects the economy to grow at 5.8 percent this year, a much conservative estimate than the government’s 6.5 percent target. The possible deterioration in terms of trade, Moody’s said, would weigh on already low government revenues and increase external vulnerability, exacerbating Sri Lanka’s credit weaknesses. Sri Lanka’s import bill doubled its export income, creating a huge trade imbalance but the external situation could get much worse this year as the remittance flows which bail out the country every year is expected to slow down while debt commitments to the tune of US $ 4.5 billion during the next 12-months could also weigh on the external front as well as government’s finances dearly.

The impending US $ 1 to 1.25 billion package with the International Monetary Fund is a far cry from solving the country’s external debt commitments. Sri Lankan government which is desperate for dollars to cushion the external reserves, which are fast depleting, gave an ultimatum to the exporters to bring their moneys soon or face consequences