Sri Lanka keeps policy rates steady

Sri Lanka yesterday decided to keep the policy interest rates steady as the Central Bank said the impacts of the previously employed monetary policy tightening measures were yet to be reflected fully on the economy.

A c c o r d i n g l y s t a n d i n g deposit facility rate (SDFR) and standing lending facility r a te (SLFR) wer e kept unchanged at 6.50 percent and 8.00 percent respectively. The statutory reserve ratio (SRR) on banks was also kept unchanged at 7.5 percent. Sri Lanka raised its policy rates by 50 basis points in February in a bid to cool down an overheating economy as excessive credit growth was seen fuelling demanddriven inflationary pressures. “Going forward, a gradual slowdown in money and credit expansion is expected in the period ahead, as the recent monetary policy measures are expected to have an impact on the economy with some time lag,” the Central Bank said. The bank also said market interest rates have risen reflecting the tight monetary conditions in the economy. Credit granted to the private sector by commercial banks increased by 26.5 percent in February 2016, on a year-onyear basis, compared to 25.7 percent in January 2016.

In absolute terms, credit granted to the private sector grew by Rs. 53.7 billion. Driven by the expansion in domestic credit aggregates, broad money (M2b) recorded a yearon- year growth of 19.8 percent in February 2016, compared to 19.1 percent in the previous month. Sri Lanka is banking on a possible International Monetary Fund (IMF) funding package to overcome economic woes. The country’s mounting debt pile and dwindling reserves prompted Fitch Ratings to downgrade its sovereign rating and Standard & Poor’s to cut the outlook to negative

According to the government statistics, Sri Lanka is under a whopping Rs.8, 475 billion debt burden, which is equivalent to 75 percent of the country’s gross national income. The annual debt servicing costs the country Rs.1, 303 billion, of which Rs.509 billion is for interest alone.

Though the previous regime is responsible for the majority of them, the populist politics practiced by the current regime by way of public sector salary hikes and fuel price cuts also contributed to the country’s appalling debt position. In this backdrop, Sri Lanka revised upwards its tax rates and the Central Bank recently said it planned to raise US $ 3 billion from international sovereign bond issues. Economists expect the tax rate revisions, specially the VAT, which comes into effect on May 2 to push inflation up. The only silver lining for Sri Lanka at the moment appears to be the lower oil prices. However, this too has a negative side, as lower oil prices have significant impact on Middle Eastern economies, thereby hindering Sri Lanka’s prospects for higher worker remittances.