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Sharp 4Q rebound essential to avert economic contraction: CB

21 August 2020 08:57 am - 0     - {{hitsCtrl.values.hits}}

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Central Bank Governor Prof. W.D. Lakshman (left) and Senior Deputy Governor Dr. Nandalal Weerasinghe addressing media during yesterday’s press conference held to announce the August monetary policy review Pic by Pradeep Dilruskhana

 

  • Says economy needs to record significant growth in 4Q at least to record zero growth
  • SL’s economic growth contracted 1.6% in 1Q; CB says the contraction was “unexpected”
  • Says COVID-19 impact on economy in 2Q will be substantial; to issue revised growth projections
  • Decides to maintain current policy rates after 4 consecutive rate cuts amounting to 200bps

By Nishel Fernando 
The Central Bank (CB) says a substantial rebound in economic activity in the fourth quarter is essential for Sri Lanka to avert an economic contraction this year following the “unexpected” contraction in the economy in the first quarter.


“At least to reach a zero growth in GDP this year, we need a significant growth revamp in fourth quarter,” CB Senior Deputy Governor Dr. P Nandalal Weerasinghe told reporters in Colombo yesterday.


As per the provisional estimates released by the Department of Census and Statistics (DCS), Sri Lanka’s economy contracted by 1.6 percent in the first quarter of the year, contrary to CB expectations. The CB noted that the adverse impact of COVID-19 on economic activity during the second quarter is likely to be substantial as per the available indicators.


The Monetary Board of the CB on Wednesday decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) at their current levels of 4.50 percent and 5.50 percent, respectively, following policy rate cuts in four consecutive instances providing a total of 200 basis points (bps) reduction since March this year.


The CB earlier projected 1.5 percent economic growth for the full year. However, several international agencies and credit rating agencies had projected negative economic growth for Sri Lanka.


The World Bank (WB) Group had projected the country’s GDP to contract by 3.2 percent this year while Asian Development Bank (ADB) projected 6.1 
percent contraction.


The CB earlier dismissed these projections while questioning the methodology used in arriving with these figures. 
Dr. Weerasinghe noted that the CB is likely to come up with a revised economic growth projection for this year once the DCS issues its provisional estimates of GDP for the second quarter. 


“However, a faster rebound of economic activity is expected, especially in the fourth quarter of 2020, supported by improved political stability, the resultant improvement in business confidence, and the lagged impact of monetary and fiscal stimulus. 


This expected rebound in the fourth quarter is essential for the country to record a positive growth rate during this year. The enhanced focus on domestic production for import substitution as well as exports is expected to drive near term growth, with potentially significant implications on the longer horizon,” the CB said.

The CB stressed that structural reforms are also crucial to sustain the growth momentum beyond the near term.
Meanwhile, CB Governor Prof. W. D. Lakshman highlighted that Sri Lanka had shown a greater stability in the external front with recent improvement in trade deficit, exchange rate and the country’s ISB yields. 


Dr. Weerasinghe added that Sri Lanka’s foreign reserves, which stood at US$ 7.2 billion at end-July is sufficient to meet the remainder of estimated US$ 2.5 billion worth debt repayment for the year.  


In addition, the market lending rates have also come down significantly amidst recent policy rate cuts. The average weighted prime lending rate (AWPLR) declined to 7 percent as of last Friday, the lowest since January 2015, and the average weighted lending rate (AWLR) came down to 12.29 percent as of last Friday, the lowest since mid 2015. 


Despite declining market lending rates, the credit granted by commercial banks to the private sector contracted by Rs.69.6 billion in May and Rs.54.1 billion in June. The CB expects private sector credit disbursement to recover in the period ahead. “A gradual recovery in credit extended to the private sector is expected in the period ahead, driven by increased economic activity, improving business sentiment with enhanced political stability, declining market lending rates and rising credit disbursement on account of concessional credit schemes for businesses affected by the pandemic,” the CB added.


However, credit to the public sector soared in recent months reflecting the government’s heightened funding requirement, thereby causing a notable expansion of broad money thus far in the year.


Meanwhile, the CB expects inflation to remain broadly within the desired 4-6 percent range in the near to medium term, with the appropriate policy measures in place, in spite of recent fluctuations.


It also ruled out a possibility of demand-driven inflationary pressure in the near to medium term.


Headline and core inflation, based on the Colombo Consumer Price Index (CCPI) accelerated marginally in July. The National Consumer Price Index (NCPI) based headline and core inflation also accelerated in June 2020, mainly reflecting the impact of food inflation.


 

Credit card, overdraft and pawning interest rates to be reduced

The Monetary Board of the Central Bank (CB) has decided to reduce bank regulated interest rates on several financial products including interest rates on credit cards.


Accordingly, the caps on interest rates on credit cards, pre-arranged temporary overdrafts, pawning facilities and penal interest rates would be revised downward shortly. 


The caps on interest rates on credit cards would be revised to 18 percent per annum from the current 28 percent while rates on pre-arranged temporary overdrafts would be revised to 16 percent from 24 percent. Rates on pawning facilities would be revised to 10 percent from 12 percent. 


In addition, , the Monetary Board was of the view that penal interest rates need to be capped at 2 percentage points over the regular interest rates charged on the relevant credit facility.


“Directions to effect these regulated interest rates will be issued shortly,” the CB said.

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