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Sri Lanka economic fundamentals strong; no fiscal slippage: CB Governor

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Sri Lanka economic fundamentals strong; no fiscal slippage: CB Governor

Post by The Invisible on Thu Oct 25, 2018 7:12 am

ECONOMYNEXT - Sri Lanka has no seen no fiscal slippage with the budget set to post a primary surplus for the second year running and a higher than expected deficit coming only from natural disaster related spending, Central Bank Governor Indrajit Coomaraswamy said.

Growth, while low, was picking up, inflation was low and rates had been much higher than before.

Tough Reforms

"The government has gone through the new Inland Revenue Act, they have raised VAT (value added tax), incentives changed, fuel prices adjusted," Coomaraswamy told a business forum organized by Asia Securities, a Colombo-based brokerage.

"[It is- very difficult to argue that there has been major fiscal slippage."

"And last year for the second time in 54 years we have a surplus in the primary account and it is likely that we will have one this year as well.

"So, a structural improvement in the fiscal operations in the budget. Of course the government has to stay on course in the lead up to the elections.

"If not all bets are off. But up to now it is difficult to argue that there is slippage on the fiscal side."

Monetary Policy

He said Sri Lanka's nominal and real interest rates were "pretty high".

"On the monetary side one could argue that the central bank has been on the conservative," he said.

He said the ceiling policy rate was cut by 25 basis points in April to signal that there was a shift from a 'tightening' to a 'neutral' stance.

"But I do not think by any stretch of imagination one could argue that there had been a slippage in monetary policy," he said.

He said there had been no loosening of policy that had led to overheating of the economy.

Independent analysts agree that Sri Lanka's credit growth is weak and there is no great credit pressure.

Analysts who have correctly predicted BOP crises in the past, are not calling 2018 runs on the rupee, a BOP crisis, partly for the same reason.

However they have said that the central bank has a penchant to weaken the currency by mis-managing liquidity while running a de facto external anchor involving a real effective exchange rate peg which is not credible and runs are generated by scaring exporters and bond investors.

Growth picking up, Inflation still low

Coomaraswamy said growth was 'clearly inadequate' was 3.3 percent last year, 3.6 and 3.7 percent in the two quarters this year. Growth was expected to be about 4 percent.

"While growth is too slow, it is on the upward trend," Coomaraswamy said. "There is no sign of collapse.

"Structural reforms had to be persisted.

"Exports have been a record last year. It is going to be higher this year."

"Inflation is well within our target range - in fact at the bottom of the target range."

He said Colombo Consumer Price Index was about 4 percent for the last 12-months, core inflation was a little over 2.0 percent.

"There is no sign of macro-economic turbulence if you look at inflation," he said.

He said private sector credit grew by 14.3 percent and broad money defined at M2b by 13.5 percent.

The Treasury bill rate at the last auction was 10.44 percent for one year, having dipped it has gone up.

Interest rates, NPLs below decade highs

Analysts have welcomed the quick rise in Treasury bills, which will ward of speculation on the currency.

Critics say that the central bank had primarily generated balance of payments crisis in the past by purchasing vast amounts of bills at auction directly to inject liquidity and drive credit to unsustainable levels requiring un-necessarily high rate increases later.

In 2000 (after the 1999/2000 BOP crisis) T-bill rates had gone up to 18.22 percent.

In 2007 (around the time of the 2008 BOP crisis) it was 19.66 percent, in 2008, 19.12 percent.

In 2012 (in the 2011/2013 BOP crisis) it was 11.96 percent.

"The economy had had much higher interest rates and had not collapsed," Coomaraswamy said.



Non-performing loans in the banking sector had gone up from 2.5 percent in mid-last year to 3.5 percent following earlier credit growth and successive drought.

In 2009, NPLs were 8.8 percent and in 2014 NPLs were 6.2 percent.

"The financial system did not collapse in 2009 nor in 2014, so there is no way the financial system could collapse now," Coomaraswamy pointed out.

"Having said that with the build up of NPLs both banks and the central bank needs to be cautious."

External Snapshot

He said the current account deficit is going to be 3.0 percent of gross domestic product, which was higher than anticipated. He claimed it was partly due to gold imports, which had now come down after a an import tax was raised to match that of India.

He said a duty structure and 'very cheap petroleum' had caused contributed.

The margins in import letters of credit and tax changes are expected to be sufficient to curb car imports, he said. Oil was another, he said.

He said in 2000, the current account deficit was 6.4 percent of GDP, in 2006, 5.3 percent, 2008, 9.5 percent, 2011, 7.1 percent, 2012, 5.8 percent.

"Again no signs of major turbulence of an impending collapse of the economy," he said.

He said forex reserves were about 8.0 billion US dollars or a little less than 5 months of import cover, but it had been lower in the past.

"We feel this is an area we need to focus in a very concerted way," Coomaraswamy asid.

The active management act had been passed will also give more flexibility in managing debt. The peak debt rollover of 980 billion rupees had now passed, he said. (Colombo/Oct23/2018)
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