The Sri Lanka Central bank on Tuesday (15) cut benchmark lending rates by 50 basis points, saying the move was aimed at encouraging growth despite IMF warnings against monetary easing. The Monetary Board of the Central Bank of Sri Lanka reduced its key lending rate from 9.0 percent to 8.5 percent and reduced deposit rates from 7.0 to 6.5 percent in the third easing since December.
Sri Lanka watched nervously as India’s rupee plunged, not least because it too suffers from the high current account and fiscal deficit mixture that turned investors sour on its larger neighbour. Now India’s currency is recovering, and Sri Lanka seems emboldened too, as its central bank today shunned IMF advice and surprised forecasters by cutting rates by half a percentage point.
Cabraal told Bloomberg television, noting that he expected 7.5 per cent growth this year, and perhaps even more the next year. in an environment that Cabraal himself admitted himself had been “very difficult” in recent months, The International Monetary Fund (IMF) said a more moderate 6.5 per cent is likely during this financial year, with some setting the rate still lower. Last month the IMF ended one of its periodic missions to the country by wanting it to keep rates on hold. The IMF statement in September also contained a second warning, namely the risk of a slowdown around the corner with a warning to focus on improving Sri Lanka’s business climate to achieve higher growth rather than cut rates.
“Given moderate credit growth, flat budget revenues, and relatively low growth in non-oil imports, it is not yet clear whether the recent acceleration in economic growth will continue into the second half of the year,” the statement said.
The IMF warned against rate cuts in May, pointing to rising inflation, and it expressed concerns in September over Sri Lanka’s high foreign debt. It said Sri Lanka’s short-term external debt represented 51 percent of the country’s foreign reserves. But the central bank said reserves totalled $7.0 billion at the end of August, enough to cover about four months of imports.
In February central bank dropped plans to seek a fresh $1.0-billion loan from the IMF following disagreements over how the money should be spent.
The Sri Lankan rupee fell on Tuesday from a three-month high in the previous session due to importer dollar demand after the central bank surprised markets by cutting key policy interest rates to multi-year lows.
The local currency could come under further pressure as investors may start selling government bonds because of lower returns, dealers said.
Currency dealers said there would be a lot of pressure on the exchange rate if big investors take away their money due to lower returns.
However, Central Bank Governor Ajith Nivard Cabraal said the rate-cut decision was taken after considering the stability in the exchange rate and favourable inflation outlook in the near term.