Economy can grow 5%

Economic downturnSri Lanka’s economy can still grow 5 per cent or slightly faster this year even after increases in its monetary policy rates, the central bank (CB) governor said on Friday.

Early this year, the central bank projected 5.8 per cent growth for 2016 early this year. On Thursday, it raised both of its main interest rates by 50 basis points, in a bid to curb stubbornly high credit growth, which is fuelling concern about inflationary pressures.

“We can still achieve 5 per cent or bit more growth despite 50 basis point rate hike,” Governor Indrajith Coomaraswamy told reporters, adding that the country will have “robust growth” this year.

Coomaraswamy, appointed to lead the central bank early this month, said rates were increased as credit growth was “higher than the desirable level” and there’s a growing likelihood that government revenue will fall due to a delay in implementing tax hikes.

“When there is a possibility of slippage in fiscal policy, clearly, the monetary policy has to lean against that,” he said. “There is uncertainty. We don’t want to wait until the horse has bolted.”

Thursday’s tightening move, the third since December, follows private sector annual credit growth of 28 per cent in May, near a four-year high, while annual consumer price inflation in June rose to a 32-month high of 6.0 per cent.

Coomaraswamy said he expects the pace of credit growth to decline to 20 per cent and inflation to moderate at around 5 per cent by end of this year.

The Sri Lankan rupee edged down on Friday due to importer dollar demand a day after the central bank surprisingly raised key policy rates, dealers said.

After market hours on Thursday, the central bank raised its main interest rates by 50 basis points each in a surprise move aimed at curbing stubbornly high credit growth that is adding to concern about inflationary pressures. The central bank governor said on Friday the nation’s economy can still grow 5 per cent or slightly faster this year even after increases in monetary policy rates.

One-week rupee forwards SLKR, which have been acting as a proxy for the spot rupee, were at 146.15/30 per dollar, slightly weaker than Thursday’s close of 146.10/25.

The spot rupee is tightly managed by the central bank, and market participants use the forward market levels for guidance on the currency.

“There is no impact of the rate hike. Technically, the currency should strengthen when interest rates go up but that is not happening here,” said a currency dealer, asking not to be named.

The rupee is under pressure due to importer dollar demand and dealers said the market has shrugged off speculation of a strong rise in the rupee as the island nation’s heavy debt repayment reduced dollar availability for the central bank to defend the currency. The spot rupee was not traded on Friday.

Spot-next, which are rupee forwards settled a day after the spot rupee settlement, were at 146.05/15 per dollar, compared with Thursday’s close of 145.95/10.

The Sri Lankan stock index was down 0.11 per cent at 6,384.99, with a turnover of 181.2 million rupees ($1.24 million). (Reuters)

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