Credible CB Governor has brought macro-stability – Fitch
Emphasising ‘clear signals’ pertaining to monetary policy, the new management at the Central Bank (CB) has shown an ‘unambiguous’ consolidation path as against earlier, says a top rating analyst.
Without this ‘clear consolidation’ it wasn’t apparent whether the said policies will stabilise the economy,” Fitch Ratings’ Associate Director Sovereign Ratings, Sagarika Chandra told journalists on Wednesday in Colombo. Fitch has had run-ins on monetary policy during the tenure of former Governor Arjuna Mahendran in February 2016 when the agency downgraded Sri Lanka’s country rating from B+ Stable to B+ Negative. A year later they upgraded to B+ Stable after Indrajit Coomaraswamy was appointed last July.
Ms.Chandra said that Dr. Coomaraswamy is very credible and that with him in the hot seat, there’s a cooling effect on macro instability in the country. “The Governor is credible and now there’s a shift in policy to show macro stability.” She noted that growth is slowing but was upbeat on the macro stability adding that now there’s now more flexible inflation targeting.
She concluded that earlier when credit growth was high, the CB moved to cut policy rates which wasn’t smart. She said that the country had rapid growth during 2015, but CB’s foreign reserves were drying out. “We didn’t get a clear indication on CB being concerned about it.” Now she said that things have changed (for the better) with CB tightening its interest rates, working with the International Monetary Fund, monetary policy tightening, low intervention in the interbank foreign exchange market, etc. “Now the currency is stable,” Ms. Chandra added.
She added that this year the growth forecast will be slightly lower due to the floods. “This year we see growth at 4.5 per cent (compared to a higher forecast earlier and from last year’s 4.4 per cent),” she said adding that inflation will be close to 6 per cent owing to the low base and high oil prices.
Ms. Chandra said that the country is expected to make a primary surplus this year; she said but added that GSP + gains won’t impact Sri Lanka’s growth on a major scale this year. “Prospects in the long term are positive. I think that’s one area that we have encountered. GSP + gains won’t impact Sri Lanka’s growth on a major scale this year but prospects in the long term are positive.”
She said that Fitch’s forecasts are based on demand from the European Union (EU). “We are also not taking a strong position on the GSP+ gains as Sri Lanka also has to compete with other countries,” Ms. Chandra said noting that owing to adjustments that Brexit, United Kingdom’s (the largest apparel market for the country) withdrawal from the European Union has to still make, factoring GSP+ gains for Sri Lanka is too early.