CB eases tight monetary policy; worries over political stability
The Central Bank (CB) has eased the tightening of monetary policy by reducing the Standing Lending Facility Rate (SLFR), by 25 basis points but raised concerns about political stability.
“The Monetary Board (the CB’s governing board) felt it is timely at this juncture to give a signal that the tightening phase of monetary policy should end now,” CB Governor Dr. Indrajit Coomaraswamy told a media conference in Colombo Wednesday.
However he pointed out that Sri Lanka’s need of the hour is to overcome the current political instability quickly as prolonged instability will bring disaster to the country’s economic consolidation.
The government should initiate a framework for service delivery, effective policy formulation and continuation of development activities, he added. “Whatever political configuration in the coalition government, the policy, basic services and development programmes should not be hindered,” he said adding that the stability of the governing coalition will be essential to limiting the damage.
The present administration has taken several tough decisions towards economic reforms it has brought successful results while resurrecting the economy, he added.
The enactment of the Inland Revenue Act, Hambantota Port project deal and several other foreign funded development programmes were among the different initiatives taken by the government for the betterment of the country despite differences of opinion among its coalition partners, he added.
It remains an open question, whether the political will is present to ensure faithful implementation of the economic reforms, he noted pointing out that the economic growth will be around 5 per cent this year from an unexpected 3.1 per cent in 2017 with an anticipated increase in foreign direct investment.
On the easing monetary policy, he said the reduction in the upper level of the CB’s policy interest rate corridor to 8.5 per cent was an indication that the monetary policy tightening cycle was easing with inflation falling and growth also slowing.
This decision is also expected to dampen the volatility observed in interest rates in the domestic market during the recent past.
While the CB monetary policy easing measure is expected to address the near term tepid growth prospects, it is essential that the planned structural reforms are carried out without delay for the economy to move towards a sustained high growth path in the medium term, he said.
According to the provisional estimates of the Department of Census and Statistics (DCS), the economic growth slowed to 3.1 per cent (year-on-year) compared to the growth of 4.5 per cent (year-on-year) in 2016.
The strategy to ease interest rates is expected to address the near term tepid growth prospects, But it is essential that the planned structural reforms are carried out without delay for the economy to move towards a sustained high growth path in the medium term, a CB media release revealed.
On the external front, in January 2018, export performance improved both in terms of price and volume, which however was outpaced by the increase in imports, thus causing a widening of the trade deficit.
Nevertheless, improved foreign exchange inflows in the form of earnings from tourism as well as workers’ remittances helped cushion the impact on the current account to some extent.