CB’s monetary policy review more forward-looking next year
View(s):Dr. Chandranath Amarasekera, Additional Director, Economic Research Department at the Central Bank, said these changes will come as against the current policy of reviewing what happened in the past and adding some comment on the future.
He was giving the keynote address on “Recent macroeconomic developments, interest rates and exchange rates” at an event organised by the Sri Lanka Forex Association on Wednesday and held at the Taj Samudra hotel.
While stating that the plan is to reduce interest rates which are too high and restricting credit growth, Dr. Amarasekera was cautious in responding to queries from the audience (during the discussion time) as to whether or when interest rates will go up, a move which would excite the market. “All I can say is that the plan is for interest rates to reduce and we expect a sizable reduction in market lending rates going forward,” he said.
The bank’s Monetary Board on May 30 announced a rate cut of 50 basis points to 7.50 per cent and 8.50 per cent the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR), respectively aimed at encouraging credit growth.
In a detailed explanation of current and future economic trends, he said that oil prices have been unexpectedly volatile this year with prices much higher than last year.
On economic growth trends, he said the Easter Sunday attacks forced the authorities to revise GDP projections for 2019 to 3 per cent, compared to 3.2 per cent in 2018 and against an earlier projection of 4 per cent for 2019.
While tourism earnings last year was $4.5 billion, this year it is expected to fall sharply owing to a drop in tourist arrivals after the Easter Sunday bombings, he said. Tourism authorities expect a 40-50 per cent drop in arrivals in 2019.
He said there has been a slowdown in private sector credit growth which other economists say is much needed, particularly in productive areas where production and increasing jobs matter compared to a rise in consumption credit which is negative.
While January 2019 credit growth was negative as people started repaying loans after a long time, the March credit was slightly better but overall credit growth was slowing down.
The government has begun repaying long-delayed payments to contractors for government contracts which in turn has resulted in repayments being made to loans which has resulted in less borrowings.
On exchange rate movements, Dr. Amarasekera said that in recent times the banking regulator has tried not to intervene in the foreign exchange market. “It’s not something that we would like to do,” he said adding that the rupee was strong – compared to the volatile situation last year – and has appreciated by 3.6 per cent so far this year. “We will intervene in the market only if it interferes with monetary policy objectives,” he added.
He said Sri Lanka’s real interest rates are currently the highest in the region. He wound up his presentation with a ‘food-for-thought’ comment: At Sri Lanka’s current rate of GDP growth, it would take 85 years for Sri Lanka to reach the current level of Singapore’s GDP!
The other panellists at the discussion were Standard Chartered Bank CEO Bingumal Thewarathanthri and Commercial Bank Chief Financial Officer Nandika Buddhipala.