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Central Bank of Sri Lanka tightens monetary policy stance

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Monetary Policy Review: No. 06 – August 2021

The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 18 August 2021, decided to increase the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points each, to 5.00 per cent and 6.00 per cent, respectively. In addition, the Monetary Board decided to increase the Statutory Reserve Ratio (SRR) applicable on all rupee deposit liabilities of licensed commercial banks (LCBs) by 2.0 percentage points to 4.00 per cent, with effect from the reserve maintenance period commencing on 01 September 2021.

These decisions were made with a view to addressing the imbalances on the external sector of the economy and to preempt the buildup of any excessive inflationary pressures over the medium term, amidst improved growth prospects. The global economy is set to make a gradual recovery in 2021, although normalisation of economic activity would largely be uneven across regions As per the July 2021 update to the World Economic Outlook (WEO) of the International Monetary Fund (IMF), the global economy is projected to grow by 6.0 per cent in 2021 and 4.9 per cent in 2022. Economic prospects have diverged across regions and access to COVID-19 vaccines has emerged as the principal factor that drives the global economic recovery in the period ahead.

Most countries have experienced transitory price pressures due to supply-demand mismatches amidst the pandemic. Such transitory pressures could become more persistent, thereby warranting preemptive action by central banks in order to ensure stability in the period ahead. Accordingly, some central banks have already commenced tightening monetary policy while several others have signalled a possible tightening of monetary policy in the period ahead. The Sri Lankan economy is on a recovery path despite the pandemic related disruptions

Supported by fiscal and monetary stimulus measures, the Sri Lankan economy is gradually making headway following the setback in 2020. As per the estimates published by the Department of Census and Statistics (DCS), the economy witnessed a stronger than expected recovery during the first quarter of 2021, recording a real growth of 4.3 per cent, year-on-year. The economy is poised to record a higher growth rate during the second quarter of 2021, partly due to the sharp contraction observed in the corresponding quarter of the previous year. Possible disruptions to domestic economic activity from the re-emergence of the COVID-19 pandemic and related preventive measures could weaken the recovery to some extent during the second half of 2021. Nevertheless, with the successful rolling out of the national COVID-19 vaccination programme and the Government’s strategy to impose only selective mobility restrictions, the momentum of activity is expected to sustain in the period ahead. Available indicators and projections suggest that the real economy would grow over 5 per cent in 2021, and this momentum would be sustained over the medium term.

Most market interest rates have reached low levels resulting in the expected acceleration in credit flows to the private sector With the gradual transmission of accommodative monetary policy measures, most market deposit and lending interest rates declined to their historic low levels. Supported by the low interest rate environment, credit to the private sector expanded notably during the first half of 2021, surpassing the annual expansion of credit observed in 2019 and 2020. The momentum of credit expansion is expected to continue in the period ahead, with increased credit flows to productive and needy sectors of the economy. Meanwhile, credit obtained by the public sector from the banking system, particularly net credit to the Government, also increased notably thus far during the year, amidst the impact of the pandemic on government revenue and recurrent expenditure. Reflecting the impact of increased domestic credit, the growth of broad money (M2b) continued to remain elevated. The external sector continued to face a multitude of challenges requiring coordinated measures The implementation of the essential growth-conducive stimulus measures, which resulted in the availability of low cost credit to the private sector, led to a sustained increase in the demand for merchandise imports since mid-2020. With the increase in import expenditure outweighing the improvements observed in earnings from exports, the trade deficit continued to widen during the first half of 2021 over the corresponding period of last year. Moreover, the expected recovery in the tourism industry could be further delayed due to uncertainties associated with the resurgence of the pandemic globally. Workers’ remittances, which recorded a significant growth in 2020 as well as in the first few months of 2021, have also displayed some deceleration. Limited conversion by exporters and the advancing of imports together with some speculative activity, prompted by anomalies between interest rates on the rupee and foreign currency products in the financial market, exerted undue pressure on the exchange rate in the domestic market. Amidst these developments, all debt service obligations of the Government, including the settlement of the International Sovereign Bond (ISB) of US dollars 1 billion in late July 2021, have been duly met thus far in 2021. Gross official reserves were estimated at US dollars 2.8 billion with an import cover of 1.8 months by end July 2021. This, however, does not include the bilateral currency swap facility with the People’s Bank of China (PBoC) of CNY 10 billion (equivalent to approximately US dollars 1.5 billion). Measures are being taken by the Government and the Central Bank to secure foreign financing from several sources in order to reinforce the level of official reserves in the near future. Meanwhile, the Government continued to aggressively explore avenues to enhance non-debt creating foreign inflows, by strengthening the domestic production economy, which would help strengthen the external sector in the period ahead. Possible upside pressures on inflation are being addressed through preemptive policy measures Inflation, which remained moderate during early 2021, accelerated somewhat in recent months due to high food inflation and some acceleration in non-food inflation. Inflation is projected to hover around the upper bound of the desired 4-6 per cent target range in the near term. The envisaged improvements in aggregate demand conditions and the likely increases in global energy and other commodity prices may generate some inflationary pressures in 2022, requiring preemptive policy measures to ensure the maintenance of inflation in mid-single digit levels over the medium term.

Tightening of monetary policy stance is expected to support greater economic stability In consideration of the current and expected macroeconomic developments as highlighted above, the Monetary Board decided to rollback some extraordinary support provided to the economy at the onset of the COVID-19 pandemic. Accordingly, with effect from 19 August 2021, the Board decided to increase the policy interest rates, i.e., the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR), of the Central Bank by 50 basis points each, to 5.00 per cent and 6.00 per cent, respectively. This would also result in the Bank Rate, which is linked to the SLFR with a margin of +300 basis points, automatically adjusting to 9.00 per cent.



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SLT-MOBITEL donates fourth PCR machine to Matara District Hospital

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Group Chairman of SLT-MOBITEL Rohan Fernando handing over the donation to Deputy Director of Matara District Hospital Upali Ratnayake accompanied by Dr.Thushara Vidanapathirana, Dr.Deepika Priyanthi and Group CEO of SLT-MOBITEL Lalith Seneviratne.

Recognising the importance to enhance Sri Lanka’s PCR testing capacity to curtail the spread of COVID-19 and to protect citizens, SLT-MOBITEL continues its support by donating yet another vital PCR machine to the District General Hospital in Matara recently.

The donation of the PCR machine valued at over Rs. 5.7 million is part of SLT-MOBITEL’s ‘Sabandiyawe Sathakaraya’ CSR initiative in further strengthening the nation’s healthcare systems and assisting communities in need.

The equipment was handed over to the Deputy Director of the Matara Hospital Doctor Upali Rathnayaka in the presence of Rohan Fernando, Group Chairman, SLT-MOBITEL; Lalith Seneviratne, Group Chief Executive Officer, SLT-MOBITEL; Kiththi Perera, CEO, SLT; Shashika Senarath, CMO, Mobitel along with Regional GM, SLT; Regional Head – Mobitel and Hospital Staff.

Previously, PCR machines were donated to the Base Hospital, Karawanella, District General Hospital, Matale and the University Hospital of the Kotelawala Defense University. SLT-MOBITEL appreciates the support received from all Sri Lankans towards ‘Daana Paaramitha’ which was conceptualized as a platform to further increase community involvement in carrying out relief efforts to support families affected by the pandemic.

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Extension of lockdown negatively impacts CSE

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By Hiran H. Senewiratne

CSE trading activities commenced yesterday in a lacklustre manner with little share-buying interest and later on became negative following the government’s announcement on the lockdown extension until October 1, stock market analysts said.

The Colombo International Financial Centre (CIFC) at the Port City was set to commence this month and has been delayed until December owing to the current Covid 19 situation. This also affected CSE trading activities yesterday, analysts said.

Consequently, the stock market lost steam yesterday, closing on a negative note as investor sentiment remained erratic due to internal and external environmental factors. Both indices moved downwards or to negative territory despite healthy turnover in the market. The All Share Price Index went down by 46.09 points and S and P SL20 declined by 17.93 points. Turnover stood at Rs. 3.8 billion with two crossings. Those crossings were reported in Expolanka, where 600,000 shares crossed for Rs. 101.1 million, its shares trading at Rs. 158.50 and Sampath Bank one million shares crossed for Rs. 49.5 million, its shares traded at Rs. 49.50.

In the retail market, some companies that mainly contributed to the turnover were; Expolanka Holdings Rs. 1.2 billion (7.4 million shares traded), JKH Rs. 604 million (4.6 million shares traded), Browns Investments Rs. 540 million (58.3 million shares traded) and Hayleys Rs. 204 million (2 million shares traded).

It is said that following two sessions of gains, the indices closed in the red due to price declines in large-cap stocks as investors opted to book modest returns after the recent sharp rally. Stocks such as Expo, LOLC, and JKH, which saw sharp gains in the past two sessions witnessed profit-taking at higher levels and weighed on the momentum throughout the session.

Further, high net worth and institutional investor participation was noted in Sampath Bank. Mixed interest was observed in Expolanka Holdings, Tokyo Cement Company and LOLC Holdings, while retail interest was noted in Browns Investments, Lanka Orix Finance and Industrial Asphalts. During the day 153 million share volumes changed hands in 24000 transactions.

As of yesterday, the current exchange rate of 1 US dollar was equal to 199.607 Sri Lankan rupees. This is an increase of 7.856656 percent (or +14.5401 LKR) compared with the same time last year (17 September 2020), when 1 US dollar equaled 185.067 Sri Lankan rupees.

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Lockdown takes toll on Sri Lanka’s manufacturing sector activities

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The resurgence of the COVID-19 pandemic in August 2021 has slowed down the manufacturing activities in the country. Accordingly, the manufacturing PMI recorded an index value of 45.1 in August 2021 with a fall of 12.7 index points from the previous month, mainly driven by the decrease in New Orders, Production, Employment, and Stock of Purchases sub-indices. The decline in New Orders and Production, especially in the manufacture of food & beverages, furniture, and textiles & wearing apparel sectors, have mainly contributed to the overall decrease of the manufacturing PMI. Many respondents in those sectors highlighted that their local orders and distribution channels were affected due to the lockdown imposed as a measure of containing the pandemic. Further, many of them also emphasised that factory operations were disrupted due to the spread of the COVID-19 virus among employees. Employment sub-index also declined in line with these developments.

The decrease of Stock of Purchases was in line with the decline in New Orders and Production. Further, the difficulties encountered in placing purchase orders and in settling foreign payments also adversely affected the supply chain of raw materials and production schedules. Many respondents stressed that the continuous increase in the cost of imported raw materials adversely affected their profit margins. Meanwhile, Suppliers’ Delivery Time lengthened at a slower rate in August 2021. The manufacturers cautioned that the uncertainty over the COVID-19 pandemic would continuously hinder the prospects of the manufacturing sector, yet, overall expectations for manufacturing activities for the next three months remained above the neutral threshold.

Services PMI dropped to an index value of 46.2 in August 2021 with the restrictions imposed to contain the further spread of the COVID-19. New Businesses, Business Activity, Employment and Expectations for Activity sub-indices recorded declines. New Businesses decreased in August compared to the previous month mainly with the declines observed in wholesale and retail trade, insurance, real estate, and education sub-sectors. Business Activities across most of the sub-sectors such as, wholesale and retail trade, real estate, insurance and other personal activities reported considerable declines indicating the adverse effects of travel restrictions on their business operations. Nevertheless, transportation sub-sector recorded some improvements solely due to the growth in freight volumes. Moreover, financial services sub-sector also indicated improvements despite the disturbances from travel restrictions. Employment continued to fall at a higher pace as retirements and voluntary resignations exceeded the number of recruitments carried out during the month. Backlogs of Work increased at a higher pace in August along with the reduction in staff availability amid travel restrictions and growing COVID-19 infections of staff. (CBSL)

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