CBSL Holds Rates To Boost Growth
By Rajiesh Seetharam
The Central Bank of Sri Lanka (CBSL) decided to continue an accommodative monetary policy stance and keep policy rates unchanged with a target to boost growth. Monetary Policy Review March 2021 revealed the Standing Deposit Facility Rate (SDFR) to remain the current 4.50 per cent, Standing Lending Facility Rate (SLFR) at 5.50 per cent, Bank rate at 8.5% and Statutory Reserve Ratio (SRR) at 2%.
“To support economic activity, Central Bank took a series of monetary measures to Reduce policy rates by 250 bps in 2020, in addition to 100 bps in 2019. SRR was reduced by 300bps in 2020 in addition to 100 bps in 2019. The Bank rate was reduced by 650 bps in 2020. These measures have resulted in historically low interest rate.
“Reflecting the expansion in domestic credit, the growth of broad money (M2b) continued to accelerate. Broad money growth is 23.7% as of January 2021, current money market liquidity remains at a high level of LKR 175.6 billion, however credit to productive sector remains low. Credit to productive sector is vital for sustained economic recovery. In 2020, credit didn’t flow into agriculture, fishing, industry or service, though personal loans were high.
In January 2021 overall credit growth was only LKR 25.7 billion which is yoy growth of 6.9%. We are expecting private sector credit to expand to about 14% in 2021.” stated CBSL Director Economic Research Chandranath Amarasekera, at a Media briefing held in Colombo.
The trade deficit contracted by USD 2.0 billion in 2020, (With a deficit of around USD 6 billion in 2020 compared to USD 8 billion in 2019) benefiting from the notable decline in expenditure on imports, which more than compensated the decline in earnings from exports. The trade deficit is expected to remain compressed in 2021, supported by appropriate measures taken by the Government. Workers’ remittances continued to increase steadily from mid 2020, recording an annual increase of 5.8 per cent. In January 2021, Sri Lanka received USD 675 million in remittances, a growth of 16.3 per cent yoy, noted Amarasekera.
He further noted that 3 -3.5% GDP growth rate is projected for Sri Lanka in 1Q2021.
“Sri Lanka’s GDP is estimated to contract 3.9% in 2020, and is projected to grow around 5.5% to 6% in 2021 with positive sentiments fuelled by COVID-19 vaccinations drive, stimulus measures, and positive business environment.”
“Gross official reserves were estimated at USD 4.8 billion, with an import cover of 3.7 months, at end January 2021. Certain market interest rates, such as yields on government securities, have shown unwarranted volatility recently, which are not in line with monetary policy expectations. The Central Bank reiterates that the high level of excess liquidity in the money market and the reduction in policy interest rates thus far are intended to result in a stable low interest rate environment, while providing a positive real return to savers,” a CBSL Media release stated.
The Sri Lankan rupee has depreciated by 4.5 per cent against the US dollar thus far in 2021 following the 2.6 per cent depreciation in 2020. The Central Bank took various measures to reduce volatility in exchange market like the recent requirement for exporters to convert 25% of their forex earnings to Sri Lankan rupees. CBSL hopes to keep inflation rate low at 4-6% in 2021 under the flexible inflation targeting framework.