‘Growth’ Beats ‘Inflation’

CEYLON TODAY | Published: 2:00 AM Nov 26 2021

Central Bank of Sri Lanka’s (CBSL’s) dilemma at its Wednesday’s monetary policy meeting was whether to cap record high inflationary pressure or to spur growth?

But with CBSL keeping its policy rates unchanged at Wednesday’s meeting, that shows that ‘growth’ has won over ‘inflation.’

Islandwide inflation due to supply side effects may end up in record high double digits in the coming months, CBSL Governor Ajith Nivard Cabraal warned the Media in a briefing at CBSL Headquarters, Colombo yesterday.

This has to be looked at in the context that inflation last month alone at 8.3 per cent was at a 47-month high.

Nonetheless, CBSL didn’t use a key policy tool in its armour to control inflation at its last monetary policy meeting for the year held on Wednesday by keeping its monetary policy rates unchanged. A key tool to draw down inflationary pressure is by increasing rates. Increased rates draw in money to institutions such as banks, thereby reducing money circulation in the economy, which in turn dampens inflationary pressure.

Nevertheless, Cabraal’s excuse for not raising rates was that inflationary pressure was not due to demand side concerns, but because of supply side effects. However, with the possibility of companies and even the Government paying bonuses to its employees next month, that will be an impetus to grow demand side inflationary pressure, on top of supply side inflationary pressure as well, as averred by the Governor, which will make a bad situation worse.

Howbeit, demand side inflationary pressure caused by bonuses may be transitory, but transitory or not, inflationary pressure is bad for a developing economy like Sri Lanka, where a considerable number of its population is living a ‘hand to mouth’ existence.

Referring to the aforesaid possibility of inflation hitting double digits in the coming months, CBSL in a statement yesterday said, “A further acceleration of headline inflation is possible in the immediate future, although such movements are expected to be transitory. The monetary policy measures already taken by the Central Bank will help curbing excessive demand pressures and preventing the buildup of adverse inflation expectations.” This statement was issued in respect of CBSL’s Thursday’s monetary policy stance.

If, as Cabraal said that record double digit inflationary pressure expected in the coming months is due to external factors beyond Government’s control, then the obvious solution to keep supply side inflationary pressure at bay is to have a strong rupee.

Meanwhile, CBSL in its aforesaid statement further said that, “In consideration of the current and expected macroeconomic developments as highlighted above, i.e., in the CBSL statement in question, the Monetary Board was of the view that the current policy interest rates are appropriate.”

However, CBSL’s Director Economic Research Dr. Chandranath. Amarasekara let the cat out of the bag as to why CBSL didn’t increase rates despite record double digit inflationary pressure expected to envelop the economy in the coming months.

Speaking to the Media, he said that private sector credit growth in September decelerated to 13.8 per cent, year on year, from 15.1 per cent in August, with this decelerating trend continuing up to last month, though October’s figures weren’t divulged.

This deceleration in private sector credit growth has to be looked at in the context that the private sector is considered the engine of growth. Therefore, if rates rise that will jeopardise private sector credit growth as borrowings would become costlier. That may well be the reason by CBSL didn’t raise rates at its Wednesday’s Monetary Board meeting, but rather, kept its rates unchanged.

And, also in the wider context, Census and Statistics Department in its latest labour bulletin showed that Sri Lanka’s labour force participation rate (LFPR) scarred by COVID-19 and exchange controls which dampens trading activities went under 50 per cent for the first time after 34 quarters in second quarter (2Q) 2021.

2Q 2021 yielded an LFPR of 49.8 per cent. A figure lower than this was last registered 34 quarters ago in 4Q 2012 with a figure of 49.3 per cent, data showed. LFPR is the cumulative total of those employed as well as those who are seeking employment and who are 15 years and above in age. A lower LFPR generally means that people of employable age have given up looking for work.

Year 2012 was a year when CBSL/Government liberalised the rupee in order to protect the country’s foreign reserves, but at the expense of steeply depreciating the rupee to then record lows at the expense of the economy, not least employment growth. 

CBSL’s salve to mitigate these economic ills is by keeping rates unchanged despite record inflationary pressure at its Wednesday’s Monetary Board meeting.

 Besides, in two consecutive months, i.e., in August and September, domestic credit by the banking sector and CBSL to the Government and its agents such as corporations have exceeded credit to the private sector, a phenomenon last seen 32 years ago for 10 consecutive months from January to October 1989, when the country was in flames due to the activities of the unholy ‘triumvirate,’ the IPKF the LTTE and the JVP.

Nonetheless, what is needed to boost private sector credit growth is by restoring their confidence, both on the economy and on the Government and not necessarily by keeping rates low, despite inflationary pressure. Sri Lanka’s six-year-old growth story from July 1977 to June 1983 is a key example.

CEYLON TODAY | Published: 2:00 AM Nov 26 2021

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