Restoring Private Sector Confidence

CEYLON TODAY | Published: 2:00 AM Oct 15 2021

Central Bank of Sri Lanka (CBSL) kept its key policy rates unchanged at five per cent (standing deposit facility rate) and six per cent (standing lending facility rate) respectively, when it announced its monetary policy stance yesterday. Explaining CBSL’s position, CBSL Governor, Ajith Nivard Cabraal told the Media that there was no need to either dampen or stimulate the economy further, hence the reason behind keeping its key policy rates unchanged, yesterday. When Ceylon Today brought to his notice that food inflation has been at the double digit levels for sometime and with Christmas round the corner, one of two seasons where demand is at its peak, the other being ‘Avurudu,’ as to what steps CBSL plans to mitigate further inflationary pressure, Cabraal said that in general food inflationary pressure is low in December. 

Nonetheless, he said that CBSL will be watching the situation. Islandwide food inflation in July and August has been 11 and 11.1 per cent, year-on-year (YoY) respectively, after being at 9.8 per cent in June, with last month’s inflationary data due to be released by the Census and Statistics Department (CSD) next week according to its calendar. Meanwhile, islandwide food inflation in December of last year was 7.5 per cent, though overall inflation, i.e. both food and ‘non-food,’ was 12.2 per cent in December, the highest in over a period of nine consecutive months beginning in December 2020 and ending in August 2021. Overall islandwide inflation in August was 9.4 per cent, marginally decelerating from an overall inflationary rate of 9.6 per cent recorded in the previous month July. 

But this month was a seemingly unusual month, with the Government increasing the controlled price of LPG used by the domestic consumer sharply by 79 per cent and milk powder by a steep 26 per cent, with cascading effects right down the food supply retail chain. The ratio between the food inflationary measurement basket and the non-food inflationary measurement basket is 46.30:53.70 in favour of non-food inflation. Non-food inflation marginally decelerated to three per cent in August, from 3.2 per cent in the previous month July on a YoY basis. Meanwhile, when Dr. Indrajit Coomaraswamy was CBSL Governor during the time of the immediately preceding regime, he used to talk of inflationary expectations. 

A complementary feature of inflationary expectations is rising demand led by a demand for higher wages by labour. CBSL originally expected overall inflation, i.e. the culmination of both food and non-food inflation to be in the 4-6 per cent range this year. However, Cabraal told the Media yesterday that they expected inflation to jump beyond that range yet be under double digits. Nonetheless, to compound matters there also appears to be a triple exchange regime in the country brought about by a shortage of US dollars due to rising imports led by higher fuel prices, both petroleum and coal, Sri Lanka’s single largest import bill caused by the recovery of the global economy scarred by COVID-19 but now being checkmated due to the availability of vaccines. 

Cabraal was cognizant about imported inflation as a result, further fuelled by an increase in global food prices as well, but the seeming real dilemma is the apparent lack of private sector credit demand relative to Government demand for the same, in the context that worldwide the private sector is considered the engine of growth. Hence, the possible reason behind CBSL keeping its policy rates steady yesterday. This was exemplified by the fact that domestic credit extended to the Government of Sri Lanka (GoSL) and its agents, namely public corporations, by the banking system together with the monetary authorities, i.e. the CBSL vis-à-vis money printing, surpassed credit extended to the private sector for the first time after 382 months in August 2021, latest CBSL data showed (Ceylon Today’s Wednesday’s editorial) The last time such a phenomenon took place was for 10 consecutive months from January 1989 to October 1989 when the IPKF and the LTTE had set fire to the North and East of the country and the JVP, in the remainder of Sri Lanka. But now there is neither LTTE nor the IPKF, while the JVP has entered the democratic process. 

Therefore, it may be construed that the reason behind CBSL not raising policy rates yesterday despite inflationary pressure is the phenomenon that public sector credit for the first time after 382 months surpassed private sector credit in August. However, controlling rates only, cannot restore private sector confidence. What is required is key policy measures led by the GoSL which are political in nature to restore that confidence, thereby aiding the current distortion caused to the economy to be ironed out.

CEYLON TODAY | Published: 2:00 AM Oct 15 2021

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