The Central Bank kept interest rates on hold yesterday as it continued to evaluate the affect of previous tightening measures amidst Government efforts to secure a $1.5 billion International Monetary Fund (IMF) arrangement. 

 The Monetary Board decided the current monetary policy stance is appropriate and agreed to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 6.50 %  and 8.00 %, respectively. 

“Going forward, with the policy measures already adopted by the Central Bank, inflation is expected to remain in low- to mid-single digit levels during the remainder of the year.

 On the external front, the deficit in the trade account narrowed by 9.1 %, year-on year, in January 2016,” the Central Bank said in a statement.

  The bank had already tightened policy twice in three months as Governor Arjuna Mahendran strives to halt the slide of the rupee due to low rates, a yawning fiscal deficit and capital outflows as the U.S. Federal Reserve begins tightening monetary policy, Reuters reported. 

Economists had been split over Tuesday’s policy outcome, with seven of 13 respondents in a Reuters poll predicting a rate hike and the rest seeing no change.

Sri Lanka is seeking a $1.5 billion loan from the IMF to tide over its finances as the government faces foreign loan repayments of over $4.56 billion, or roughly 6 %  of gross domestic product, in the 12 months to January 2017. 

“Market rates are going up due to the borrowing pressure,” said Colombo-based Frontier Research analyst Shiran Fernando, “Future direction depends on securing the IMF loan. If not, it would add pressure to monetary policy.”

The Central Bank also has to manage an economy facing weak overseas demand. It is hoping that higher borrowing costs will temper the risk of overheating in domestic private sector credit growth as well as a recent pick up in inflation.

Meanwhile the Central Bank assured earnings from tourism are estimated to have increased by 19.4% in February 2016, while workers’ remittances, which declined by 0.5% during 2015, recorded an increase of 8.0 % during January - February 2016. 

Gross official reserves, which stood at $ 7.3 billion at end 2015, are estimated to have decreased to $ 6.6 billion by end February 2016, mainly due to debt service payments and the supply of foreign exchange to the domestic foreign exchange market largely to cover the demand arising from foreign investors who moved their funds away from the government securities market. Meanwhile, the Sri Lanka rupee remained broadly unchanged against the US dollar thus far during 2016.

“In the monetary sector, market interest rates have risen, reflecting the tightening monetary conditions and the transmission of policy actions of the Central Bank. The year-on-year growth in broad money (M2b), which responds to monetary policy actions with a time lag, remained high at 19.1 %  in January 2016 in comparison to 17.8 % recorded at end 2015,” the Central Bank statement noted.  

Private sector credit growth was 25.7 %  in January 2016 compared to 25.1 % in December 2015 and 27.0 % in November 2015. In absolute terms, private sector credit grew by Rs. 43.6 billion during January 2016. Going forward, the growth of monetary aggregates is expected to decelerate gradually over the remainder of the year, reflecting the impact of the upward movement in market interest rates, while the envisaged fiscal consolidation path is expected to support the moderation of monetary expansion.

Rupee forwards decline for fifth session

Reuters:  Rupee forwards fell for a fifth straight session on Tuesday due to dollar demand by importers and foreign investors selling bonds amid low liquidity in the greenback.

Dealers said importers were buying the greenback at record low levels.

The spot rupee LKR=LK, which has not been active since 27 January did not trade. The Central Bank has fixed the spot trading price at 143.90 through moral suasion.

One-week rupee forwards, which act as a proxy for the spot currency, were traded as low as 149.10 per dollar and ended at 149.00/15, down from Monday’s close of 148.10/30.

The one-week forwards have fallen around 3.4 % since they started to trade after 27 January.

“We have seen some panic importer buying also, as importers expect the rupee to depreciate further,” said a currency dealer asking not to be named.

The steep fall came ahead of the Central Bank’s key policy rates announcement later in the day.

The Central Bank is expected to raise its key interest rates by at least by 25 basis points on Tuesday, a Thomson Reuters poll showed, as it seeks to reduce downward pressure on the fragile local currency LKR=LK. 

The rupee is under pressure due to foreign investors exiting from government securities amid speculation over further rate hike by the U.S. Federal Reserves and economic woes.

Rising debts, rating downgrades and revisions by rating agencies, slowing economic growth, widening fiscal deficit, looming balance of payments crisis, and changes in budget proposals have dented investor sentiment.

Finance Minister Ravi Karunanayaka said last week that Sri Lanka borrowed over 25 %  more last year than in 2014, blaming the high cost of refinancing loans raised by the previous government without parliamentary approval. 

Analysts said short-term borrowing has gone up and the debt roll-over cycle is getting shorter. Borrowings are expected to increase and that could raise dollar borrowing rates in future unless remittances and exports grow.

Foreign investors sold Rs. 17.58 billion worth of government securities in the week ended 23 March, data from the Central Bank showed, taking the total offloaded since 30 December  to Rs. 83.7 billion ($570.16 million).