Monetary Board Has Decided to Increase the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 100 basis points to 14.50% and 15.50% respectively with immediate effect States Central Bank Governor Dr.Nandalal Weerasinghe

By Charumini de Silva

The worsening economic crisis has forced the Central Bank to further tighten the monetary policy, to curtail the soaring inflation to ensure macroeconomic stability.

The Monetary Board at its meeting on Wednesday has decided to increase the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 100 basis points to 14.50% and 15.50% respectively with immediate effect.

The latest hike comes three months after the tightest stance in April when policy rates were increased by 7%. “The inflation is running over 50% and as per our projections, it might even go close to 70%.”

“From the Central Bank’s point of view, the major concern here is to address inflation and expectations going forward. We hope to bring it down to a reasonable level as soon as possible,” Central Bank Governor Dr. Nandalal Weerasinghe told journalists yesterday.

With the higher-than-expected escalation of headline inflation recently and the increased persistence of high inflation in the period ahead, the Board was of the view that a further monetary policy tightening would be necessary to contain any build-up of adverse inflation expectations.

“In arriving at this decision, the Board weighed the impact of tighter monetary conditions on overall economic activity, including the micro, small, and medium scale businesses, and the financial sector performance, among others, against far-reaching adverse consequences of any escalation of price pressures across all sectors of the economy in the near term.

“On balance, the Board was of the view that this policy adjustment would help guide inflation expectations to be anchored around the targeted level of headline inflation over the medium term while curtailing any build-up of underlying demand pressures in the economy,” the Central Bank said.

The Governor justified the move to further tighten the monetary policy, noting that Sri Lanka was certainly ready to go into a “hyperinflation” situation.

“If we let the inflation go beyond 100%, no one will be able to do their business, while the most vulnerable or the poor will be the most impacted. Even the SMEs will have an adverse impact from high inflation levels. The International Monetary Board (IMF) too recommended introducing safety net programs to support the poor and vulnerable segments to be able to survive high inflation situations,” he explained.

Dr. Weerasinghe however pointed out that given the worsening economic crisis, it was critical to implement not only the monetary policy but also the Government fiscal policy as well as the economic and structural reforms simultaneously.

“The puzzle can only be completed if all macroeconomic imbalances could be addressed in parallel and preferably,” he said.

The Governor claimed that the delay in imposing correct prices for electricity has adversely impacted the Ceylon Petroleum Corporation’s cashflows despite its operating a price formula at present.

“The CPC does not even generate sufficient rupees even after the price hike as per formula and by selling all petroleum products. It does not have sufficient rupees to buy dollars,” he pointed out.

He said the CPC has recently requested Rs. 217 billion from the Treasury which will mean that the Central Bank would have to print money.

“If there is no allocated money, obviously the Treasury will ask the Central Bank to print money,” he said, adding that they did so last week too for an immediate request by the Treasury to print Rs. 18.5 billion. He pointed out that if they did not heed the money printing request the country would have experienced severe economic consequences.

He also claimed that the Ceylon Electricity Board was making losses, but there has been a delay in raising prices.

“Today, we are facing the consequences of not raising prices on time. This is why we need to do the necessary structural reforms on the State-owned enterprises simultaneously with the monetary and fiscal policy decisions,” he said.

The CPC, CEB, and SriLankan Airlines are the three key State enterprises making large losses for years.

As per the Governor’s recommendations, the SOEs are urgently required to bring down the deficit by either increasing the revenues or cutting down on expenditure. However, he said the measures need to be introduced by the Finance Ministry.

Noting that the Central Bank had so far received money printing requests from the CPC, Dr. Weerasinghe hinted there is a possibility that even the other two SOEs might make such appeal in the coming months.

On a positive note, he said the policy adjustments announced in the export and import sector show some development as the trade gap had narrowed slightly.

“The previous import bill which was around $ 2 billion has now come down to $ 1.4 billion and seeing the data we have received so far, it seems like it would come down further to $ 1.3 billion, whilst exports are expected to grow over $ 1 billion this month,” he added.

The Central Bank also said the gross official reserves as of the end of June were provisionally estimated at $ 1.9 billion, including the swap facility from the People’s Bank of China equivalent to around $ 1.5 billion, which is subject to conditions on usability.

Dr. Weerasinghe reiterated that the pace of turnaround with new CBSL measures, IMF support as well as friendly nations China and India, and an end to sufferings of the people depends on implementing the policy and structural reforms simultaneously.

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SL close to wrap-up discussions for Staff-Level Agreement with IMF Says Central Bank Governor

Central Bank Governor Dr. Nandalal Weerasinghe yesterday said Sri Lanka is close to wrapping up discussions for a Staff-Level Agreement with the International Monetary Fund (IMF).

He confirmed the discussions with the IMF linked to monetary targets have been closed and agreed upon, though the fiscal targets and measures are still ongoing.

“As per my understanding they are almost close to completing the discussions,” he told journalists yesterday.

Following the conclusion of the IMF staff visit to Sri Lanka last week, further discussions were resumed on certain areas virtually on Tuesday.

“There is nothing open on the monetary policy side, including monetary stance and reserve targets. We have agreed on all aspects and reached an agreement,” he told journalists yesterday.

However, when asked about the areas that are currently being discussed with the IMF, the Central Bank Governor said he cannot comment on them, as it relates to the fiscal policy.

In terms of the debt restructuring, Dr. Weerasinghe said they were continuing discussions with the legal and financial advisors simultaneously.

“IMF staff and our financial and legal advisers held several rounds of talks and shared details. Upon the debt sustainability analysis, the advisors will seek the types of relief or restructuring that should be negotiated with different creditors. The process is going on and we are making some progress,” he explained.

He also said that the Central Bank and the Finance Ministry maintain their parameters for external debt restructuring only.

Despite the debt restructuring negotiations continuing, the Governor was of the view that a Staff-Level Agreement with the IMF could be reached shortly.

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Central Bank Governor dismisses Hanke’s inflation analysis on Sri Lanka

Central Bank Governor Dr. Nandalal Weerasinghe yesterday dismissed the inflation figures presented by Prof. Steve Hanke on Sri Lanka, noting that the analysis did not have a proper foundation for the calculation.

“The methodology of the calculations has not been revealed to even consider. However, the calculation used by the Central Bank of Sri Lanka is followed by most of the central banks in the world,” he said in response to a query from the journalists yesterday.

Dr. Weerasinghe also pointed out that Sri Lanka has been doing the inflation calculation since the 1950s, and knew the methodology.

“Thus, we do not have to consider his version of inflation,” he quipped.

On 3 July, the US-based Economist Steve Hanke said Sri Lanka was in a ‘death spiral’, adding that the annual inflation in the country has risen to a staggering 122%.

“Sri Lanka is in a death spiral. Today, I measure LKA’s inflation at 122%/yr. things are so bad even IMF refuses to offer Sri Lanka a bailout loan. SPOILER ALERT: Sri Lanka has had 16 IMF programs. None have worked,” he tweeted on Sunday. The tweet has created much stir on social media since then.

However, the local economics insisted on not taking Hanke’s inflation theory very seriously.

Prof. Hanke is an economist at John Hopkins, a private research university in Baltimore, Maryland in the US. He measures the inflation in countries with currency troubles.

Courtesy:Daily FT