CB expects economy to rebound in second half

From left: CB Governor Prof. W. D. Lakshman and CB Senior Deputy Governor Dr. Nandalal Weerasinghe

• But anticipates virus-hit economy to contract in second quarter
• Cuts policy rates by further 100bps to bring down market lending rates 
• CB reduced policy rates by 250 basis points this year 
• Supported by SWAP arrangements, foreign reserves edges up to US$ 6.7bn in June
• Says growth promoting and confidence enhancing structural reforms crucial

By Nishel Fernando
The Central Bank (CB) anticipates a strong economic rebound in the second half of this year from the expected contraction in the second quarter due to COVID-19 related lockdown, although the growth projection of 1.5 percent could be subject to revisions in future. 

“We still maintain the projections in the annual report which is 1.5 percent. We think the growth should be above one percent with a strong rebound in the second half,” Director, Economic Research at CB, Dr. Chandranath Amarasekara told reporters in Colombo. 

However, he noted that CB might revise the growth forecast for the virus-hit economy after analysing the first quarter GDP data, which is expected to be released next week. 
Many international institutions including World Bank, have forecast a significant contraction in Sri Lanka’s economy this year.

Meanwhile, CB’s Monetary Board on Wednesday cut policy rates for the fifth time this year by one percent to bring down market lending rates and consequently to encourage the banking sector to aggressively increase lending to virus-hit businesses.  Accordingly, the CB reduced the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) by 100 basis points each, to 4.50 percent and 5.50 percent respectively.

So far this year, CB has reduced policy rates by 250 basis points.

Despite high levels of surplus liquidity available to banks, the CB noted that credit extended to the private sector contracted significantly in May while lending rates for SMEs in particular remained at higher levels. 

Overall credit disbursements to private sector by the banking sector, which continued to pick up since last December, declined by Rs.69.6 billion in May. On cumulative basis, credit to private sector increased only by a mere Rs.89.9 billion during the first five months of the year.

The CB also noted that Average Weighted Prime Lending Rate (AWPR) has only recorded a decline of 146 basis points so far during the year in response to 150 basis points reduction in policy rates and 300 basis points reduction in Statutory Reserve Ratio (SRR). 

Further, the Average Weighted Lending Rate (AWLR), which is considered the lending rate for risky businesses including SMEs, has only come down by 63 basis points to 12.96 percent and the Average Weighted New Lending Rate (AWNLR) has only come down by 113 basis points to 11.68 percent at the end of May. CB expects these rates to come down to single digits in coming days backed by Wednesday’s policy rate cut. 

Meanwhile, the country’s foreign exchange reserves have edged up to US$ 6.7 billion in June from US$ 6.49 billion in May supported by SWAP arrangements with merchant banks. 

Sri Lanka’s export earnings have declined by 29.7 percent YoY to US$ 3.5 billion during the first five months of the year while import expenditure recorded a decline of 19.3 percent YoY to US$ 6.6 billion during the period, leading to a US$ 200 million improvement in trade deficit compared to the same period last year. The government last week extended the import controls, which were to be expired this month by a further six months.

CB Senior Deputy Governor Dr. Nandalal Weerasinghe noted that a treasury-appointed committee is reviewing the requests from the private sector to allow importation of raw materials and other intermediary goods for production and for exports, based on long-term credit facilities. The FDI inflows to the country including loans obtained by BOI firms have fallen below US$ 200 million in the first quarter of the year. The government was targeting to lure in US$ 3 billion worth FDIs this year.

Despite the anticipated economic rebound in the second half of the year backed by monetary and fiscal stimulus measures, the CB stressed that the introduction of growth promoting and confidence enhancing structural reforms is crucial to foster high and sustainable economic growth over the medium term.