Central Bank calls for caution handling stimulus package

From left: CB Deputy Governor H. A. Karunaratne, CB Governor Dr.  Indrajit Coomaraswamy and CB Senior Deputy Governor Dr. Nandalal Weerasinghe
Pic by Nisal Baduge

By Nishel Fernando 
The recently introduced fiscal stimulus package should be accommodated within a stable framework without comprising Sri Lanka’s fiscal and debt sustainability, the Central Bank (CB) stressed last week.

“There’s capacity for some expansionary policy in terms of aggregate demand in the system. The fiscal stimulus could possibly be accommodated without overheating the economy, provided it’s structured within a clear framework. 

“However, it’s extremely important that we remain vigilant and this fiscal stimulus package must be kept within a framework, which doesn’t undermine fiscal sustainability and even more importantly, it must not undermine debt sustainability. Sri Lanka has never missed a single payment as far as its debt obligations are concerned, and we don’t intend to start now,” CB Governor Dr. Indrajit Coomaraswamy said. 

Dr. Coomaraswamy shared these remarks addressing his final post monetary policy review press conference as CB Governor in Colombo last Friday. 

The government is expected to issue a statement shortly to demonstrate as to how the fiscal stimulus package would be accommodated without undermining stability and averting a scenario leading to overheating of the economy. 

The Moody’s Investors Service estimated the hit from the tax cuts to State revenue to be around 1 to 1.5 percent of gross domestic product (GDP).

The sweeping tax cuts which include VAT rate cut and PAYE tax revision are aimed at reigniting consumption while supporting small and medium-sized businesses through the increase of tax-free monthly threshold for turnover for VAT from Rs.1 million to Rs.25 million.

“The rationale behind this fiscal stimulus package is to put more aggregate demand into the system and revive the economy. We had persistent low growth for sometime now. The idea is that through these reductions in taxes, you will put additional aggregate demand into the system, which would help grow the economy,” the Governor noted.

He pointed out that subdued private sector credit growth and broad money growth (M2B) provide the capacity for some expansionary policies in terms of aggregate demand in the system. 
The CB estimates that credit disbursements to the private sector to grow by Rs.250-270 billion in absolute terms this year below the original projection of Rs. 750 billion. Meanwhile, the broad money growth (M2B) is estimated to decelerate to 6-7 percent YoY this year below 13 percent YoY recorded last year. 

The CB expects that the stimulus package will lead to a high growth and low inflation environment in the short run while emphasising that a stable framework is required to maintain this momentum in medium to long-term. 

“The challenge is to maintain that momentum to ensure we get the growth in medium to long term and maintain inflation at lower stable level,” Dr. Coomaraswamy stressed. 
The CB expects Sri Lanka’s GDP to grow a notch below 3 percent this year.