Monetary and fiscal policies in SA could stay largely accommodative through 2022: WB

While the worst of the pandemic on the South Asian economies including Sri Lanka may be their behind, the region is still vulnerable to rising consumer prices, financing conditions and the evolving Omicron variant of the coronavirus pandemic, according to the World Bank.  

However, the global multilateral lender said the regions’ central banks could stay more through 2022, while the global central banks move fast to end the pandemic era policy support and follow it up with increasing interest rates to fend off the rising price pressures which proved to be more entrenched than earlier anticipated. 

The Federal Reserve Chairman, Jerome Powell in the Senate testimony on Tuesday prior to confirmation of his re-nomination for a second term said unequivocally that inflation has now become a, “severe threat,” to the full US economic recovery. 

He also said the US economy no longer requires emergency support and the Fed is expected increase interest rates multiple times starting from March, while shrinking its US$ 8.8 trillion portfolio of bonds and other assets later this year. 

Meanwhile, Sri Lanka’s consumer inflation hit 12.1 percent in December, hitting the highest level in 12 years while food prices rose by 22.1 percent from a year ago. 

“Risks to the outlook remain to the downside,” said World Bank in the South Asia chapter of its Global Economic Prospects report released this week. 

“The pandemic and the emergence of Omicron variant could hinder economic activity by requiring additional mobility restrictions and undermining external demand. 

Another risk stems from financing conditions. Further upward pressure may cause inflation expectations to become unanchored, worsening domestic financing conditions, riding real incomes”, the publication added listing a bevy of risks to the region in 2022.

However, the World Bank said the region’s growth outlook has improved since June 2021 largely because of the prospects in Bangladesh, India and Pakistan. “In most economies, monetary and fiscal policies are expected to remain broadly accommodative in 2022, but gradually shift to a focus on fiscal sustainability and anchoring inflation,” it added.

Speaking to media this week, Central Bank Governor Ajith Nivard Cabraal anchored the inflation expectations at more modest levels as he said the future readings could ease from the last couple of months. 

Meanwhile, alleviating heightened concerns over the inflationary impact of the Rs.229 billion relief package announced by the government last week, Cabraal said it would be accommodated with the budget and borrowings hadn’t been adjusted. 

However, neither the Treasury nor the Central Bank has explained to the public how they are going to ram it through the existing budget and what existing expenditures would be slashed and so on, as policymakers have continuously kept the people in dark over the management of public finances. 

If the package were to be paid from additional borrowings, it could create a nightmare scenario from the inflation point of view, according to economic analysts. 

However, Cabraal said the Central Bank is watching inflation very carefully and would not hesitate to deal with it, though he sees no reason to increase policy rates.