Press Release – Central Bank Of Sri Lanka
October 13, 2009
Worldwide inflation is expected to pick up moderately in the ensuing months with the base effects of last year’s high consumer prices driven by the commodity price bubble wearing out, as well as firming demand alongside the nascent recovery in global markets.
Nevertheless, inflation in Sri Lanka is expected to be at subdued levels in the approaching months, with current inflation remaining at around 1 per cent during the four months up to September 2009.
So far during the year, market interest rates have gradually declined in response to the monetary policy relaxation measures of the Central Bank, but are yet to adjust fully to such measures. Benchmark yield rates on Treasury bills have declined significantly by around 800 – 865 basis points since the end of last year, by the first week of October this year.
The Central Bank expects the downward movement of the benchmark yield rates to permeate to other market interest rates over the coming weeks, further reducing the borrowing costs of economic agents. This, together with the improved outlook for economic activity, is expected to underpin an expansion in credit utilisation of the private sector, thereby supporting enhanced economic performance.
Accordingly, the Monetary Board is of the view that the current levels of policy interest rates do not require any adjustment at the present time, since the policy measures adopted so far are still supportive of the desired outcome of gradual easing of the credit conditions in the country.
The release of the next regular statement on monetary policy will be on 18 November 2009.
October 13, 2009 at 10:33 am
Standard & Poor’s has revised Sri Lanka’s Sovereign Rating without proper assessment of current developments and future outlook.
The Standard & Poor’s Ratings Services has issued a press release today downgrading Sri Lanka’s sovereign rating to ‘B’ from ‘B+’ citing certain concerns. However, many comments by S&P in their press release are factually incorrect, logically untenable and grossly misleading. Hence, the Sri Lankan authorities wish to make the following clarifications to get the record right.
Sri Lanka has experienced a decline in foreign exchange reserves in October and November 2008 due to the supply of foreign exchange to the market mainly to meet higher oil bill payments and to allow the outflows of Treasury bonds and bills. The Central Bank purchased US dollars 622 million out of foreign inflows including foreign investments in Treasury bonds and bills during the first 8 months to face events of this nature. On that basis, more than 60 per cent of speculative capital in terms of Treasury bonds and bills has already flown out the country and hence, the high risk of further loss of reserves is very unlikely.
In addition, a large amount of short-term credit by way of petroleum bills has already been settled and therefore, the pressure on external reserves as well as the exchange rate will be much lower than that prevailed during the last two months. The Central Bank intervention in the foreign exchange market has also declined markedly since November 2008 and as of now, the Central Bank has even greater flexibility in the exchange rate management.
It is quite disappointing that S&P has apparently not realized that the decline in foreign exchange reserves is a global phenomenon under the present international financial crisis. Hence, it is grossly unfair to single out Sri Lanka only on a global situation and downgrade the rating position mainly based on that.
Furthermore, in contrast to the claims by S&P, the elimination of the fuel subsidies has improved the macroeconomic stability of the country further, as it has prevented the transfer of huge funds through the government budget by way of fuel subsidies.
It is also a fact that the overall budget deficit of the country has declined gradually in the recent past from about 10.8 per cent of GDP in 2001 to around 7.0 per cent in 2008 has not given the due recognition by S&P. In commenting on the debt position in Sri Lanka also, S&P has simply neglected the improvements the country has achieved in the recent past. The true picture is that the debt burden of the country has eased significantly over the years, which is reflected in the sharp decline in the outstanding debt to GDP ratio from 105.6 per cent in 2002 to 75 per cent by end of 2008 as has been projected by S&P.
Further, in contrast to the S&P’s claim, there is no evidence that migrant worker remittances will decline in the near future. In fact, past experience shows that remittance flows are counter cyclical as Sri Lankan expatriates tend to make more remittances during the periods of slower economic growth. In addition, the S&P’s presumption that the preferential access to EU markets will lose is also incorrect, as Sri Lanka has just received the confirmation of the GSP+ facility for the next 3 years.
The above matters that S&P has, for whatever reasons, unfortunately suggests that S&P has deliberately neglected the recent improvements in the country’s macroeconomic fundamentals. This is even more significant when it is observed that S&P pointedly does not refer to the much concerned economic variable, inflation. In fact, the rate of inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index (CCPI) (2002=100), which risen to 28.2 per cent in June 2008, decelerated to 16.3 per cent in November 2008 for the fifth consecutive month. This improvement, which was achieved as a result of the favourable developments on both demand and supply factors, is expected to continue.
The above clarifications reveal that S&P has overlooked many favourable developments in the Sri Lankan economy and hence, Sri Lankan authorities view S&P’s decision as being arrived at without proper assessment of current developments and future trends.
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