CBSL downgrades Sri Lanka’s growth to 3%

The Central Bank yesterday stated that Sri Lanka’s growth forecast for 2019 has been downgraded to 3% from 4% earlier in the year.

“As you know, growth was projected to be 4% at the beginning of the year, and after the Easter bombings we have revised it down to about 3%. I’ve seen some projections that have been much gloomier, but I think that is overdone,” Central Bank Governor Dr. Indrajit Coomaraswamy told reporters.

“Certainly the second quarter growth will be disappointing, but fourth quarter there are very favorable base effects, as in 2018 the 4Q growth was only 1.8%,” he added.

Coomaraswamy noted that currently the country is experiencing a faster recovery in the tourism sector than expected.

“I think 3% is realistic,” he said.

Speaking further the governor informed reports that macroeconomic fundamentals remained in “good shape” due to moderate inflation, stronger reserves, and international rates taking a dovish turn but also said that the Monetary Board has decided not to reduce rates further.

“The reason why the Monetary Board decided not to reduce policy rates is to wait and see the full effect of everything that has been done so far. Policy rates were reduced on 31 May and we haven’t really seen the Statutory Reserve Ratio (SRR) reduction and the Rs. 100 billion of Government payments, the effects of the deposit cap that we now hope to see spilling over into lending rates. In the coming weeks we anticipate lending rates coming down quite significantly. The Government is also spending about Rs. 300 million in each electorate under the Gamperaliya program, so there is a lot of money being flushed into the system. We would like to wait and see exactly what the overall impact of this money will be before making another call on policy rates.”

Meanwhile responding to a question, governor noted that Sri Lanka’s banks should lower the average lending rate by 200 basis points to avoid ceilings on lending rates.

“The prime lending rate has come down by 120 basis points but the average weighted lending rate hasn’t moved at all,”

“We would anticipate a reduction of up to 200 basis points in lending rates, especially the average weighted lending rates, and will monitor it closely. We don’t want to impose a lending cap because those sort of measures are highly distortionary, but if we are forced to do it, we will. However, we anticipate banks will be cooperative and the impression we get is they also see lending rates come down.” Coomaraswamy said.

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