Interest rate cuts

Interest rate cuts

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Slowed growth stimulated, financed by further borrowing

The Central Bank of Sri Lanka (CBSL) cut its main lending rate for the second time in three months, on 23 August, a measure it hopes will revive the struggling economy. The devastating Easter Sunday attacks and their aftermath hit the crucial tourism sector, the only growth sector in an otherwise faltering economy. Meanwhile, the treasury is preparing to take loans to meet debt obligations, as the yields from treasury bills fell.

Reduced fund costs

The CBSL said that it had lowered its commercial bank lending rate to 8% – or by 50 basis points –adding that a similar, 50-basis-point reduction in May did not cause financial institutions to offer their customers cheaper credit. and that it hoped that this time around, the cut would be reflected in moderated market lending rates.
“It is essential that market lending rates are lowered,” it stated in its monthly economic review, “by bank and non-bank financial institutions in response to their reduced cost of funds, thereby boosting credit flows to productive sectors, and in turn help the revival of the economy.”

The economy has been in trouble for some time – its growth slowing to 3.2% last year, down from an already slackened 3.4% in 2017 – but the devastating Easter Sunday bomb attacks by the Thowheed Jamaath islamist terrorist group, which killed over two hundred people, impaired tourism severely and hit consumer spending, beat it down to its knees.

“Although economic growth is expected to recover gradually towards its potential in the medium term,” the CBSL said in its review, “domestic and global headwinds are likely to delay this recovery.”

The International Monetary Fund (IMF) helped government efforts to stabilise the economy, in the aftermath of the bombings, by releasing a USD 164 m loan instalment of the three-year, USD 1.5 billion bailout package, which it suspended last October, after president Maithripala Sirisena replaced prime minister Ranil Wickramasinghe with former president Mahinda Rajapaksa. Rajapaksa’s resignation and Wickramasinghe’s re-appointment did not result in a resumption of the facility.

Tourism recovers

The government let a state of emergency, imposed following the attacks, lapse after four months, on 22 August, having announced that the security forces has killed or arrested everyone concerned directly with the attacks. This has brought some confidence in the possibility of improvement, particularly in the tourism sector, one of the country’s biggest foreign exchange earners.

Although finance minister Mangala Samaraweera expects cancellations after the attacks – which counted 45 foreigners among the victims – to reduce tourist revenues sharply by USD 1.5 bn, from a record USD 4.4 bn last year, the tourist trade itself is more optimistic.

Foreign governments removed travel advisories after the security forces apparently shut down Thowheed Jamaath completely. Hotels slashed their prices by 50% or more, after the government suspended its mandatory minimum room-rate rule, making them competitive with South East Asia; while the national carrier, SriLankan also offered concessionary fares.

Meanwhile, extensive promotion in the Russian Federation appeared to bear fruit, despite a Russian government travel advisory remaining in place. Russia is significant as a market for Sri Lankan tourism. In 2018, 64,000 Russian tourists visited Sri Lanka, and in the first part of this year, the number of Russian visitors to Sri Lanka reportedly increased seven-fold. The first batch of new tourists to arrive in the island following the attacks were Russian.

In late August and early September, hotels and flats in Colombo were booked fully, due to a religious convention of the Dawoodi Bohras, a Shia Isma’ili sect of Islam – about 2,500 of whom comprise an important part of Sri Lanka’s business community. The leader of the Dawoodi Bohras, the Dai al-Mutlaq, His Holiness Dr Syedna Mufaddal Saifuddin, known as the Syedna Sahib, presided over the celebrations of Ashara Mubaraka, which commemorate the martyrdom of the Holy

Prophet Mohammed’s grandson, the Imam Husain. The convention drew some 21,000 Dawoodi Bohras.
Officials expected a 30% drop in arrivals this year, from the record figure of 2.33 million in 2018, but have now revised the figure to 10%, and expect 2.1 million arrivals in 2019, with monthly figures reaching last year’s level by October. Revenues are forecast to fall only by about 20%, to USD 3.5 billion, the revenue loss being greater than the drop in arrivals due, in part, to the discounts being offered by hotels and airlines.

Indrajit Coomaraswamy

Gloomy outlook

Notwithstanding the recovery of the tourism sector, however, the outlook for the economy does not appear rosy. A growth rate of 3%, the lowest in 20 years has hit small businesses and the self-employed, many of whom have been complaining of shrinking clienteles over the past three years, and some of whom have lost all their customers.

The LKR has been under pressure from a ballooning deficit and growing debt. The major contributor to the balance of payments, remittances from Sri Lankan workers overseas, has stagnated.

Rising government debt has become a major issue, with tax revenues falling short of spending by a long mark. Sri Lanka has had to depend on external borrowings to accumulate foreign reserves, and on internal borrowings to service local debt. Foreign debt totalled USD 33 bn in March. Debt repayments will total USD 6 bn this year. According to a senior official, the Treasury received LKR 894 bn in the first half of this year, but has to par LKR 1.1 trillion as debt service – even after debt and interest repayment, a shortfall of LKR 206 bn remains.
CBSL Governor Indrajit Coomaraswamy remains reasonably confident that the government could manage the situation, although he expects the country’s foreign exchange reserves to fall to USD 6 bn by the end of the year. In June, the government raised USD 2 bn from USD bond markets, and Coomaraswamy anticipates that foreign currency swaps and Panda or Samurai bond issues could be arranged.

A senior finance ministry official revealed that the government plans to raise LKR 1.9 trillion in 2019, to service debts and cover the budget deficit.

The government has found no lessening in demand for treasury bills. Sales at the debt office’s end of August auction the equalled the total of LKR 12.5 bn of 12-month, six month and three-month bills offered, receiving bids of almost LKR 37 bn. Consequently, yields fell by 9 basis points, to 8.22% for 12-month bills; by 19 basis points, to 7.70% for six-month bills; and 21 basis points, to 7.63% for three-month bills.

Savithri Guruge