ECONOMYNEXT – Sri Lanka expects the economy to grow 3.7 percent in the first quarter of 2018 driven by service sector expansion, Central Bank Governor Indrajit Coomaraswamy said.
The growth was still below potential, he said.
Sri Lanka’s central bank which is intervening in forex markets and collecting reserves is operating a soft-pegged monetary regime, which frequently goes into balance of payments crises.
The policy stance was now ‘neutral’ Coomaraswamy said, from an earlier tight policy until April.
The central bank cut the ceiling policy rate on April 04 from 8.75 percent to 8.50, when overnight rates, which had fallen from near ceiling rate close to the 7.25 percent floor rate, suddenly shot up to rate ceiling.
It has now turned out that in March private credit spiked to 122 billion rupees, which had helped push rates up.
The central bank then injected cash through reverse repo auctions at rates low as 7.50 percent generating a run on the rupee towards the end of April, undermining the credibility of its downward crawling dollar peg.
Sri Lanka’s new Governor is not in favour of printing money to boost growth which results in a credit bubble, which leads to balance of payments troubles and has urged the government to engage in real reforms to bring investment.
However the central bank has depreciated the rupee in a bid to subsidize exporters with cheap labour and improve their ‘competitiveness’ at the expense of the welfare of the workers.
Meanwhile the country is also emerging from a drought and already the main cultivation season ending in April has brought stronger harvests. (Colombo/May11/2018)