SL should consider IMF support: ex-CB

Deputy Chief

Wijewardena opines 2016 will be

more challenging from a foreign reserve and capital raising perspective;
IMF support will help overcome Balance of Payment challenge
By Charumini de Silva-Wednesday, 30 December 2015
Former Central Bank Deputy Governor W.A.Wijewardena yesterday opined
that Sri Lanka should go for International Monetary Fund (IMF) support to
avoid Balance of Payment (BoP) crisis situation.
By end September the countrys BOP was
estimated to have recorded an overall deficit of
$2.3 billion during the first three quarters of
2015 in comparison to a surplus of $2 billion
recorded a year earlier.
Given the tight liquidity in capital markets, I
think the best option right now is to consider a
bail-out package from the IMF as it is
unavoidable for Sri Lanka next year,
Wijewardena told the Daily FT.
In 2009, Sri Lanka was bailed-out by the IMF from BOP crisis, which was
triggered by excessive money printing to support subsidies- through a $2.6
billion Stand-By-Arrangement (SBA).
We have been able to build up our foreign reserves, amounting to about
$4.5 billion, by selling out treasury bills at high interest rates to the US. We
will go bankrupt if the remaining $2.5 billion in reserves goes out of the
economy, Wijewardena cautioned.
However Central Bank said recently gross official reserves, which stood at
$6.8 billion at end September, are estimated to have strengthened to
around $8 billion by 3 November.
This is with the receipts from the ninth International Sovereign Bond
issuance for $1.5billion.

Ahead of the Monetary Review Policy Review meeting today Wijewardena

also stated that with falling foreign reserves and the consequential pressure
on the exchange rate, the Central Bank can no longer keep interest rates at
low levels.
Rates of the deposit side had been cut down to the bare minimum and we
have to match the rates, he pointed out.
The US Central Bank raised interest rates by a 25 basis point and pledged a
gradual pace of increases in 2016. This marked the end to the near zero
borrowing costs that have prevailed since the US was struck by the worst
financial crash in modern times.
In this backdrop Sri Lanka has already experienced foreign outflows from
the money and capital markets this year, as global investors anticipated a
Fed tightening which eventually took place in December 2015. The
December 25bps rate increase by the Fed was expected and markets have
had a smooth adjustment. The Fed is expected to meet again next March
and only then will its intention be clearer.
Ceylon Chamber of Commerce Chief Economist, Anushka Wijesinha said
The fed rate hike was widely expected for months now and Fed had
managed expectations rather well. So much of this first rate hike was
mostly priced in by the markets. We have not seen any major movement in
capital flows and asset prices since then. However, key to watch will be
what next how will the markets react after the next rate revisions, the
tightening cycle next year.
The fact that the Fed decision was unanimous indicates that there is little
doubt on the path of monetary policy tightening. Looking at the dot plot
also shows not much change since the last meeting. The markets maybe
expecting a slower tightening cycle. But this unanimous decision may
indicate that the tightening cycle may be faster than the markets have
priced in, he pointed out.
Emphasising a broader perspective Wijesinha asserted that one of the
major shifts to look at in 2016 is the monetary policy divergence which is
taking place at present.
In the US rates are gradually rising, while in the EU rates are now cut to
negative rates. Meanwhile unsure of emerging markets some will have to
raise rates to continue to attract foreign capital. This kind of unprecedented
divergence has not been seen before, he added.
Noting that Sri Lanka has seen the effect of the Fed rate hike expectations

impact foreign capital outflows in the past few months, he pointed out that
foreign holdings of Government paper have fallen from Rs 460 billion in
January to Rs 300 billion in November.
This no doubt contributed to the downward pressure on the Rupee seen in
the past couple of months. This is likely to continue, as well as upward
pressure on interest rates, he explained.
According to the Central Bank statistics, Sri Lanka rupee has depreciated by
8.1% against the US dollar so far in 2015.
Wijesinha went onto say that it will also affect the price of foreign borrowing
for Sri Lanka next year, as global rates rise. Already Sri Lankas foreign
bond yields are edging up rather fast. Thus, we can only assume that 2016
would be more expensive from a foreign capital raising perspective.
Central Bank Governor Arjuna Mahendran said: The danger is the dollar
gets stronger and rupee weaker, so capital keeps flowing out. However,
exports should recover momentum next year to compensate.

CB seen raising rates by 25 bps

Lower rates weigh on exchange rate; rupee at record low
Central Bank cut key rates to record low in April
Reuters: Sri Lankas Central Bank is expected to raise interest rates by 25
basis points from record lows at its policy meeting on Wednesday, a Reuters
poll found, a move that could relieve pressure on the fragile rupee.
The rupee closed at a record low of 143.95/144.05 per dollar on Tuesday,
hit by dollar demand from importers.
Six out of 11 economists surveyed expected the Central Bank of Sri Lanka
to raise the standing deposit facility rate (SDFR) and the standing lending
facility rate (SLFR) by 25 basis points to 6.25% and 7.75%, respectively.
It will be the first increase since February 2012,
should the Central Bank raise rates on Wednesday.
All 11 economists predicted the statutory reserve
ratio (SRR) for commercial banks would remain
unchanged at 6.00%.
Four economists expected the rates to be left

steady, while one expected the Central Bank to raise SDFR and SLFR by 50
basis points (bps) each.
If they want to maintain the currency, they will have to raise the policy
rates, said Danushka Samarasinghe, research head at Softlogic
Stockbrokers.
Sri Lanka has to raise rates to guard against outflows from the pressure of
higher U.S. rates and cooling economic growth.
Economists said the government had little fiscal options to help keep the
currency stable as it had promised a lot of spending in the 2016 budget.
Sri Lanka early this month passed its 2016 budget with a series of
amendments due to public protests that could derail the governments
attempts at fiscal consolidation.
The Central Bank in April surprised markets with a 50-bp cut to spur
economic growth and boost consumer prices. Until then, it had held rates
steady for 14 months.
Since then the island nation has witnessed a 22.2% growth in private sector
credit in September from a year earlier, compared with 13.9% growth in
March this year.
The Central Bank floated the currency on 3 September after heavily
defending it. Since then the currency has fallen 6.4% and economists say
lack of monetary and fiscal policy tightening led to the steep fall, apart from
the strong dollar.
The International Monetary Fund in September said that the key policy rates
were not necessarily inappropriate.
Sri Lankas economy grew 4.8% in the third quarter of this year compared
with the same period a year earlier, slowing from 6% in the second quarter.
Finance Minister Ravi Karunanayake during his 2016 budget speech last
month estimated the economy would expand 6% this year and aimed to
achieve annual growth of 7-8% during the next few years.
Posted by Thavam