Sri Lanka is cutting policy rates by 100bp during the slowdown of Coronavirus

Sri Lanka has slashed the policy rate by 100 basis points. The action means that one can inject money into the banking system at 5.50 per cent and withdraw excess money at 4.5 per cent.

"The Board arrived at this decision to induce a further reduction in market lending rates, thereby encouraging the financial system to aggressively improve lending to productive sectors of the economy, which would reinforce support for COVID-19 hit businesses as well as the wider economy, given the conditions of subdued inflation."

"While recovery expected in the second half of the year with the help of monetary and fiscal stimulus measures, the implementation of growth and confidence-building structural reforms is necessary for fostering strong and sustainable economic growth in the medium term."

Money market rates drifted around the earlier floor policy rate of 5.50 per cent amid excess liquidity injected in March and April through domestic asset purchases, which caused currency pressure and hit businesses and the economy in general.

Nonetheless, private credit was also low, which tends to hold rates close to the floor rate. As analysts have shown, Sri Lanka's Central Bank typically triggers monetary uncertainty by injecting massive amounts of money to keep the price below the maximum rate or in the middle of the corridor as the market regains from the last balance of expenses crisis and borrowing picks up.

Credit to the private sector was around 30 billion rupees in May, data shows, although there is a pickup in government credit as the deficit spreads. The Central Bank has also reduced the legal reserve ratio, with Sri Lanka's interest rates being one of the factors being higher than other countries with more excellent monetary stability.

Excess liquidity from purchases of domestic assets ultimately leads to foreign exchange shortages (and reserve losses when liquidity is mopped up by dollar sales) in a fixed exchange rate system when credit picks up. The Central Bank has withdrawn some excess cash from the system over the past week. Further money is also to provide through the ref-financing of bank loans by central banks and the discounting of contractors bills.

OSL Take: The government of Sri Lanka has made all arrangements to ensure a hassle-free and safe visit for tourists planning to make a trip to the island. With international airlines all geared to recommence flights to Sri Lanka, the country is now geared for foreign travellers looking at leisure/business/investment opportunities. The World Health Organization has recommended Sri Lanka as one of the safe countries concerning COVID 19. Hence, Sri Lanka’s tourism industry shows signs of picking up from where things stopped before the COVID 19 lockdown. Foreign businesses/investors looking at opportunities could explore business/investment opportunities in Sri Lanka’s tourism industry.

Many large scale real estate development plans that were on hold during the COVID 19 lockdown have now recommenced operations. Given Sri Lanka’s resumption of economic activities much faster than other countries in the region, business opportunities in Sri Lanka are expected to open up more quickly than anticipated. Also, Sri Lanka’s geographical positioning in the Indian Ocean, the ease of doing business environment, the many trade accords as well as trade reductions enjoyed by the country will undoubtedly help Sri Lanka regain its position as a business hub in the South Asian region. Hence, this will create many business/investment opportunities in Sri Lanka’s real estate development as well as construction sectors.

VBS/AT/06082020/Z_TB3