Sri Lanka central bank sees recovery in 2018, cautious on easing

Indrajith Coomaraswamy

Sri Lanka’s economic growth in 2018 is forecast at between 5-5.5 percent, bouncing back from an anticipated four-year low of less than 4 percent last year, central bank Governor Indrajit Coomaraswamy said on Wednesday.

The turnaround was expected in the wake of a stronger global economy, but the governor’s deputy said the central bank would be cautious easing monetary policy, though official interest rates stand at four-year highs.

Tight fiscal and monetary policies along with periods of both drought and floods contributed to last year’s slower growth.

“Economic growth is expected to pick up to between 5-5.5 percent. The economy is stabilising and on the right path but growth is still a challenge,” Coomaraswamy told the heads of banks, financial institutions, stockbrokerages and state-owned firms at an event to unveil economic policies for 2018.

The central bank has kept policy interest rates unchanged since the last rise in March 2017, having embarked on a tightening cycle in December 2015.

During that time the central bank had raised rates three times and increased commercial banks’ statutory reserve ratio (SRR) once to prevent sharp fall in the rupee and curb demand-driven inflation. Private sector credit growth has slowed to a near three-year low of 15.4 percent year-on-year in November from a four-year high of 28.5 percent hit in May 2016.

Coomaraswamy said the central bank expect to maintain 15 percent credit growth this year and the decision to ease monetary policy in future would be “data-driven”.

Consumer inflation was up 7.1 percent in December from a year earlier, slowing from a record high of 7.8 percent hit in October. The central bank is targeting inflation between 4-6 percent this year.

Deputy Governor Nandalal Weerasinghe said the central bank will be cautious before easing the monetary policy.

“We don’t necessarily need to loosen the monetary policy achieve a growth which is below the potential,” he told reporters after the policy announcement.

“Our forecast is right now 5-5.5 percent growth. If that is not going to realised, then obviously we have to take measures in future. If this trend of declining inflation and growth being below potential continue, I don’t see any reason why we should tighten monetary policy.”