Historic monetary policy tightening
- Monetary Board jacks up policy rates by 7% with immediate effect
- New Governor says highest-ever hike and tightest monetary policy action critical for macroeconomic stability
- Assures future policy stance to be conducive but insists political crisis and social unrest must end to ensure greater stability
- Suggests fiscal policy needs to be supportive of stability as well
- Looks to restore independence and credibility of CBSL with transparency and honesty
- Says CBSL is accountable and responsible to the people, not a political party
- Veteran central banker says he has fullest support of Govt. and Opposition; claims will not entertain political influence during his tenure
The worsening economic crisis has forced the Monetary Board to effect a historic monetary tightening with the new Central Bank Governor justifying the move as critical to ensure macroeconomic stability.
The Monetary Board at its meeting under new Governor Dr. P. Nandalal Weerasinghe decided to increase the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 700 basis points to 13.50% from 6.50% and 14.50% from 7.50%, respectively with immediate effect.
“This is the highest ever policy rate hike and tightest monetary policy action in the history of the Central Bank of Sri Lanka and this critical decision was after a honest and realistic assessment by the Monetary Board,” Dr. Weerasinghe told journalists at a late evening briefing following the Monetary Board meeting.
He also described the Monetary Board move as “proactive”, implying that some of the decisions in recent times had not been so, hence the ongoing crises in the country.
In its brief statement, the CBSL said the Monetary Board noted the inflationary pressures that could further intensify in the period ahead, driven by the build-up of aggregate demand, domestic supply disruptions, exchange rate depreciation and the elevated prices of commodities globally.
It was of the view that a substantial policy response is imperative to arrest the build-up of added demand driven inflationary pressures in the economy and pre-empt the escalation of adverse inflationary expectations, to provide the required impetus to stabilise the exchange rate and also to correct anomalies observed in the market interest rate structure.
Dr. Weerasinghe also told journalists that the decisive monetary policy action will send a strong message to markets and investors that the new leadership at CBSL is taking corrective action to ensure macroeconomic stability and confidence. “When the markets open on Monday we also expect the banking and financial community to respond positively,” he added.
He said the move will help suppress excessive demand, curb imports thereby reduce pressure on forex reserves, reign-in a higher inflation in the medium term. However, he cautioned that proper beneficial impact of yesterday’s decision will be felt only in three to six months and in the interim inflation is forecast to rise from current 17.5% to over 25% due to past policy slips.
“It is not an easy situation. We can’t turn around a crisis caused by two years within two days. However I am confident in Central Bank playing its part for an early turnaround,” the new Governor added.
Dr. Weerasinghe also said that whilst tighter monetary policy and other planned measures including an IMF support program along with a foreign debt restructuring strategy and prudent fiscal policy can help towards creating a conducive environment, for greater macroeconomic stability, the ongoing political crisis and social unrest must end.
“The pace of turnaround (with new CBSL measures and IMF support) and an end to sufferings of the people depends on restoration of political stability and normalcy,” he added.
The new Governor also promised to restore the independence and credibility of the CBSL. “An independent Central Bank is the only way to ensure prudent policies irrespective of politics. The existing Monetary Law Act provides for such independence. I will not tolerate political interference during my tenure and I have the fullest support of the Government, the Opposition and the public,” he said.
“CBSL is accountable and responsible to the people not a political party. I have to live up to public expectations of ensuring CBSL independence and credibility,” added Weerasinghe, who was previously a Senior Deputy Governor and took early retirement in October 2020.
Response by The Joint Chambers – Source : DailyFT – Posted by PRMinds Admin
The Joint Chambers welcomed the appointment of two experienced professionals to the posts of Governor, Central Bank and Secretary to the Ministry of Finance. The Joint Chambers believe that the immediate appointment of a Minister of Finance is critical to complete the country’s economic management team to prepare for the forthcoming discussions with IMF and the commencement of the long-delayed debt restructuring process. “Hence, we urge that a new appointment is finalised before the end of this week as a matter of utmost priority,” the statement added.
Source : AdaDeranaEnglish/AdaDerana24 – Posted by PRMinds Admin
Well in a nutshell we are not planning for the long term. Most of the policies are responsive as to the current predicament which of course is very pressing and needs to be addressed but we are actually not thinking about the long term and this has been a recurrent theme for Sri Lanka. Over the last 25 to 30 years certainly my involvement with Sri Lanka I’ve seen the same thing over and over again that the long term has been completely neglected.
The policies recommended by the IMF can help over the short term because actually it doesn’t matter whether it’s IMF or anyone else there will have to be certain restrictions on the budget deficit so we’ll have to contract the budget deficit. We’ll certainly have to raise interest rates because inflation is rising and we’ll have to be far more prudent in terms of credit expansion now having said that again what i go back to is the long term you know this is only there to deal with the short-term problems but will not address the longer-term issues which we still need to look at.
I think there’s actually no other choice but export-oriented manufacturing and there it’s just giving the right incentives and support structures and letting the entrepreneurs do the rest essentially. Government shouldn’t meddle too much but should actually facilitate export-oriented manufacturing.
This is something all successful East Asian countries have done in the past and continue to do at present. Not just these east Asian look at the Europeans they’re all doing the same thing they do that but preach something else they tell other people. No No you shouldn’t interfere, you should let the market work etc. etc. But actually there are no totally free market economies they’re all aggressively interventionist. The trick is to convince someone else to do the wrong thing by not intervening.
Source : Lanka Business Online – Posted by PRMinds Admin
Technical negotiation with IMF started; RFPs to be called to appoint advisors for debt restructuring
Sri Lanka’s Central Bank has already started technical negotiations with the International Monetary Fund for an IMF program and appointing financial and legal advisors for debt restructuring will be expedited, new Central Bank Governor Nandalal Weerasinghe said.
“I want to make it very clear that I am going to exercise the powers vested with the Monetary Law Act. Central Bank should be independent without any kind of external or political influence,” Weerasinghe told reporters in Colombo.
“I have been closely monitoring the suffering of people. Delaying and denying and not telling the truth is not going to work.”
Addressing the concerns the Governor emphasized that only the foreign debt needs to be restructured on a priority basis but not the domestic loans.
“We can’t turn this overnight; this will take some time and I am trying to do my best. But there are positive developments as well. Technical negotiation with the IMF for a program already started. So, the negotiation for an IMF policy package as well as the debt restructuring will go parallelly,” he explained.
“Calling RFPs for appointing financial and legal experts for debt restructuring will be published on the Ministry of Finance website today. Within a week we will close the proposals and within another week we will appoint financial and legal advisors and intend to complete this process within two weeks.”
Expressing views on the exchange rate he said that the government should have tightened the fiscal policy, monetary policy and started debt restructuring before allowing the exchange rate to float.
Central Bank Governor Nandalal Weerasinghe added that he will remove all interest rate caps on credit cards soon.
Source : NewsWire – Posted by PRMinds Admin
“If no political stability 10 to 12 hr power cuts, more fuel shortage in next two days” CBSL ——————- The Governor of the Central Bank of Sri Lanka (CBSL) has issued a grave warning about the country’s economic crisis.
Dr. Nandalal Weerasinghe said if the current situation in Sri Lanka continues in the next couple of days, with no government in place, things could get worse in the country.
“If the current situation continues in the next two days, we could have 10 to 12-hour power cuts daily, massive shortages of fuel, and other essential items further deteriorating the current situation,” he said.
The CBSL Governor stressed that it is extremely challenging to revive an economy in a country where law and order are not maintained.
He indicated that without a cabinet and finance minister Sri Lanka won’t be able to proceed with debt restructuring and International Monetary Fund (IMF) negotiations.
Dr. Weerasinghe thereby emphasized that political stability is paramount in a country.
He also warned that he will resign from his designation if political stability is not established in Sri Lanka in a week or two.
“I took on this responsibility with expectations that political stability will be established within two weeks since the Mirihana incident. It’s been more than a month with no progress. I do not wish to continue in this post if political stability is not achieved,” he added.
Dr. Nandalal Weerasinghe assumed duties as the Governor of the Central Bank of Sri Lanka in the midst of a severe economic crisis.
Sri Lanka has commenced talks with the International Monetary Fund (IMF) under his guidance.
However, the unrest that broke out in Sri Lanka on Monday has resulted in political instability further affecting the already weakened economy of the country.
“If no political stability 10 to 12 hr power cuts, more fuel shortage in next two days” CBSL
