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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » CB rate cut would improve policy congruence: Cabraal

CB rate cut would improve policy congruence: Cabraal

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fireshelter

fireshelter
Associate Director - Equity Analytics
Associate Director - Equity Analytics
The Central Bank should consider further easing policy rates when it makes its latest monetary policy decision this week, Advisor to the Prime Minister on Economic Affairs Ajith Nivard Cabraal said, insisting it would improve policy congruence following the stimulus package announced by the Government earlier this month. 

Speaking with members of the Foreign Correspondents Association on Monday, Cabraal noted that despite easing of policy rates by the Central Bank earlier this year, and capping of lending rates, there was still room for the Central Bank to announce an additional rate cut. The Monetary Board will meet tomorrow for their final meeting for 2019. 

“In my view, there is space for the Central Bank to cut rates, and the Central Bank will have to look at that in the context of the stimulus (package). These are all interconnected, so I have a feeling that the Central Bank will look at it in a way that the factors will gel together, sit together. So let’s see what they will do. At some stage there will have to be some congruence of policies,” he said.   



“I’m saying there is scope for them to cut rates, because if you take the rates that are prevailing in the market and inflation, there is a big disparity that suggests that the Central Bank’s rates are not actually representative. So it may be or it may not be all that conducive for the Central Bank to follow the market, but obviously the market is ahead of the Central Bank. Then at some point you have to have some congruence.”   

Cabraal acknowledged there was need to keep an eye on inflation, but argued that if policy rates are also reduced, Sri Lanka would be able to grow at a much faster rate than seen in the past few years. Last week, the Census and Statistics Department announced that Sri Lanka grew by 2.7% in the third quarter, but the country is still projected to end 2019 with less than 3% growth, after recording a five-year low growth of just 1.6% in the second quarter, largely due to the Easter Sunday attacks. 



The former Central Bank Governor also indicated interest in continuing with the existing $ 1.5 billion Extended Fund Facility (EFF) program with the International Monetary Fund (IMF), but expressed plans to tweak the agreement to achieve targets. The program, which was extended by the previous administration earlier this year, is set to end in mid-2020.  

“We will discuss with the IMF. We have given them a few parameters where we will differ. We have not had a formal conversation as yet, but we have given an indication there will be certain changes we will have in the way we approach the targets. We will have to discuss with the IMF. We are keen to have an arrangement with them. We will see how best we can approach the numbers but in different ways. This is what we did in 2009 as well,” he said. 



Cabraal was also upbeat about investment prospects, insisting that there was greater interest in Sri Lanka after the appointment of President Gotabaya Rajapaksa than seen before, and investors would return once the General Elections were concluded. Several roadshows and other measures will also be rolled out to pique investor interest next year.   

“There have been several investors coming to Sri Lanka and talking to us, because they want to take a fresh look, and they are very bullish about Sri Lanka. They want certain assurances, and are saying they will probably come after the (General) Elections. But they are serious and with credentials. Once the elections are over, there will definitely be an upturn because our country is in good shape. We have democracy and a Government and rule of law, all those things are there.”



“I have a feeling there will be another turnaround of investment, and some investors who have left Sri Lanka will come back, particularly for bonds, because that is a sure sign that they have confidence in both the exchange rate and the interest rate. That message is what we want the foreign investors giving to the world.” 

Cabraal also emphasised that Small and Medium Enterprises (SMEs) that avail themselves of the moratorium announced by the Government should nonetheless continue to pay interest. He said additional details of how the moratorium on loans under Rs. 300 million will be implemented will be announced after discussions with the Central Bank and banks. 

Responding to questions on the Millennium Challenge Corporation (MCC) grant of $480 million, Cabraal noted that the Sri Lankan Government was well within its rights to study the proposed agreement and “does not need to rush to make a decision.”

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