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Business confidence bounces back in Jan: First Capital

02 Mar 2021

Reversing the downward trend witnessed in recent months, the LMD-Nielsen Business Confidence Index (BCI) shot up by 39 points to 122 in January 2021, according to a recent report released by First Capital Research.  Accordingly, the BCI index spiked a notable 12 points above the average for the last 12 months, with the Covid vaccine rollout giving some form of relief to prevent the spread of Covid-19.  Meanwhile, the Index of Industrial Production (IIP) for December 2020 increased to 110.7, from 106.9 in November 2020, while Sri Lanka’s Manufacturing and Service Purchasing Managers’ Index (PMI) remained in expansion territory in January 2021. New business activity in the PMI increased in January 2021, particularly with the improvements observed in financial services, transportation, and wholesale and retail trade sub-sectors. Commenting on the credit growth and structural recovery, the report added that private sector credit increased by Rs. 25.7 billion in January 2021, recording its sixth consecutive month of growth, indicating  a revival in gross loan disbursements.  “Growth reflects that both businesses and individuals are speeding up economic activities. The Central Bank of Sri Lanka (CBSL) continues infusing ample liquidity into the banking system via increased CBSL holdings (money printing), which also supports fiscal shortage. CBSL holdings rose to Rs. 809.9 billion on 26 February 2021, from Rs. 738.4 billion as at 31 December 2020,” the report added.  They noted that in line with their expectations, at the previous policy meeting held in January 2021, CBSL maintained its monetary policy stance, after considering the macroeconomic conditions and forecasted developments on domestic and global fronts.  “The Board, having noted the reduction in overall market lending rates during 2020, stressed the need for a continued downward adjustment in lending rates to boost economic growth in the absence of demand-driven inflationary pressures, particularly considering the significant levels of excess liquidity prevailing in the domestic money market,” the report added further.  Further, First Capital Research estimates that Sri Lanka’s GDP would recover to 3.2% in 2021, from its estimate of the steepest contraction in history of -5.8% in 2020. Lack of demand for credit, slowness in consumer demand recovery, and import restrictions can be considered major factors favouring an easing of policy rates at the upcoming meeting, it added. “Yields in the secondary market witnessed an increase, with moderate market activity from participants followed by a wait-and-see approach amidst looming uncertainty.  The last two Bond auctions and five Bill auctions were undersubscribed by a considerable amount, reflecting the lack of clarity among market participants with the current economic conditions. We consider a rate cut would be required to sustain the secondary market rate at lower levels,” the report concluded.   


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