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No immediate sign of inflation: ICRA Lanka 

16 Mar 2021

  • Early success in vaccine rollout to attract intl. investors 

  • Swap with China to restore LKR confidence 

  Releasing its monthly economic update for the month of February this year, ICRA Lanka yesterday (16) noted that there is no immediate sign of inflation taking off, but rising commodity prices and import restrictions may push up prices in certain sectors. According to ICRA Lanka, inflation fell below 4% (the lower bound of the Central Bank of Sri Lanka’s inflation target) for the second straight month in February, due to the higher base that prevailed around the same time last year. Inflation surpassed 6% in February last year as a result of an increase in prices of food. Wages grew stronger above inflation in January, on account of continued recovery of services and industrial sectors. Commenting on the outlook for the month of March, ICRA Lanka stated that early success in the vaccine rollout is crucial, as this will be closely monitored by international investors, and the recovery of the real economy hinges on this. According to ICRA Lanka, over 500,000 people in Sri Lanka have been vaccinated against the Covid-19 virus by early March.  It further noted that if the credit growth becomes weak in the first quarter, the Central Bank will be on the spotlight, as markets may anticipate some policy action in the next Monetary Policy Committee meeting early April.  “China approved a $ 1.5 billion currency swap with Sri Lanka last week. This may help restore confidence in the rupee and the SLISBs in the near term,” the local rating agency added.  Elaborating on the economic indicators during the month of February 2021, ICRA Lanka noted that the manufacturing sector continued to expand in January and February, as seen from the latest Purchasing Managers Index (PMI) data.  According to the report, new orders have slowed down, while employment rose at a higher rate. Supplier delivery times continued to lengthen, as a result of lower inbound ship traffic triggered by the import controls. The services sector expanded and expectations for business activity enhanced as mobility improved, with individuals adapting to the new normal. However, employment continued to contract, the report added.  Oil prices surged above $ 60 a barrel for the first time since January 2020 after Saudi Arabia cut oil production. Tea prices continued to recover in February while production declined gradually, and rubber price was steady in February in the domestic auctions while spot prices in the global markets rose, driven by soaring crude oil prices. Gold fell during February as investors were attracted to high yields of US treasuries. In addition, bullish equities drove investors away from gold, ICRA Lanka stated.  “Enthusiasm among domestic investors evaporated as the markets closed, with a 13.75% fall in the ASPI and a 15.6% in the S&P SL20. The plunge in equities was board based, a likely market correction, wiping out nearly Rs 520 billion in value from the market after making back-to-back steep gains in previous weeks. The CSE crashed several times, after stocks saw sharp intra-day falls. During February, market PBV (Price-to-Book-Value) decreased from 1.44 to 1.22, favouring buyers,” ICRA Lanka noted further. 

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