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Very little progress made on CBSL road map: ICRA

17 Dec 2021

  • Says Govt. left with extremely narrow options
  • Insists to consider IMF assistance
  • ‘SL may enter a high era of inflation’
  The steps taken by the Government so far to address the existing external sector issues, including the six-month road map, have yielded very little progress, and consequently the country is left with an extremely narrow set of options to find a way out of the current crisis, said ICRA Lanka in its “Monthly Economic Update: November 2021”. Given this scenario, Sri Lanka should consider an International Monetary Fund (IMF)-assisted programme, as the looming debt default would be catastrophic to the country, it added. Explaining further, ICRA Lanka claimed that the external sector troubles of Sri Lanka are on the brink of breaking point. They further claimed that the balance of payment (BOP) crisis shows no sign of dissipating anytime soon, pointing to the Year-on-Year (YoY) increase in the trade deficit observed in September, primarily driven by fuel, textiles and textile articles, and machinery and equipment. The credit rating agency further criticised the heavy-handed approach taken by the Central Bank of Sri Lanka (CBSL) in the forex market, and claimed that such an approach is counterproductive and is unlikely to help to improve the situation. Receipts from foreign remittances fell by nearly 50% YoY to $ 317.5 million in October, they added. ICRA Lanka further stated that the total official reserves had fallen to $ 1.6 billion in November after the CBSL sold over $ 372 million in the open market and made settlements of around $ 400 million in foreign obligations. Therefore, the rating agency claimed that all though certain officials and government representatives have continued to express their unwillingness to commit to an IMF programme, due to the failure of the steps taken so far to address the existing external issues, including the six-month road map, Sri Lanka should consider an IMF-assisted programme as the looming debt default would be catastrophic to the country. The report further stated that based on official data Sri Lanka’s GDP contracted by 1.5% during 3Q2021, which was lower than ICRA Lanka’s forecasts. Based on this development, it claimed that they will be revising their previous GDP growth forecast of 3.4% for 2021. However, they claimed that they continue to view the CBSL GDP growth forecast of 5% for 2021 as overly optimistic, considering the fact that the country has recorded two quarters of economic contraction. Moreover, the report recognised that headline inflation had increased by 9.9% during November, the highest recorded level since July 2012, driven by supply shocks. Explaining further, it stated that food inflation rose 17.5% from 12.8%, mainly due to increase in the prices of vegetables, rice, and milk powder and that non-food  inflation rose from 5.4% to 6.4% as a result of increased prices of housing, water, electricity, gas, and transport. Therefore, ICRA Lanka claimed that Sri Lanka may be entering “an era of high inflation” over the next few months. The report further stated that increasing lending rates due to the tightening of monetary policies will continue to weaken private credit. It further expects liquidity shortage in the money markets to put pressure on the short-term rates.

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