Changes at these rates

Sri Lanka’s inflation will fall to single digits by the end of the year, assisting in the reduction of interest rates, according to Central Bank Governor Dr. Nandalal Weerasinghe, although there is no public projection on growth. 

Sri Lanka’s Central Bank presently maintains an exchange rate pegged to the dollar at 360/370, assisting in externally anchoring the monetary system. According to him, an International Monetary Fund debt sustainability analysis predicted 70% year-end inflation in 2023, but it was already down to 57%. Yesterday he stated that every effort is being made to expedite the IMF program and debt discussions. India has provided the necessary debt guarantee and Governor Weerasinghe stated that there was a lot of communication with China and letters were being exchanged. Domestic interest rates were high due to speculation about domestic debt restructuring. Rates would fall faster after the hurdle is overcome, according to CBSL.

Remittances to Sri Lanka through official channels increased to $ 476 million in December 2022, up from $ 353 million a year earlier, as parallel market premiums disappeared and money printing decreased, whereas our neighbour Pakistan saw a decrease.

Severe pressure from liquidity injections, which lose domestic credit, imports, and capital flight for the currency rate’s lost credibility, then generate alternative exchange rates via which remittances are funnelled. At this point Sri Lanka’s dollar rate plummeted to 371.50 to the US dollar in December, the same or slightly lower than the TT selling rate of banks as interest rates were permitted to rise, limiting private lending and halting money printing.

Hundreds of thousands of people fled Sri Lanka as the currency fell but remittances via official rates did not improve until rates were raised, and local credit was reduced. After Sri Lanka, Pakistan has the worst central bank track record in South Asia.

Since its inception, Sri Lanka’s Central Bank has devalued the Rupee from 4.70 to 370, depriving the people of sound money. The Pakistan and Sri Lanka rupees are derived from the Indian rupee, which was valued at 4.70 to the US dollar at the time of independence from British administration. The Pakistan rupee has plummeted to 228 per US dollar, with parallel exchange rates hovering around 270 per US dollar.

Sri Lanka ran out of reserves and defaulted in April 2022, having incurred significant amounts of monetary stability-driven external borrowings each time currency shortages made external payments difficult under flexible inflation targeting. Economic bureaucrats in Sri Lanka refer to monetary insecurity borrowings as bridging finance. Pakistan is also looking for external loans as its foreign reserves shrink and parallel currency rates rise as a result of money printing. Banks in Pakistan are reluctant to lend dollars for relatively minor things, a situation that Sri Lanka faced last year.

Market interest rates are now hovering around 30%, and inflation has slowed. The market interest rate structure that includes deposit and lending interest rates is projected to decline in the coming months as market liquidity improves. If the adjustment takes longer than expected, the Central Bank will consider administrative steps. It also stated that headline inflation is likely to move along a deflationary path, with a slowdown in the first half of 2023 and a return to target levels of inflation by the end of 2023. If any inflationary risks develop in the near future, CBSL assures that they will be addressed through appropriate policy measures.

Whilst several of CBSL measures are commendable, challenges remain in the quest to consolidate the improved macro-economic indicators and further strengthen those. The Government, the public and private sectors too have an important role to play. Reaching consensus and a collective effort will help make the future course smoother.