• Proactive decision to offset possible fiscal slippage from VAT delay, wants credit growth to slow to 12% 
• VAT Bill to be tabled in Parliament on 11 August, July inflation up 5.5% 
• Credible policymaking a focus as SL braces for market borrowing over the next few years to finance debt

By Uditha Jayasinghe

A combination of macroeconomic developments, including high credit growth, rising inflation and uncertainty on Government revenue collection after the VAT suspension, pushed the Central Bank to tighten rates, Governor Dr. Indrajit Coomaraswamy said yesterday, backing the proactive measure and assuring Sri Lanka would still hit a growth target of about 5%. 

A day after policy tightening, Dr. Coomaraswamy was optimistic that the Monetary Board decision to increase monetary policy rates by 50 basis points by the country’s banking regulator would not affect the country’s growth targets of 5% or “slightly over”.

Despite Finance Minister Ravi Karunanayake setting the growth target for 2016 at 5.8% in the Budget last November, Central Bank officials insisted growth prospects for the country were periodically reassessed on prevailing macroeconomic conditions. They stressed that focusing on 5% growth was not a downgrade on prospects and insisted growth would remain robust as key industries such as remittances and tourism continued to expand strongly in the first half of 2016. 

Even though Dr. Coomaraswamy dismissed the need to increase rates during his first press conference after being appointed Governor in July, he acknowledged high private sector credit growth that stayed near a four-year high of 28% in May from a year earlier, hardly slowing from 28.1% a year ago, and June consumer prices rising to a 32-month high of 6.0% after the Government raised Value Added Tax (VAT) from 11% to 15% to tackle a soaring deficit, pushed him to change his mind. 

“I’m going to take refuge in a quote made by John Maynard Keynes who said that ‘when the facts change I change my mind,’” the Governor quipped. 

Almost on cue after the Central Bank announcement, the Census and Statistics Department on Friday said inflation rose to 5.5% in July from a year earlier, but slowed down from the previous month’s 32-month high of 6%. Core annual inflation, which excludes fresh food, energy, transport, rice and coconuts, rose 5.8%, slowing down from the previous month’s 6.4%. It hit a 38-month high of 6.6% in May.

On a month-on-month basis, the Colombo Consumer Price Index (CCPI) rose 0.2% in July, compared with 2.1% in June. July inflation, as measured on a 12-month moving average basis, touched a 17-month high of 2.7%, compared with June’s 2.2%.

“Private credit continues to be buoyant and it is higher than the desirable levels at the moment. The second fact is the macroeconomic framework for this year, which was to deliver 5% growth with inflation in the mid-single digits and a stable Balance of Payments assuming that there would be a 2% GDP contraction in the Budget deficit,” he said.

The Governor went on to say that regulators are targeting a slowdown in private credit growth to 12%, which would be sufficient to hit the 5% growth targets. The change in monetary policy was also to protect against further delay in revenue collection if the VAT Bill fails to be passed by Parliament next month. 

“The VAT Bill will be presented in Parliament on 11 August and if it goes through we might be able to catch up on revenue. Obviously the Central Bank will take that into account but there is a possibility of slippage in fiscal policy and clearly monetary policy has to lean against that.” 

“We want to have a framework of policymaking where we are forward-looking, so we felt we needed to take some action. We also thought we have some room to manoeuvre in doing so because growth impulses are fairly strong and we are confident Sri Lanka will hit 5% growth or a little more.” 

Taking the sting from primary dealers who would be affected by the tightening, Dr. Coomaraswamy urged the public and private sector to look at the big picture.

“We want people to think of the Central Bank as a doctor, that is what patients want of their doctor – to diagnose early and treat early because then the treatment is pretty mild. If you allow a delay, then you have to have a major operation in the end. We saw some of these issues emerging and we thought we should move early and, of course, we can recalibrate depending on how things pan out.” 

Focusing on lacklustre export performance and weak Foreign Direct Investment (FDI) in the first six months of 2016, Dr. Coomaraswamy was hopeful both would show improvement in the second half. However, funds from the recent bond issue by the Government would be sufficient to meet immediate debt repayments of $1.1 billion since the bulk of the $2.4b has been already worked off. 

“Clearly over the next three to six years we are going to have to access capital markets to meet our debt obligations and that is one of the reasons we want to have this proactive approach to policymaking within the Central Bank because if we can establish credibility around our policymaking, that would give us better access to capital markets. We are going to have to go and borrow and to get the best possible terms we need to have credibility.” 

Balance of Payments remain poised in a fine balance, with the Governor admitting that prolonged lapses in revenue collection and higher inflation could cause concern for the Monetary Board about aggregated demand developments.

CB to ensure security of National Payment Platform

The proposed National Payment Platform (NPP) will be supported by the Central Bank, which will ensure security and stability in the system, Central Bank Governor Dr. Indrajit Coomaraswamy assured yesterday.    

The much-needed National Payment Platform (NPP) was approved by Cabinet earlier this month and will soon be a reality empowering efficiency in the country for Government, businesses and the public at large.

The NPP proposal was submitted by Finance Minister Ravi Karunanayake on the recommendation of the Inter Ministerial Committee chaired by Telecommunication and Digital Infrastructure Harin Fernando. The Information and Communication Technology Agency (ICTA) and the Central Bank will be spearheading the groundbreaking initiative

“The law devolves considerable responsibility on the Central Bank to ensure that there is security and stability in the payment system so the ICTA Agency has been doing some work and what has happened now is Central Bank officials and ICTA will convene all stakeholders to ensure that we have a system which is stable, has security and the Central Bank will be integrally involved in taking this initiative forward,” the Governor said.     

In essence the NPP will bring about digital commerce to facilitate governments, businesses and citizens to perform digital commerce with efficiency, ease and low cost. It will also enable the public to transfer funds from any of their bank accounts through mobile phone for the payment of goods and services using their National ID. 

The NPP will bring in savings for the Government by increasing efficiency, thereby reducing cash movement and the cash float in the market. The NPP will also ensure Sri Lanka’s ranking in the global index of Ease of Doing Business improving considerably. 

Private businesses will be able to make online payments, including to crucial Government institutions such as the Customs, Inland Revenue and Excise Departments.

“The most convenient method used by public in obtaining goods and services, is the international credit card such as Visa, MasterCard, and American Express. However, Government institutions such as Sri Lanka Customs, Department of Inland Revenue, Department of Excise and others are less interested in using this method as the charges are increased according to the value of the transaction,” the Cabinet paper said. 

An online- and mobile-based system rather than a credit card-based system would be more acceptable to these Government institutions, the paper added.