CB says S&P’s revision unwarranted

The Central Bank last night said the revision of Sri Lanka Foreign Currency Rating Outlook from ‘Positive’ to ‘Stable’ and lowering of the country’s long-term local currency rating from BB- to B+ by Standard & Poor’s was unwarranted.

In a statement, the Central Bank said the Sri Lankan economy is estimated to have grown by around 8.3% in 2011, recording the second consecutive year with an annual growth rate of 8% or above for the first time in the post-independence history. Year-on-year inflation has remained at single digit levels in the last 37 months, and in February 2012 inflation fell to 2.7%.

Inflation is expected to continue to be at single digit levels in 2012, notwithstanding the recent adjustments to domestic energy prices. The debt to GDP ratio is also projected to improve to below 79% in 2011, the lowest after 1981.

With effect from 9 February 2012, the Central Bank of Sri Lanka has intervened in the foreign exchange market mainly for the partial settlement of oil bills. This policy change has resulted in the rupee depreciating by 5.1% against the US Dollar during the period from 9 February 2012 to 28 February 2012.

The depreciation of the rupee is expected to have a contractionary effect on imports, while foreign fund inflows are likely to be encouraged. In that context, foreign investments in Government securities have already increased, with a net inflow of US$ 216 million during the period 9-29 February 2012.

FDI, which exceeded US$ 1 billion in 2011, is also projected to increase further in 2012. Hence, the country’s international reserves, which are currently at US$ 5.7 billion, are expected to improve during the year. Meanwhile, the IMF-SBA programme is progressing with plans of completing the seventh review towards the end of March 2012.

On 3 February 2012, the Central Bank of Sri Lanka raised its policy interest rates by 50 basis points and directed commercial banks to limit the growth of their credit in 2012 to 18%, whilst allowing those commercial banks raising funds from abroad to expand their credit by a further 5%, i.e., to 23%.

These monetary policy measures are expected to decelerate monetary expansion significantly during the course of the year 2012, thereby helping to mitigate any second-round effects of the recent increases in administratively determined prices, on inflation.

In addition to ensuring that inflation is maintained at single digit levels in the medium term, the deceleration in credit expansion will lead to the reduction of expenditure on imports and the reduction of the deficit in the current account of the balance of payments.

In the meantime, the State-owned Ceylon Petroleum Corporation (CPC) increased selling prices of its products while the Ceylon Electricity Board (CEB) also raised its tariff in response to the increased fuel prices. Hence, the financial viability of these State-owned enterprises is also expected to improve significantly in the period ahead.

Such measures, too, would help the Government to consolidate its fiscal position further. With ongoing fiscal consolidation, the budget deficit in 2011 is estimated to be around 6.9% of GDP, and is expected to decline further to 6.2% in 2012.

In that background, it is clear that the Government of Sri Lanka and the Central Bank of Sri Lanka have taken necessary measures that would strengthen Sri Lanka’s performance on the fiscal front, the monetary front and the external front. Accordingly, S&P’s revision of Sri Lanka’s foreign currency rating outlook from ‘positive’ to ‘stable’ and lowering the country’s long-term local currency rating from BB- to B+ at this juncture, is highly unwarranted.