IMF Extends Sri Lanka’s Fund Facility 0 759

Manuela Goretti

Ms. Manuels Goretti who has almost 13 years of work experience in the International Monetary Fund currently is a Deputy Division Chief and Asia and Pacific Department and has held this position from February 2018 to date. Prior to this position Ms. Goretti was the Advisor to the 1st Deputy Managing Director for a little over two years.

She has served as Deputy Chief in the office of Risk Management Senior Economist European Department and Economist in Emerging Markets. She has experience in country assignments in Haiti, Romania and Bulgaria, Greece, Turkey, Poland, Peru and Portugal.  She led the IMF staff Mission to Sri Lanka in February 14- 28, 2019 to undertake Fifth Review of Extended Fund Facility (EFF) supported Economic Reform Program of Sri Lanka in February 2019.

The IMF mission expressed optimism and predicted that economy is gradually stabilizing, however had to re-calibrate their own projections in two instances on the back of poor economic data and fiscal slippage from its original targets. Economic growth outlook for 2019 is expected to improve to about 3.5 percent from 3 percent in 2018. Inflation has regained in January and is projected to reach 4.5 percent in 2019. The current account deficit widened to 3.2 percent in 2018 but is expected to narrow in 2019 benefiting from the recent exchange rate correction.

The Mission noted that the primary surplus in the Budget in 2018 fell short of the program target due to weak revenue mobilization.  The mission further noted foreign exchange reserves target missed by sizable margins.

The staff mission also observed that sustain fiscal consolidation through revenue effort and prudent spending is priority and welcomed government commitment to raise primary fiscal surplus to 1.5 percent of GDP in 2019 and reduce the budget deficit to 3.5 percent of GDP in 2020 and 2 percent of GDP over the medium term by adopting sound fiscal rules and new medium term debt strategies.

The Mission emphasized the need for a concerted effort by all stakeholders to preserve the gains of the economic reform program, support macro-economic stability and strengthen the economic resilience considering the high level of public debt and low international reserve buffers.

The Mission highlighted the need for an improved transparency, accountability and cost efficiently of large state owned enterprises. It also advised government to move forward with plans to bring Sri Lankan Airlines on sound commercial and financial footings and has insisted upon completing energy pricing reforms in order to address fiscal risks.

The staff team endorsed the commitment of the Central Bank to rebuild international reserve buffers and allow exchange rate flexibility. However, rapid slippage in the rupee and cost escalations has pushed the government to reign back the free fall with new fiscal measures on consumer imports.

It advised the Central Bank of Sri Lanka to continue to maintain a prudent and data dependent monetary policy, and stands ready to tighten policy rate inflationary pressures which re-emerged.

The team also emphasized the need for the government’s consistent implementation of the Inland Revenue Act and the modernization of the Inland Revenue and Customs Departments.

The Mission in its deliberation left three messages with the Government

  1. Revenue based fiscal consolidation and state enterprise reforms are needed.
  2. A prudent policy mix and exchange rate flexibility to rebuilt foreign exchange reserves are critical to strengthen resilience and market confidence.
  3. Strengthening institutions and fast tracking structural reforms can lay the foundation for strong sustainable and inclusive growth in Sri Lanka.

The IMF staff mission agreed to the government’s request to extend the EFF arrangement for an additional year to allow more time for the completion of the economic reform agenda. The IMF Board of Directors is expected to consider Sri Lanka’s request favorably in 2019.

By: BiZnomics Special Economic Correspondent

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Banking In a Spot of Bother 0 675

By : Kenneth De Zilwa

The Sri Lankan Banking system credit growth is strongly correlated with the economic activity of the country. The Correlation Coefficient between GDP growth rates and Banking Sector Annual Average Loan Growth is 0.76.

The Banking sector profits have witnessed a 25pct growth from 2016 to 2017. The growth comes on the back of highly volatilize exchange rates and interest environment in the economy. NII of the banking sector to showed a growth 12pct for the corresponding period, thus remaining flat from 2015.  Other income have accounted for 73pct while NII contributes circa 27pct of the total income of the Banking sector.

Banking In a Spot of Bothe

The Sri Lankan economy has recorded an average growth of 4.5 pct over the past 66 years. While only recording above average growth rates of 8pct post war in 2010, 2011 and 7pct growth rates in 2013 and 2014.  In 2015, 2016 and 2017 the economic activity declined and continued to grow marginally above the trend line growing   by 4.8pct in 2015, 4.4pct in 2016 and 4.0pct in 2017. Credit growth has decelerated from 32pt in 2016 to 18.1pct in 2017. Recording a  57pct year on year decline.

Banking sector credit growth has predominantly focused on the Industrial sector which accounts for circa 42pct of which housing and construction accounted for 75pct of the total, while services accounted for 30pct, within which tourism based credit creation was circa 29.3pct while consumption based credit lending stood at  21pct and agriculture 9pct.

Banking In a Spot of Bothe

Therefore Econsult anticipates that the slowing of credit growth would translate to an overall slowing of the real sector and lower GDP growth for 2018 to 3.0pct and 2019 to 3.5pct. On the back of tighter credit controls, declining agricultural supplies,  incremental VAT and taxation ushered in by the New Inland Revenue Act 2017, and the currency depreciations

The rating agency too have indicated that Banks would have to consider supplementing risk capital by cutting down dividend payout and consider further capital raising based on Basel III rules since CAR have come under pressure due to rising NPL’s to equity & reserves. This could mean that Banks would be forced to tighten credit while adopting more secure means of lending. Such outcomes could pose more issues to the already choked real economy. The recent deceleration of the economy is bound to hit the banking sector in Q4 2018 and Q1 2019.

Source : CBSL Annual Report & Thmosonreuters

Past is a Reflection of the Future – History does repeat itself 0 858

By : Kenneth De Zilwa

The Global Stock Markets have rallied beyond its mean of 50.45 pct on three previous occasions and on all three we have had a significant correction lower, with balance sheets wiped out.

The same is witnessed in 2016-2017; the Market Capitalization is currently at 97 pct of GDP. While Gross Fixed Capital Formation as a percentage of GDP is indicating a declining trend (Blue line). This is indicative of a trend going against fundamentals and the ability generates such high market capitalization gains remains questionable.

Past-is-a-Reflection-of-the-Future---History-does-repeat-itself

Therefore, Econsult expects 2019 to be a year of lower corrections in the global stock markets. This downturn can signal another deeper adjustment in global GDP as our Sri Lanka too must be watchful, as our external finances can be under stress.