Sri Lanka Central Bank Sees ‘Some Space’ for Cuts Amid Deflation
(Bloomberg) -- Sri Lanka’s central bank governor said he sees scope to loosen monetary policy but any decision will depend on the economic outlook when policy makers meet late next month.
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Governor Nandalal Weerasinghe said that while it’s too soon to commit to any decision ahead of the Nov. 26 policy rate meeting, indicators pointed to conditions for potential interest rate cuts.
“It appears there is some space for us to relax further, but we will look at the latest information before the November policy meeting,” he said in an interview on the sidelines of the World Bank and International Monetary Fund annual meetings in Washington on Friday. “For timing, we have to wait and see the data points.”
The Central Bank of Sri Lanka on Sept. 27 kept the benchmark standing lending facility rate at 9.25% as it flagged the onset of deflation due to changes in administered prices and easing of supply conditions. The South Asian island nation’s inflation has undershot a 5% target since March. Bloomberg Intelligence forecasts it will remain below that level for the rest of this year.
“We have seen a deflation situation right now,” Weerasinghe said. The monetary authority has slashed rates by 725 basis points since the easing cycle started in April 2023.
Meanwhile, Sri Lanka plans to start a swap of its defaulted dollar debt for new bonds in November, drawing the nation closer to completing its restructuring, according to people familiar with the matter. Restructuring external debt after the island nation fell into default in 2022 amid an unprecedented economic crisis, is a key step toward restoring its access to international debt markets.
Weerasinghe declined to comment on the timing of the deal, but said that authorities and bondholders were working to complete it as soon as possible.
IMF ‘Encouraged’
Sri Lanka’s new president earlier this month held his first meetings with officials from the IMF since taking office and initiated steps to move forward with the nation’s debt restructuring.
The IMF’s Asia-Pacific Department chief, Krishna Srinivasan, said in a briefing Thursday that the fund and government have been in talks this week in Washington. The IMF is “encouraged” by the interactions and hopes to “move fast” toward Sri Lanka’s third program review, he said.
President Anura Kumara Dissanayake, the leftist leader who swept the Sept. 21 election, has said he remains committed to the overall objectives of the IMF’s $3 billion loan program, but added they should be achieved “through alternative means that relieves the burden of the people.”
Weerasinghe said there will be “some delays’ in completion of the next review under the program due to parliamentary elections scheduled for Nov. 14. Those will force the government to push back the budgeting process until early 2025.
He added that the government aims to reach a staff level agreement this year on the review, but the executive board will take it up next year once the 2025 budget is in place.
For its part, the central bank has said that the continuation of Sri Lanka’s Extended Fund Facility arrangement with the IMF and early finalization of the debt restructuring process will support the strengthening of external sector buffers further.
The governor on Friday said gross foreign reserves of $6.1 billion were already above year-end targets set under the IMF program.
“The government will stick to IMF program and its parameters. I don’t see a reason why we need to change the parameters,” Weerasinnghe said.
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