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Sri Lanka keeps policy rates steady despite rising foreign outflow

The Central Bank of Sri Lanka yesterday kept its key policy rates unchanged despite mounting foreign capital outflow from government securities and the Colombo Stock Exchange (CSE) exerting heavy pressure on the value of LKR against USD.

Fed Rates 2Amid the US Federal Reserve tightening its monetary policy in recent years, effecting the latest hike in its short term interest rates last week, a total of LKR81.2 bn (USD480.5 mn) foreign investor funds have exited Sri Lanka with LKR depreciating against USD by 10.4 percent year-to-date.

SLFR and SDFR

Concerns over economic growth hold back policy tightening…

While the US raised its benchmark overnight lending rate three times this year, Sri Lanka mostly maintained the rates steady keeping Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) at the current 7.25 percent and 8.50 percent respectively, except a reduction of SLFR by 0.25 percent in April 2018.

In September last week, the International Monetary Fund (IMF) revised the country’s growth forecast for 2018 to sub 4 percent, well-below the 7 percent projected for the South Asian region.

However, on Tuesday the Central Bank Governor expected the 2018 economic growth could improve up to 4 percent despite in 2017 growing by only 3.3 percent, the slowest pace in 16 years.

Quarterly GDP

Regional central banks hikes rates…

Amid fast-depreciating INR which has plunged 12.7 percent against USD year-to-date, India is expected to increase key policy rates by 0.25 percent this week, while Pakistan raised its key interest rates by 1.0 percent last week.

Sri Lanka is under a USD1.5 bn Extended Fund Facility programme arranged by IMF in 2016 while Pakistan, amid dwindling USD reserves, is currently seeking a fresh bailout from IMF following its previous such arrangement in 2013 for USD6.6 bn.

With no monetary tightening, foreign outflow to expand…

With local policy rates unchanged despite more future rate hikes expected from the US, foreign currency outflow from the country, currently at LKR74.9 bn (USD443.1 mn) from government securities and LKR6.3 bn (USD37.4 mn) from equity investments year-to-date, is only expected to increase.

Sources

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