Sri Lanka's moves to curb imports are starting to work and officials shouldn’t “rush” into further policy steps, Treasury Secretary P.B. Jayasundera said, signalling the central bank may leave interest rates unchanged.
“Preliminary indications are that import and credit growth are slowing down and adjustments made in fuel and electricity are curtailing domestic demand,” Jayasundera, a member of Sri Lanka’s policy-setting monetary board, said in an interview in his office in Colombo on Monday. “We still haven’t seen the full impact of the measures.”
Sri Lanka let its currency weaken to a record low this year by shifting toward a more freely floating exchange rate, raised interest rates for the first time since 2007 and increased fuel prices. The policy overhaul seeks to pare loan growth and curb demand for imports such as oil to narrow a trade deficit that’s also been fanned by an export slide as global growth falters.
The central bank announces the decision on borrowing costs on June 13 and will probably leave rates unchanged for a second month after increasing them in February and April, according to the majority of economists in a Bloomberg News survey.
An oil-price drop is easing pressure on foreign-exchange reserves, Jayasundera said, adding the island is confident of receiving the last tranche from a $2.6 billion (Dh9.5 billion) International Monetary Fund loan. Sri Lanka plans to seek a further two-year IMF programme to bolster reserves and investor confidence, he said.
The island is committed to a budget deficit of 6.2 per cent of gross domestic product this year, Jayasundera said, adding “revenue levels are settling well and expenditure on track.”
“A strong resolve on the part of the authorities to fight inflation and the current-account deficit with policy measures could help instil confidence among foreign investors seeking to invest in the long-term growth story of the economy,” said Kaushik Das, a Mumbai-based economist at Deutsche Bank AG.
Sri Lanka’s rupee has declined about 12 per cent against the dollar this year and touched its lowest level of 133.10 per dollar on April 25. It slid 1 per cent, the biggest decline since April 23, to 131.60 as of 2.34pm in Colombo. The benchmark Colombo All-Share Index of stocks has slumped 21 percent in 2012. It closed up 0.3 per cent.
Central bank Governor Ajith Nivard Cabraal said May 8 average inflation may accelerate to 7 per cent in 2012. He has forecast 7.2 per cent economic growth this year, compared with expansion of 8.3 per cent in 2011.