Sri Lanka likely to keep rates steady, awaiting IMF progress- Reuters poll

COLOMBO : Sri Lanka’s central bank is expected to hold interest rates steady on Friday as it awaits progress on debt restructuring seen as crucial to receiving the second tranche of a $2.9 billion IMF bailout package.

The median forecast in a Reuters poll of 15 economists and analysts is for the Standing Deposit Facility Rate (SDFR) to remain at 10 per cent and the Standing Lending Facility Rate (SLFR) at 11 per cent.

However, room exists for a rate cut of 50-100 basis points, according to six of the polled analysts who cited moderating inflation and declining government borrowing costs as incentives for the Central Bank of Sri Lanka (CBSL) to do so.

The CBSL increased rates a total of 10.5 per centage points until March to contain inflation and rebuild reserves to shore up its currency, after the economy tanked last year in the country’s worst financial crisis in more than seven decades.

Since June, however, the CBSL has reduced rates by a total 550 basis points, including a 100 basis point cut in October, as the economy stabilised following an IMF rescue package in March.

“This rate decision is tricky. Typically the CBSL waits for policy decisions to filter through markets,” said Raynal Wickremeratne, co-head of research at Softlogic Stockbrokers.

“We feel they will also wait for more direction from the IMF and progress on debt restructuring and reduce rates by about 100 basis points in early 2024.”

Sri Lanka expects the IMF’s executive board to approve the first review of the bailout by Dec.6 after receiving more clarity on its debt restructuring talks with key bilateral creditors. The approval would unlock $330 million in funding and signal progress for the four-year programme.

The CBSL has forecast Sri Lanka’s economy will shrink 2 per cent this year after a 7.8 per cent contraction in 2022. The World Bank, however, predicts a 3.8 per cent contraction in 2023.

“Growth in the third quarter will be positive but it will have to be about 3 per cent in the third and fourth quarters to reach the CBSL target, which is unlikely,” said Udeeshan Jonas, chief strategist at equity research firm CAL Group.

The policy decision will be at 7:30 a.m. (0200 GMT) on Friday.

For individual contributions, please see table below:

Organisation SDFR SLFR

Acuity 9.50 per cent 10.50 per cent

Advocata Institute 10 per cent 11 per cent

CAL Group 10 per cent 11 per cent

HSBC 10 per cent 11 per cent

First Capital 10 per cent 11 per cent

Asha Securites 10 per cent 11 per cent

Capital Economics 9.50 per cent 10.50 per cent

Standard Chartered – 10 per cent

University of Colombo 9 per cent 10 per cent

S C Securities 10 per cent 11 per cent

Frontier Research 9 per cent 10 per cent

Asia Securities 9 per cent 10 per cent

JB Securities 10 per cent 11 per cent

Softlogic Stockbrokers 10 per cent 11 per cent

Almas Group 10 per cent 11 per cent

Median 10 per cent 11 per cent