Monetary Policy Review – September 2009
The Monetary Board, at its meeting held on 11 September 2009, has decided to reduce its policy interest rates by 50 basis points each, to be effective from the close of business on 11 September 2009. Accordingly, the Repurchase rate and the Reverse Repurchase rate of the Central Bank would be 8.00 per cent and 10.50 per cent, respectively.
Inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index (base=2002), has remained around 1 per cent during the last three months. While inflation is expected to gradually rise to moderate levels in the approaching months, it is projected to remain at single digit levels during the rest of 2009. Current projections indicate that inflation, on a year-on-year basis, would be at low single digit levels even by the end of 2010.
Economic prospects for Sri Lanka had improved considerably during the past few months. With the contraction in the world economy now widely believed to have bottomed out, the scope for domestic economic activity is now even wider. During the first six months of this year, the Central Bank eased its monetary policy stance in several steps to support domestic economic activity, in view of the sharp decrease in inflation, the improved outlook for inflation and the significant slowdown in domestic economic activity in the face of the global economic downturn.
With the gradual relaxation of the monetary policy stance of the Central Bank, though short term interest rates have declined in line with the policy rate reductions, there has not been an appreciable reduction in lending rates in general, and credit flows to the private sector have not picked up as desired. Today’s decision by the Central Bank to further reduce its policy interest rates would signal to the market the need for further reductions in market interest rates and expansion in credit to the private sector.
Sri Lanka gets US$75mn World Bank credit for villages
Sept 11, 2009 (LBO) – The World Bank has approved a 75 million US dollar credit for village infrastructure development in Sri Lanka to expand its ‘Gemi Diriya’ project, the multilateral lender said.
The project which is already active in the Uva, Southern and Sabaragamuwa provinces of Sri Lanka has helped about 870,000 in over 1,000 most remote and poorest villages, the World Bank said.
The money is going into community infrastructure such drinking water, access roads and bridges, ICT centers, access to credit, markets, skills and income generation.
The project will expand its reach to two more provinces; the North Central and Central.
“Despite an encouraging drop in poverty, considerable regional disparities remain between the wealthier Western Province and the lagging regions,” Naoko Ishii, World Bank Country Director for Sri Lanka said in a statement.
“Gemi Diriya has proven remarkably successful in empowering the poor and raising incomes in some of Sri Lanka’s poorest provinces.
“Key to its success is the focus on social services, skills development, access to micro-finance for small businesses and micro-enterprises, and partnerships with the private sector.”
To date, the program has financed 2,140 community infrastructure subprojects, generated about 18,500 jobs, and provided livelihood activities to 140,000 households, the World Bank said.
It has mobilized resources by promoting savings and village credit, and by linking communities to financial institutions and the private sector.
Gemi Diriya has also been instrumental in forging partnerships between the rural youth and key industries with employment potential, especially textile, food retail and the ICT sector.
Meena Munshi, World Bank team leader for the project said the project which is driven by community needs has been successful in transferring control over decision-making and financial resources to rural communities.
First sovereign bond trades above par: official sources
The country’s first sovereign bond which has a coupon above 8.25 percent has started to trade above par, recovering from steep discounts seen before an internal war ended, an official said.
The bond has traded at a yield of around 7.80 percent this week, the head of Sri Lanka’s public debt office C. P. J. Siriwardene said. “From July we have seen an improvement of about 25 basis points a week,” he said.
“We expect this steady improvement in the near future too and [the yield] to reach somewhere around 7.0 percent.” Siriwardene said local investors have also bought the bond at above par. Sri Lanka’s first 500 million sovereign bond was issued in 2007 for five years.
The bond fell amid international turmoil and an intensifying conflict at home, to yield over 20 percent at one point. But the end of a 30-year internal conflict has brightened prospects for the country.
Sri Lanka is now evaluating bids from seven international investment banks to float another 500 million US dollar bond which is expected to hit markets in October.
Standard and Poor’s recently upgraded the outlook on Sri Lanka’s ‘B’ speculative sovereign rating to ‘stable’ from ‘negative’ in August, on expectations of better policy and strong foreign reserves, following a deal with the International Monetary Fund.
Fitch, which has rated the country a notch higher at ‘B+’ also lowered the outlook to ‘negative’ amid foreign reserves losses of the Central Bank.
But Sri Lanka’s foreign reserves have zoomed to over 3.0 billion US dollars following a float of the rupee in late March and the IMF also approving a 2.6 billion US dollar stand by arrangement.