First Capital Research estimates that Sri Lanka’s GDP would recover to 3.2% in 2021, from its expected steepest contraction in the history of -5.8% in 2020.
Moreover, the Sri Lankan government aims at achieving an economic growth of 6% or higher for 2021. In addition, further need to improve the demand for credit, fragile consumer demand recovery and import restrictions can be considered as the major factors favouring easing policy rates at the upcoming meeting.
Private credit, one of the key gauge of the economy, increased by Rs 112.2 billion in Mar 2021 recording a growth for the 8th consecutive month indicating a revival in gross loan disbursements.
According to First Capital Research this growth reflects that both businesses and individuals are speeding-up economic activities. CBSL has set a target of 14% to grow private sector credit while YTD credit growth figure of 2.57%, nearly marks an achievement of one quarter of the total credit earmarked for the entire year, indicative of that the full year target is within reach.
Despite the fact that the third wave may create a temporary slowdown, low interest rates are expected to be a sweetener to propel the demand for private credit in 2021.
CBSL continued to infuse ample liquidity into the banking system via increased CBSL Holdings which also supports fiscal shortage. Despite the volatilities, liquidity continued to remain in the positive territory and remained above Rs 100 billion since April 19, 2021.
In contrast to the detrimental impact witnessed last year amidst first wave of COVID-19 and the complete lock down, the impact of the third wave appears to be lesser as the Govt. rule out complete lockdown to ensure that the economy heals with minimal scarring.
Moreover, rejuvenation of the vaccination program and better preparation are expected to bolster the economic sentiment, despite a temporary slowdown expected in 2Q-2021.
Lower interest rates have a negative impact on the exchange rate as it can cause loss of foreign capital causing the exchange rate to decline. Despite the import restrictions, YTD USD:LKR has plunged by 6.3% to LKR 197.2 against the greenback and further rate cuts could lead to a plunge in foreign exchange.
Therefore, in order to preserve the foreign currency which is considered to be the talk of the town, further rate cuts are unlikely.
