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Will rate cuts and policy talks help the vulnerable and free markets?

Friday, 7 July 2023 00:00 –      – 8

For the second meeting in a row, Sri Lanka lowered its benchmark rate because rapidly slowing down inflation allowed authorities to concentrate on reversing the worst economic crisis in seven decades. On Thursday, the Central Bank decreased the standing lending facility rate by 200 basis points to 12%. According to the views of six economists, four projected cuts ranging from 150 to 250 basis points, while the other two predicted a stay on the rates.

Although analysts believe that the country has passed the worst of the crisis, its issues are still not fully resolved. Food, healthcare, and housing expenses are high and steadily growing, the poverty rate has doubled over the past year and is expected to rise much more, and there is uncertainty surrounding efforts to restructure the Government’s severe debt load.

The past quarter saw a reduced rate of economic contraction in Sri Lanka as new funding alleviated severe shortages. Prior to September this year’s first review of the country’s $ 3 billion IMF loan program, authorities are putting changes into place to improve fiscal health and bring about price stability.

The Government announced a new scheme to benefit the impoverished in which it would distribute direct cash transfers to approximately 2.3 million households later this month and commit to spending $ 680 million annually on welfare. However, many believe that the monthly payout of between Rs. 2,500 and Rs. 15,000 depending on poverty levels, is insufficient to sustain a proper dignified standard of living with current living costs.

Sri Lanka received $ 3.2 billion in remittances and tourist revenue this year alone which has increased by 30% and 76%, respectively. These inflows have helped the country’s reserves reach a 14-month high of $ 3.5 billion in May and its currency gain nearly 18% this year. A sizable portion of Sri Lanka’s $ 36 billion foreign debt, which consists of international sovereign bonds and bilateral credit due mostly to China, Japan, and India, still has to be renegotiated. In order to smooth the delivery of a second tranche of IMF money coming in October, the president has set a target of concluding debt discussions by September.

With nearly $ 7.4 billion in outstanding bilateral and commercial loans, China is Sri Lanka’s largest bilateral lender, but it has so far refused to take part in the so-called common framework being put out by Japan and the Paris Club to restructure Sri Lanka’s debt. Additionally, despite the expectation of recovery beginning in the third quarter of July, Sri Lanka’s export-based economy is predicted to fall. Up to May this year, exports decreased by 11%, mostly due to a decline in clothing sales to the European Union and the United States.

The Ceylon Chamber of Commerce stated that exports need to accelerate, and the need for real investors coming in, expedited market access through free-trade agreements and other measures is also urgent. The IMF program will only keep us afloat for the next one to two years; beyond that, tougher changes in the areas of labor, land, and state firms that are losing money are required.

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