SL’s foreign reserves cross USD 3 Bn mark in March
Sri Lanka’s foreign reserves for March 2023 are estimated to have crossed the USD 3 billion mark according to First Capital Research (FCR) Pre policy analysis.
Strengthening reserves position and stable currency Sri Lanka’s reserve position improved to USD 2.2Bn in Feb-23 from USD 2.1Bn in January-23 and USD 1.9 Bn in December-22. The reserves were further boosted with the IMF disbursing its first tranche of USD 333 million of which the Govt. decided to settle India with USD 121 million.
“Further inflows are expected from multilateral lenders (USD 7.0Bn inflows from ADB and WB promised between 2023E2027E), fast recovery of the tourism sector (expected to reach USD 1.9Bn in 2023E from USD 1.1Bn in 2022), and steady inflows from remittances (USD 5.4Bn in 2023E cf. USD3.8Bn in 2022).
Reserves are expected to register another substantial boost in Mar-23, with CBSL purchasing c. USD 900Mn absorbing the significant inflows into the economy following the confirmation of dates of the IMF board level approval. Successful signing of the IMF – EFF board level agreement on March 21, 2023, aims to restore Sri Lanka’s macroeconomic stability and debt sustainability, mitigate the economic impact on the poor and vulnerable, safeguard financial sector stability, and strengthen governance and growth potential. “Moreover, signing of the IMF deal is also expected to improve the investor confidence in Sri Lanka, which we believe may improve investments to capital markets.”
The improved investments are expected to accelerate the decline in government security yields, which we believe will provide the platform for a possible policy rate cut. Despite the decline in exports below USD 1.0Bn for the second consecutive month, the trade deficit reported a decline of 72.6%YoY to USD 449 Mn.
Meanwhile Inflation to record a faster decline Inflation measured by the CCPI inflation recorded a further decline in the month of Mar-23 to 50.3% cf. 50.6% in Feb-23, in line with FCR expectations. The decline in inflation during the concerned period was largely as a result of the decline in food commodity prices. Meanwhile, going forward we expect inflation to continue its disinflationary path benefitted by significantly high base effect in 2022, reduction of fuel prices, normalizing of global commodity prices and plunge in freight rates to below pre-pandemic levels.
FCR expects inflation to tone down to c.16% by Jun-23 and c.10% by end of 2023. Given the consecutive decline in YoY inflation amidst no pressure from demand side, we believe a policy rate cut could pave the way for monetary stimulus and enable a faster recovery of the economy. Commenting on the upcoming policy meeting, FCR says that there is a 70% possibility for CBSL to maintain the rates at its current levels allowing further strengthening of key economic indicators.