IMF projections make it easier to hit debt targets – CAL

Capital Alliance Investments Chairman Kanishke Mannakkara noted that the IMF projections were overly pessimistic and given recent estimates the economy was likely to expand this year. He noted that such pessimistic projections made it easy for the government to hit debt targets. He forecast that in the period ahead the country would see falling inflation while at the same time seeing falling interest rates.

Mannakkara said, “IMF projections were to make the achievement of debt targets easy. Having a low GDP forecast baked into your projections makes it easy to reach those targets.” Mannakkara was speaking to LMD TV on April 19.

Mannakkara was dismissive of the way inflation data was being interpreted. He said, “Inflation is normally measured on a year-on-year basis. It was in March-May of last year that price levels started increasing rapidly. When we think of price inflation, we default to a year-on-year figure. When prices increase rapidly at one point in time that is still baked into subsequent month figures.” He added, “When you look at the CCPI you see only gradual increases in prices since July of last year.”

Mannakkara predicted a strengthening of the LKR against other currencies. He said the country was running a significant balance of payments surplus of about US$ 200 million a month. He said, “This is aided by a tourism comeback, by remittances, and a reduced trade deficit.”

He added, “That is what is driving the stabilization and the apparent ‘strength’ of the LKR.” He noted that the balance of payments turned positive in Q3 of last year.

Mannakkara noted that even the current misleading view of inflation would see rapid declines in figures shortly. He said, “We see inflation coming down and there is a lot more to go. The base effect is going to kick in the next 3 months.” CAL forecasts that government treasury rates would revert to single-digit levels by 2024. He said, “By the end of 2024 interest rates will be around 8-12%.”

Mannakkara noted that there was room for drastic monetary easing moves by the Monetary Board. He said, “30 % interest rates are not sustainable. Even 20 % are too high but at least they are sticky downwards.”

He added, “We have an extremely tight monetary environment and that is potentially tighter than it needs to be to bring inflation into control.”

Noting the topical issue of excessive returns in the government securities market, Mannakkara said, “It is driven by fears of debt restructuring, so partly it is a risk premium.” Foreigners have been net buyers of government securities and CAL forecasts this to be quite significant shortly.

Elaborating on his forecast for growth he said, “The huge supply side shocks you saw in the economy, curfew, fuel shortages etc. led to significant contractions in economic activity in 2022 which we do not see in 2023.” He added, “There will be growth this year. We see significant growth in 2024 and 2025.”

Mannakkara noted that he expected the currency to be more free-floating. Mannakkara is in support of an independent Central Bank. TP