‘Foreign reserves touch USD 3.5 Bn level’
Foreign reserve level of Sri Lanka has shown gradual progress with the highest month on month (MoM) peak of 26% witnessed in May 2023 where it touched the USD 3.5 billion mark.
There on, reserves continued to perk up marginally till July-23 while in Aug-23, reserves dipped by 4% to USD 3.6 Bn as the country settled a significant portion of the Bangladesh swap facility,” said Capital Research in their Pre-Policy Analysis report.
“Substantial progress in Tourism Earnings (+43.1%YoY) and Worker remittances (+78.0%YoY) contributed largely to the growth in reserves level.”
Further, BoP remained in the positive territory aided by the shrinking trade deficit that was recorded at USD -2.7Bn in July-23 compared to USD – 3.6 Bn recorded during last year. However, reserves still remain below required levels while the gradual relaxation of import ban and struggling export segment (mainly apparel) is likely to hinder the reserves growth.
“Though Sri Lanka has completed the Domestic Debt Restructuring in September 2023, External Debt Restructuring continues to be completed. “In line with our expectations, the second tranche is likely to be delayed up to December 2023 until the external debt restructuring is completed.”
Sri Lanka’s GDP for second quarter of 2023 displayed a contraction of 3.1% YoY (aligning with the FCR forecast of -3.0%YoY) relative to the degrowth of output by 7.4% in 2Q2022 indicating a sharp slowdown in the GDP contraction in light of decelerating inflation and anticipated interest rate stabilization during the quarter.
Inflation continued to demonstrate a deceleration for the 11th consecutive month and the report says that reduced inflation is a sign that tight monetary circumstances have nearly entirely eliminated demand forces. Additionally, cost-push inflation has begun to show indications of easing off as global commodity prices have started to stabilize and China’s recent reopening has opened the way for a quicker-than-expected recovery.
“Even though commodities, like crude oil and coal, have recently risen marginally, they are still below the peaks reached in 2022. We believe that there is a 60% probability that CBSL may consider relaxing policy rates in the upcoming policy review meeting moving into a dovish stance with a view to stimulate economic growth and accelerate the decline with interest rates.”
“With economic indicators stabilizing and the economy projected to recover during 2H2023 with a drastic slowdown of inflation witnessed in 3Q-2023, we believe a sizable monetary relaxation may be required in the latter part of 2H-2023.”
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