Lankan economy could regain normalcy with IMF financing-FCR

First Capital Research in their Pre-Policy Analysis (FCR) says that they expect the Sri Lankan economy to return to normalcy with the country being able to sign the IMF deal by March 2023 and secure necessary financing from IMF and other multilateral creditors while regaining its access to the global capital market during the year.

IMF had called for cost reflective electricity tariffs in Sri Lanka also as a pre-condition for the IMF bailout and this too has been fulfilled by the government as of February 15, 2022.

“Accordingly, anticipations are high on achieving the board level agreement in the near term.’’ Excessive market interest rates have begun to adjust downward and are expected to ease further, the report says. “The external sector remains resilient despite heightened challenges, and the outlook remains positive.” In line with FCR expectations, inflation continued to demonstrate a deceleration for the fourth consecutive month as YoY CCPI for the month of January stood at 54.2% (cf. 57.2% in Dec-22). Accordingly, YoY inflation in the Food group declined to 60.1% (cf. 64.4%) while Non-food group declined to 51.0% (cf. 53.4%). Easing inflation is an indication that demand pressures have almost completely been stamped off with the tight monetary policy conditions. “Moreover, cost-push inflation also has shown signs of easing off as global commodity prices have begun to stabilize after the record-highs registered during the previous year with Russia’s invasion of Ukraine. Accordingly, commodities such as crude oil and coal which skyrocketed during February 22 has now returned to pre-invasion levels.” FCR expects inflation to tone down significantly in the upcoming quarter as a result of the higher base effect on inflation. Local Government elections which have been postponed continuously have yet again been postponed indefinitely after calling off the decision to conduct it on March 9 2023 while officials cited inadequate funds as the reason for the delay. However, this has given rise to an uncertainty among the citizens while recent tax hikes and electricity tariff hikes prompted several protests around the country backed by professionals as well as the general public. This may lead to massive protests and provoke social unrest which is unhealthy for the economy as a whole. “Therefore, times of such uncertainty and unrest shall not welcome any significant changes in the monetary policy, hence discourages the possibility of a relaxation in rates.” First Capital Research believes that CBSL may consider maintaining the monetary policy rates at its current levels in the upcoming policy review meeting allowing a soft landing from its hawkish to dovish stance.

Graph caption: FCR 2023 forecast illustrates a sharp dip in inflation towards 2Q2023