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LK looking at modest and undisturbed economic performance in 4Q

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“The Government lifted the quarantine curfew in early October and 60% of the Sri Lankan population will be fully vaccinated soon reaching a new milestone. We believe the worst of the Delta-variant is behind us. Businesses have learnt to deal and operate amidst the pandemic over time and due to these factors, Sri Lanka is looking at a fairly modest economic performance in 4Q.”

Businesses will look forward to National Budget Proposals in November. The total expenditure allocation is slightly less than that of 2021 and signals a conservative fiscal stance in 2022.

“Tighter market liquidity will be the new normal moving forward. We may see some levelling off of treasury yields in the next few weeks. Banks may compete for funds pushing deposit rates higher, but we expect lending rates to be slightly stickier in the short term. In this context, private credit is likely to weaken. With price controls on several of the items being removed, inflation will remain elevated for the rest of the year. In its latest Monetary Policy Review, the CBSL acknowledged “headline inflation to deviate somewhat from the targeted levels in the near term” as predicted by ICRA Lanka before.

In the 6-month policy Road Map, the CBSL expressed its intention to request the government to tax profits of exporters at 28% instead of 14% where the foreign exchange is not repatriated and converted.

“We doubt this move will bring about the desired objective and help to establish the credibility of the currency. Given the precarious position on the country’s foreign reserves, what is needed is to encourage and provide additional incentives to boost exports, rather than penalizing the sector.”

The CBSL on the other hand needs to address underlying causes of alleged speculation and focus on a long-term strategy to stabilize the currency.

Meanwhile, the US Equities market slowed down in September as investors turned cautious over the Delta variant infections and ongoing debates regarding potential interest rate hikes. European markets followed suit with Germany, France and the UK equities experiencing losses. Asian Markets displayed mixed sentiments as China and Korea experienced losses while Japan and India recorded gains.

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