Sri Lanka’s Quarterly Growth Slows Amid Interest Rate Increase

  • Island’s 2Q GDP expands 2.6% y/y versus 4.9% median forecast
  • Central Bank raised benchmark interest rates in July

Sri Lanka’s gross domestic product expanded less than estimated in the previous quarter, even as central bank Governor Indrajit Coomaraswamy raised key interest rates in his first review in July.

Key Points

  • Sri Lanka’s April-June GDP grew 2.6% from a year earlier, the Department of Census & Statistics said in a statement in Colombo on Thursday.
  • That’s slower than the 4.9 percent median estimate in a Bloomberg survey of six economists and compares with 5.2 percent growth in the first quarter
  • The Central Bank of Sri Lanka kept its standing lending facility rate at 8.5 percent and standing deposit facility rate at 7 percent in August after raising it by 50 basis points in the previous month

Big Picture

The central bank’s tight rate bias is likely to further cloud the growth outlook even as government spending cuts, shrinking trade volumes and floods hurt economic activity. In his latest policy review on Aug. 30, Coomaraswamy said private sector credit remained higher than desired and measures adopted during the first seven months of 2016 will gradually slow expansion in bank lending and support a mid-single digit inflation target.
 

Economist Takeaway

“Growth will remain challenging in the short-term given the tight monetary policy and fiscal consolidation measures,” said Bimanee Meepagala, Colombo-based fund manager at NDB Wealth Management Ltd. “The central bank will likely stick to its stance of gauging credit expansion in its rate decisions.”

The Details

  • Sri Lanka’s industry sub sector rose 2.2 percent in the second quarter from a year earlier and services grew 4.9 percent, while farm sector contracted 5.6 percent
  • The Colombo consumer price index rose 4.0% in August, slowing from a 5.5 percent gain in July
  • The International Monetary Fund which approved a $1.5 billion loan to Sri Lanka in June, has advised to keep policy rates tight in case of elevated inflationary pressures, sustained private loan-growth and pressure on the rupee
  • Investors have cheered the IMF loan, coined by Moody’s as “ambitious”, boosting the rupee about 2.3 percent from its record low hit in March
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