Sri Lanka’s Central Bank Governor Says Policy on Looser Side

Sri Lanka’s monetary policy has been “veering toward the looser side,” new central bank Governor Arjuna Mahendran said on Tuesday as he left interest rates unchanged amid inflation that’s near a five-year low.

Subdued demand pressure in the economy, lower fuel costs this year and the new government’s pledge to cut prices of key commodities will probably ease inflation further, he said in a statement. President Maithripala Sirisena ended the decade-long rule of his predecessor in a Jan. 8 election.

It’s appropriate now to “stand still, and watch how the new situation unfolds,” Mahendran said in an interview with Bloomberg TV.

Mahendran succeeded Ajith Nivard Cabraal, who resigned a day after the vote. The former HSBC Holdings Plc wealth manager will be watching to see if parliamentary elections in April and the possibility of interest rate increases in the U.S. trigger capital outflows, according to Krystal Tan, a Singapore-based economist at Capital Economics.

“The Central Bank of Sri Lanka is unlikely to see scope for rate cuts,” Tan wrote in a report Tuesday. “We expect the CBSL to keep rates on hold for an extended period.”

Mahendran said he agrees with the International Monetary Fund that the rupee, which weakened about 1 percent in the past year to 132 a dollar, is at an “appropriate” level. The government is looking to emulate China by eliminating corruption and steering the economy away from infrastructure investment toward domestic consumption, he said.

Debt Payments

Sirisena’s government will have to repay or rollover about $2 billion of debt in 2015, the most in data going back to 2005, prompting it to begin talks with the IMF on ways to lower interest costs. He’s also reviewing the nation’s growing ties with China, which has provided funding for large infrastructure projects.

Sri Lanka will start talks to seek arrangers for a dollar bond sale after the nation’s interim budget is announced Jan. 29, Mahendran said.

“I am hopeful that by February we will have a mandate to tap the markets,” he said, adding that “interest rates are very low in Western countries to fund our requirements.”

The country had issued $500 million of five-year notes at a 5.125 percent coupon in April, according to data compiled by Bloomberg. The bonds traded at 4.79 percent as of 1:03 p.m. in Hong Kong.

Political Risks

Foreign borrowing more than doubled since the end of Sri Lanka’s civil war in 2009, underpinning a growth spurt that saw the island’s economy expand 7 percent a year on average. China’s share of lending to the island nation rose sevenfold and interest costs surged to among the highest in countries rates by Moody’s.

Critics have said that while Mahendran is capable, his ties to the island’s new leaders pose a risk. He’s considered an ally of Prime Minister Ranil Wickremesinghe, whose party is the largest in a coalition that backed Sirisena.

Actions needed to keep the president’s disparate coalition together until parliamentary elections are called in April may also bring instability to Sri Lanka, Standard & Poor’s said after the vote.

Related News and Information: Sri Lanka Taps Former HSBC Wealth Manager to Head Central Bank Sri Lanka to Seek IMF Help to Reduce Debt, Finance Minister Says

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