‘Lankan economy will return to normalcy after IMF deal’ | Daily News

‘Lankan economy will return to normalcy after IMF deal’

The Sri Lankan economy is expected 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.

The First Capital Research in their Pre Policy-Analysis “TUNING TOWARDS DOVISH MODE?” says that with the complete stabilization of economic indicators, concentration would be shifted towards fast tracking the revival of the economy.

After significant delay, Sri Lanka managed to enter into a staff level agreement with the IMF Sep-22.

However, beyond the staff level agreement, in order to move into an IMF support program there were a number of pre-conditions that needed to be fulfilled by Sri Lanka. In line with the other countries that have gone through a similar crisis in the economy it is understood that obtaining approval of all creditors to move into a debt restructuring process was the utmost priority condition for the IMF.

“We have already witnessed significant progress on the primary bilateral creditors India and China.”

Meanwhile the Inflation measured by CCPI witnessed a gradual decline on a YoY basis for the 3rd consecutive month. Accordingly, YoY CCPI for Dec 2022 was recorded at 57.2% down from 61.0% in Nov 2022 as prices of both food and non-food items started to stabilize after interest rates were allowed to move up. 

Meanwhile, FCR expects a steep dip in inflation in 2Q2023 amidst the higher base effect on inflation. Moreover, as the demand push inflation is restrained via tighter monetary and fiscal policies, cost push inflation also started to exhibit a gradual ease off in line with a decline in global commodity prices where EIU expects commodity prices to recede in 2023 in the face of slowing demand globally while Fitch Solutions reported that 73% of the key commodities are likely to experience decline in annual average price below 2022 levels.

“Therefore, as the demand pushed inflation is at its minimum, any actions pertaining to further monetary tightening can be eliminated while paving the way to introduce monetary stimulus by CBSL via a relaxed monetary policy.”

Commenting on FCR Policy Rate Forecast First Capital says they believe 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. “However, considering both arguments for and against monetary easing, we have assigned an equal probability for both scenarios.

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