COLOMBO: Sri Lanka kept policy rates steady at multiyear lows on Tuesday, as expected, and expressed confidence that private sector credit growth would rebound in the second quarter and push up the pace of economic expansion.
The repurchase rate and reverse repurchase rate were left at 6.50 percent and 8.00 percent, respectively, as most analysts in a Reuters poll had forecast. In January, Sri Lanka reduced the reverse repurchase rate by 50 basis points. Private sector credit grew 4.4 percent year-on-year in February, the slowest expansion since May 2010.
That compared with growth of 5.2 percent in January and 13.3 percent in February 2013. Analysts said some temporary policy measures have hit private sector business confidence.
"Corporate sector is not ready to invest and there is lack of job creation," said Danushka Samarasinghe, head of research at TKS Securities.
Still, economic growth picked up to 7.3 percent in 2013 from a three-year low of 6.3 percent in 2012. Boosting growth were massive state-led infrastructure projects started after the end of a 26-year civil war in 2009.
The central bank projects 7.8 percent economic growth this year.
"The Sri Lanka economy is poised for stronger performance with the recovery observed in the external sector, sustained momentum in construction and manufacturing sectors and with monetary aggregates performing as expected, and inflation remaining low and stable," the central bank said in a statement.
It also said that continued fiscal consolidation, together with a $500 million, five-year sovereign bond issuance early this month, are expected to ease the public sector's reliance on bank financing in the coming months. "The resulting release of funds for private investments bolstered by sufficient market liquidity levels would provide the necessary stimulus to strengthen private sector activity and in turn, as expected, expand credit growth from the second quarter."
Some banks and currency dealers say that despite multiyear-low policy rates, they do not see much demand for imports and borrowing for investments, as consumer spending is declining due to higher taxes and lower disposable income.
The central bank cut the repurchase rate by 125 basis points and reverse repurchase rate by 175 basis points between December 2012 and January 2014 to stimulate economic growth.
Commercial banks' lending rates have still been high at around 15 percent.
The Finance Ministry in March said benchmark interest rates would remain steady for the next two to three months.
Sri Lanka's annual inflation fell to a 25-month low of 4.2 percent in March, and the central bank in the statement said inflation is expected to remain in the mid-single digits throughout 2014 even as some price pressures may be felt due to supply disruptions brought by drought conditions.
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