Sri Lanka’s possible fiscal slippage, main argument for not relaxing policy: CBSL Chief

July 12, 2019 (LBO) – Sri Lanka’s possible fiscal slippage is the main argument against relaxing monetary policy, the Central Bank Governor Indrajit Coomaraswamy said.

Speaking to journalists in Colombo after the monthly monetary policy announcement, he said the government’s revenue has come down with increased expenditure, opening doors for a possible fiscal slippage.

Monetary Board at its latest monetary policy meeting decided to maintain policy interest rates at their current levels.

“The reason why the monetary board decided not to reduce policy rates on this occasion is to wait and see the full effects of everything that has been done so far,” Coomaraswamy said.

The Central Bank took a number of measures recently to ease monetary conditions including the reduction of policy rates by 50 basis points on 31 May 2019.

The bank also imposed maximum interest rates on deposit products from April and carried out sizable liquidity injections through SRR cuts.

“The effects of the deposit cap which we now want to see translated into lending rates in the coming weeks, the government is also spending about 300 million on each electorate under the ‘Gamperaliya’ program,”

“So there’s a lot of money being flushed into the system, so we would like to wait and see how that plays itself out before taking another call on interest rates.”

“The only reason one would want to be careful about relaxing policy is that there is evidence now that there could be a fiscal slippage due to the Easter bombings as well as the import compression, outside the effects of the bombings,” he said.

Coomaraswamy said the government’s revenue including import duty, VAT and income tax collection has come down amidst a lower level of economic activity.

“All that is likely to be affected so government revenue is being affected in addition expenditure also is likely to be higher,” he said.

“The government is taking steps to review the whole budget and to make sure that it maintains the overall framework of the budget but that fiscal slippage or possible fiscal slippage is an argument against relaxing policy.”