Rating agency ICRA Lanka expects the Central Bank of Sri Lanka (CBSL) to maintain an accommodative monetary policy and therefore current low-interest rate climate to continue throughout 2H 2020. Moreover, the rating agency believes that a stable policy framework and recovery strategy is paramount for the overall stability of the economy. ICRA Lanka, which is a subsidiary of Moody’s Investor Services, releasing their Mid-year Economic Update, stated that recovery of the financial sector will be largely contingent on the recovery of certain key segments of the economy, such as construction, tourism, and the SMEs. ICRA Lanka’s projections show that the economic growth recording better performance in 3Q and 4Q. “It is less likely that we see an appreciable expansion in credit as the recessionary currents flow strong at the moment. In addition, fall in aggregate demand may lengthen the current deflationary environment.” From the point of view of strengthening of reserves, the Government is likely to meet foreign currency obligations by rolling over some of these debts or through bilateral arrangements being negotiated or in place currently. However, the bigger challenge would be in meeting the obligation of the $ 1 billion international sovereign bond maturing in October,” the rating agency stated. “Wage growth will continue to trend down in accordance with higher unemployment level expected by the year-end. Given the slightly stronger rupee in terms of REER that prevailed as of end 1H 2020, the CBSL may tolerate further depreciation leading to reserve accumulation,” it said. “Going by the forward rates, the rupee could depreciate close to Rs. 187/USD by the end of the year with strong probability of falling further if the imports pick up. Financial institutions will continue to lend to safer and less risky market and customer segments,” it added.
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