The activities in the real economy are expected to continue to pick up in June. Both short and long-term interest rates are likely to remain low, amid weaker credit demand says ICRA Lanka in their monthly economic update.
‘Rupee is likely to display stability as forecasted by the forward rates. Wage growth may slow down. In this context, inflation is likely to be well within 4 to 6%.’
Commenting on May 2020, the report says that the activities in the economy, especially the industry and services sector, improved marginally. However, the economy was still operating with excess capacity.
ASPI rose 6% during the month, more as a correction from the steep fall witnessed earlier as investors picked up undervalued stocks. Foreign participation in the equities was mild and foreigners were net sellers.
Data indicates the CCPI has declined to 4% in May, which is now on the lower bound of the CBSL’s inflation target. After almost 4 months of consecutive foreign capital outflows, in the last week of May debt market reported its first major weekly inflow.
Rupee demonstrated a steady appreciation of about 4% throughout the course of the month helped by weaker imports. Higher excess liquidity levels that prevailed during the previous month started to gradually decline throughout May. Money supply decreased by nearly Rs 22 billion mainly on account of maturing long-term reverse repos issued in April and first half of May.
The long-term rates also declined but, the spread between T-bill and AWPR widened marginally and was still higher than the pre-crisis level indicating the risk appetite of banks had not improved despite the efforts by the CBSL to maintain excess liquidity in the money markets.
The COVID-19 induced downturn in the Sri Lankan manufacturing and services sector deepened during April marking the lowest index values on record. Employers were seen cutting down and freezing temporary/casual jobs as they were operating below the capacity. The COVID-19 induced downturn in the Sri Lankan manufacturing and services sector deepened during April marking the lowest index values on record. Employers were seen cutting down and freezing temporary/casual jobs as they were operating below the capacity. Apparel manufacturers experienced low orders from US and European clients.
The activities in the economy, especially the industry and services sector, improved marginally in May as evident by increasing power demand. However, the economy was still operating with excess capacity. In this backdrop, ICRA Lanka expects the real GDP of Sri Lanka in Q2 to record a contraction of around 4.5%.
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