With Sri Lankan businesses having clarity on the general policy direction of the government, September may see the economy continuing to recover, ICRA Lanka says in their Monthly Economic Update.
Consumers likely to experience further increase in food prices amid persistent supply disruptions and import controls.
Non-food inflation is yet to pick-up; hence the headline inflation will continue to be mild. Given the liquidity buildup and the CBSL’s decision to maintain policy rates, the short-term rates are expected to move in a tighter margin. However, long-term rates still have space to adjust downwards.
For September and October, USD 2.1 billion forex payments are pending, which are likely to be financed out of official reserves. To strengthen the reserve position, the CBSL may be a net buyer of forex and likely to hold a SLDB auction. Commodity prices are expected to rise benefiting the export-oriented industries while hurting import dependent sectors.
The reports points out that both exports and worker remittances continued to recover and recorded the highest year-to-date values in July, however, the total aggregate figures of January to July period are still lower than that of the last year. Remittances marked USD 702 million merchandise exports crossed USD 1 billion. Export earnings were driven by
personal protective equipment such as face masks, cash crops; tea, coconut, rubber and related products, and some perennial crops; cinnamon and pepper.
Meanwhile the imports declined 25% (Y-o-Y) USD 1,294 million. In August, the merchandise exports fell 8.8% to USD 948 million mainly on account of drop in apparel and tea exports.
The Real Effective Exchange Rate index which measures the external competitiveness of the country, declined to 92.29 in July from 92.72 a month earlier.
The official reserve position strengthened by USD 345 million to USD 7.4 billion in August. For September and October USD 2.1 billlion forex obligations including the ISBs maturing in October are pending.
In August, the net FX purchases amounted to USD 93 million amid import controls.
Wages made a further recovery in July on account of wage growth recorded in Agriculture and Services sectors but continued to remain under the inflation rate. These increments were a result of lower base prevailed during July 2019 due to subdued performance of Services sector post Easter Attacks and drought condition.
Manufacturing sector continued to expand in July, helped by the favorable performance of the merchandise exports. However, certain industries were affected by the import restrictions.
The manufacturers cut production in line with the slowdown in new orders while building raw material inventories amidst expectations of higher global input prices. New hires continued. Crude oil prices recovered further.
Accordingly, Lanka’s import bill may see an incremental rise in value in the coming month despite the import controls.
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