Sri Lanka Central Bank Weighs Options to Support Economy After Terrorist Attacks

(Bloomberg) -- Sri Lanka’s central bank will consider all options to support the economy in the wake of last month’s terrorist bomb attack, including reducing the reserve ratio at its next policy meeting.

“If you look at all indicators, there’s a strong case for relaxing monetary policy,” Governor Indrajit Coomaraswamy said in an interview in Singapore on Tuesday. “All options are there. It could be a SRR, it could be a policy-rate reduction, it could be a combination of the two,” he said, referring to the statutory reserve ratio.

Speaking to Bloomberg Television’s Haslinda Amin, Coomaraswamy said the April 21 attack on three luxury hotels and three churches, which killed more than 250 people, would result in a “big hit” to tourism and impact growth. Tourism makes up about 5% of the economy.

The central bank left its benchmark lending rate unchanged at 9% on April 8 and signaled there was room for monetary policy easing. The next policy decision is scheduled for May 31. In February, the central bank cut banks’ liquidity ratio to boost money supply in the system.

“Clearly this hit to growth has increased the output gap even more and the private sector has also slowed down. Monetary aggregates are where we want them to be, so there is certainly a case for relaxing monetary policy,” Coomaraswamy said.

Growth was slowing even before last month’s violence, reaching 1.8% in the fourth quarter, the weakest pace since the start of 2014. Sri Lanka has been struggling to revive growth following a three-decade long civil conflict that ended in 2009 and after political turmoil last year.

The governor also made the following comments:

Currency Outlook

Policy makers will consider external conditions and the rupee when they meet later this month. The currency has fallen 1.6% against the dollar since the terror attacks, trimming its gain for the year to about 4%.

The rupee should remain “fairly stable” as long as the global environment is favorable, with the Federal Reserve pausing in its rate-hiking cycle, Coomaraswamy said. Sri Lanka is less affected by the renewed dispute between the U.S. and China as the South Asian nation is not part of the Chinese supply chain but it’s more exposed to a slowdown in the U.S., its main export market, he said. The trade deficit has also narrowed to $1.7 billion in the first quarter from $3 billion in the same period a year ago, he said.

Global Bond

The government raised $2.4 billion in an international bond sale in March to help boost reserves and repay debt. The central bank chief said Sri Lanka is aiming to raise another $2 billion before a presidential election expected to be held in December. That should help boost foreign-exchange reserves to $8 billion by the end of the year after it fell to $6.7 billion in the aftermath of last month’s attacks, he said.

Up to $1 billion could be raised from a dollar bond with a World Bank guarantee, he said. Sri Lanka plans to also issue samurai bonds with a guarantee from the Japan Bank for International Cooperation, panda debt, or borrow from a term loan.

The International Monetary Fund on May 13 approved a one-year extension to June 2020 of Sri Lanka’s lending arrangement, providing a cushion to the island nation’s economy to recover from the attacks. It also agreed to disburse $164 million from the $1.5 billion facility.

--With assistance from Anusha Ondaatjie.

To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net

To contact the editors responsible for this story: Anusha Ondaatjie at anushao@bloomberg.net;Nasreen Seria at nseria@bloomberg.net

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