Sri Lanka needs to further tighten monetary policy since credit growth in the country is still more than 30 per cent, according to economists. “The credit growth hasn’t seen a significant slowdown and we are seeing underlying inflationary pressures,” Leif Eskessen, Chief Economist for India and ASEAN HSBC,told the Business Times at the HSBC Power [...]

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SL needs to further tighten monetary policy : economists

By Duruthu Edirimuni Chandrasekera
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Sri Lanka needs to further tighten monetary policy since credit growth in the country is still more than 30 per cent, according to economists.

“The credit growth hasn’t seen a significant slowdown and we are seeing underlying inflationary pressures,” Leif Eskessen, Chief Economist for India and ASEAN HSBC,told the Business Times at the HSBC Power Breakfast for Corporate and Global Markets customers in Colombo recently.

Sri Lanka’s GDP growth has slowed due to weaker external demand but its domestic demand has so far proven resilient, he added.“Growth has slowed, led by weak external demand, but resilient domestic demand has provided some cushions. Despite the moderation in growth, inflation risks still linger and are likely to linger and recent measures to cool inflation could only help temporarily,” Mr. Eskessen said. He added that external vulnerabilities have eased following policy measures introduced earlier in the year, but risks remain given the challenging external environment.

Presenting ‘Asia’s Inflation – Growth Tango: who’s dominating the dance?’ he said that despite the slowdown in GDP growth, inflation risks linger in the country. External position (reserves are pumped up while external debt is set to decline) is stabilizing following policy measures in early 2012, he said, reiterating that it is premature to loosen the grip now.

Raising and sustaining growth requires more investment and despite the country attracting some investments, there’s still scope to improve the investment climate, he added. “The step up in investments should be sustained and partly financed through fiscal consolidation.”

The export share in the economy is relatively low and exports are not sufficiently diversified, he observed, noting that increasing the knowledge base of the economy and getting ready for more urbanisation is also important.

Meanwhile, Asia’s private consumption is likely to prove resilient and investments are also expected to hold up relatively well, he said. “The biggest risk to Asia’s outlook is the debt crisis in Europe. We believe a further escalation of the sovereign debt crisis in the euro area is the main downside risk to the growth outlook; it would affect Asia severely through the trade, financial and confidence channels.” The US economy is not out of the woods yet and bipolar politics also present a risk, he said, especially in light of the upcoming presidential elections and the “fiscal cliff” face by the US. “Ongoing tensions in the Middle East pose upside risks to oil prices, which could be disruptive given the existing fragility of global economic conditions. While there is room to ease policies, there is less scope than during the 2008-09 global financial crisis Core inflation pressures are still prevalent, the credit cycle in many Asian countries is quite mature following several years of rapid lending growth. Exchange rates should also be allowed to respond to market forces to help cushion the impact on growth, he said, noting that a hard landing in China would have significant regional implications. “However, we expect that robust domestic demand conditions and policy accommodation will deliver a soft landing for China.”




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