The Asian Development Bank (ADB) approved a $200 million concessional loan to the Government of Sri Lanka to help stabilize the country’s finance sector following the sovereign debt and economic crises that started in April 2022 when it suspended its external debt payments.
The Financial Sector Stability and Reforms Program comprises two subprograms of $200 million each. Subprogram 1 targets short-term stabilization and crisis management measures that were implemented in 2023, while subprogram 2 is planned to be implemented in 2024 and focuses on structural reforms and long-term actions to restore growth in the banking sector. The program will help strengthen the stability and governance of the country’s banking sector; improve the banking sector’s asset quality; and deepen sustainable and inclusive finance, particularly for women-led micro, small, and medium-sized enterprises. According to the International Monetary Fund’s (IMF) latest review, Sri Lanka’s economy is showing tentative signs of stabilization, although a full economic recovery is not yet assured.
“The program’s overarching development objective is fully aligned with the country’s strategy of maintaining finance sector stability, while ensuring that banks are well-positioned for eventual recovery,” said ADB Country Director for Sri Lanka Takafumi Kadono. “The expected development outcome is a stable financial system providing access to affordable finance for businesses in various sectors of the economy.”
The program is a follow-on assistance from ADB’s crisis response under the special policy-based loan that was approved for Sri Lanka in May 2023. It is aligned with the fourth pillar of the IMF’s Extended Fund Facility provided to Sri Lanka to help the country regain financial stability. It is also in line with the government’s reform agenda, including strengthening the operational independence of the Central Bank of Sri Lanka (CBSL) and its designation as the country’s macroprudential authority.
In designing this subprogram 1 loan, ADB has maintained close coordination and collaboration with the IMF to design targeted regulatory reforms for the banking sector—including the asset quality review—and with the World Bank on strengthening the deposit insurance scheme.
The loan is accompanied by a $1 million grant from ADB’s Technical Assistance Special Fund to provide advisory, knowledge, and institutional capacity building for Sri Lanka’s Ministry of Finance and CBSL.
The Reserve Bank of India on Friday expectedly left its key lending rates unchanged for the fifth consecutive time and predicted faster growth in the world’s fastest-growing major economy amid an uncertain outlook on inflation ahead of elections.
The six-member Monetary Policy Committee , consisting of three RBI and an equal number of external members, voted unanimously to keep the benchmark repurchase rate at 6.5 per cent. All but one of the panel members voted to keep the policy stance at »withdrawal of accommodation » in signs that rates may remain higher for longer.
The central bank raised its forecast for economic growth to 7 per cent from 6.5 per cent, maintaining India ‘s position as the world’s fastest-growing major economy, after a stronger-than-expected 7.6 per cent growth in the July-September quarter.
»Growth has been resilient and robust, surprising everyone, » RBI Governor Shaktikanta Das said announcing the MPC decisions.
The encouraging signs, including an expanding manufacturing PMI and healthy growth in eight core industries, underline confidence in sustained robust growth.
On inflation, he said while there has been broad-based easing in core inflation, the »near-term outlook, however, is masked by risks to food inflation, which might lead to an inflation uptick in November and December ».
»This needs to be watched for second-round effects, if any, » he said, projecting consumer inflation at 5.4 per cent for 2023-24, unchanged from its previous projection.
Going ahead, the inflation outlook would be considerably influenced by uncertain food prices, with elevated global sugar prices being a matter of concern.
The RBI has raised the repo rate by a total of 250 basis points (bps) since May 2022 in efforts to cool surging inflation, which dropped to 4.87 per cent in October but is expected to remain above the 4 per cent medium-term target for some time.
The governor also highlighted that »over-tightening » can also pose growth risks to the economy, and emphasised that it is not a signal that the policy stance was moving towards neutral.
Inflation remains above 4 per cent and »monetary policy must continue to be actively disinflationary to ensure fuller transmission and anchoring of inflation expectations, » he said. The RBI’s stance echoes the global trend of central banks signalling an enduring period of higher rates, further emphasising the need for a cautious yet progressive approach in navigating the financial landscape.
Suman Chowdhury , Chief Economist and Head – Research, at Acuite Ratings & Research said the intensity of hawkishness in the policy statement has clearly subsided and a balance has been brought in. »The statement has also addressed the market concerns on liquidity by clarifying that OMO will be adopted only if required and currently, the liquidity is already in a relatively tight mode, » Chowdhury said.
Other measures announced included banks and money market participants being permitted to balance adjustments to the MSF and SDF on holidays and over the weekends. This will help in normalising the sharp swings in system liquidity and prevent excessive volatility in call money or other short-term rates.
Upasna Bhardwaj , Chief Economist, Kotak Mahindra Bank said, »The MPC has retained focus on 4 per cent inflation being the medium target, with monetary policy actions to ensure disinflationary trends ahead. We continue to expect prolonged pause by the MPC, with liquidity tools being more closely if necessary to manage the policy stance ».
