The Government is confident that External Debt Restructuring (EDR) talks with the Steering Committee members of the Ad Hoc Group of Bondholders on achieving a resolution regarding debt restructuring by June 2024 would be successful.
“Upon agreement on EDR, Sri Lanka stands to potentially receive a rating upgrade, enhancing foreign activity in the market,” stated a First Capital Research Pre-Policy Analysis report.
“This could further lower yields and bolster economic recovery. As a result, we advocate that further monetary easing measures are unwarranted at present.”
The report stated that private sector credit surged significantly in March 2024, marking a consecutive increase for the second month of 2024, totalling Rs. 7.4 trillion (increased by Rs. 71.9 bn on a MoM basis), signaling a resurgence in gross loan disbursements.
The uptick aligns with declining interest rates and the recovery of business activities. The AWPLR experienced a robust continuous decline, reaching single digit in May-24 at 9.65%. With lending rates plummeting, growth in private sector credit is anticipated. However, exercising caution is prudent to avoid potential implications of excessive borrowing and spending, which could lead to economic overheating. Since the onset of 2024, overall rupee liquidity in the domestic money market has shown consistent improvement, notably maintaining positivity since March 2024 followed by the relaxation of borrowing limits for Licensed Commercial Banks (CBSL) by the Central Bank in February 2024.
The decision, made after reviewing prevailing market conditions and enhanced liquidity, is expected to stimulate interbank lending and borrowing, thereby facilitating a decline in market interest rates in alignment with the CBSL’s monetary policy objectives.
“Consequently, this relaxation is anticipated to bolster banks’ borrowing capacity and enhance lending activities, potentially strengthening liquidity within the financial system in the forthcoming months.” “As a result, a gradual decline in interest rates is expected.”
