Sri Lanka cuts lending rates to boost growth

Despite IMF advice to the contrary, the CBSL cut policy lending rates yesterday in a move that is not entirely surprising. It’s clearly a “push to the 2013 finish” at this point, with the government under pressure to ensure that the growth rate for this year is seen to be above 7% unlike in 2012. Several agencies have forecast below 7% growth for Sri Lanka this year, while CBSL has maintained 7.5% growth is achievable. ADB forecast 6.8% and the IMF forecast 6.5%. For the Sri Lankan economy these would have probably been a more sustainable rates to grow at. The moderate growth in 2012 and so far in 2013 is largely down to fundamental challenges in the economy, from wider business climate issues to the absence of real growth drivers like exports (growth has been mainly driven by consumption and construction lately). So fixing these would be key to achieving faster growth – 7% and above. Yet with this latest rate cut, Sri Lanka has once again gone down the monetary expansion route to boost the economy by making borrowing cheaper. This route may help Sri Lanka get closer to the optics of faster growth in the short term but the question is whether this is the route to sustained, long-term faster growth.

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