IMF Board Level Approval likely in late March 2023; Managing Director of IMF, Ms Kristalina Georgieva to present the IMF-supported program to Executive Board on 20 March 2023
On 03 March 2023, the CB increased its SLFR and SDFR by +100bps each to 16.5% and 15.5% respectively, as the final pre-requisite for the IMF program. With the IMF receiving financing assurances from the Paris club, and non-Paris club members such as India, Saudi Arabia, Hungary, Kuwait, the ad-hoc private creditor group and the People’s Republic of China, the Managing Director of IMF, Ms. Kristalina Georgieva is to present the IMF-supported program to its Executive Board on 20 March 2023. The debt restructure discussions and negotiations with private creditors would commence following the inking of the IMF - BLA. Continuation of the Government’s fiscal consolidation plans following the recent steep tax increases and the envisaged SOE reform program are crucial at this point to ensure continued fiscal management in the near-term.
Currency appreciates on improving macro conditions; Current account to be liberalized in line with expected FX inflows to ensure economic stability
LKR / USD commenced its appreciating trend since 27 Feb 2023, with the CB absorbing USD 308mn worth FX during the week ended 03 March 2023. Following the CB allowing the LKR/USD to operate without a daily operating band w.e.f. 07 March 2023, we expect the currency to hover in the range of LKR 310.00 +/- 3.0% in the near-term. However, we expect this to stabilise upon the conclusion of the debt restructure negotiations that are expected to be finalised by early 4Q CY23. External sector continues to improve with export volumes picking up in January 2023 whilst import volumes declined. Earnings from tourism to continue its improving trend with February tourist arrivals also exceeding the 100k level.
Inflation to improve with a better outlook expected on food and non- food inflation due to improving supply side factors, reduced demand side pressures and lower imported inflation
The CB expects fuel & gas prices to reduce in the near term owing to the LKR appreciating, resulting in faster downward adjustments in non-food inflation. Food inflation continued to fall due to reduction in prices of rice, vegetables and eggs during February. We forecast headline CCPI inflation to moderate to 9.0% - 11.0% by end 2023, resulting in real interest rates of +5.0% - +6.0% by end 2023.
AWPLR to significantly reduce following IMF’s Board Level Approval (IMF - BLA)
AWPLR reduced 462bps in YTD 2023 to 23.45% as of 03 March 2023. The IMF – BLA may likely materialise on or around 20 March 2023, reducing the risk premium attached to current market interest rates. The debt restructure discussions and negotiations with private creditors would commence following the inking of the IMF - BLA. We forecast AWPLR to reach 15.0–16.0% by end 2023.