COLOMBO (Reuters) – Sri Lanka’s central bank unexpectedly slashed banks’ statutory reserve ratio on Friday to spur credit growth as policymakers struggle to boost the island’s faltering economy after a political crisis.

People walk past the main entrance of the Sri Lanka’s Central Bank in Colombo, Sri Lanka March 24, 2017. REUTERS/Dinuka Liyanawatte/File Photo

Economic growth cooled to a 17-year low of around 3 percent in 2018, central bank Governor Indrajit Coomaraswamy said after the policy decision, adding that it will pick up to about 4 percent this year.

The Central Bank of Sri Lanka (CBSL) cut the statutory reserve ratio (SRR) by 100 basis points to 5 percent effective March 1, while leaving its two key monetary policy rates steady, saying they were “appropriate”. Analysts polled by Reuters had expected all three to be left unchanged.

The SRR cut would inject 60 billion rupees (334.45 million) into the financial system, the central bank said.

“The (Monetary) Board was of the view that some policy intervention by the Central Bank to address the large and persistent liquidity deficit in the domestic money market is warranted,” the central bank said in a statement.

It said liquidity has remained tight despite a 150 bps cut in the statutory reserve ratio in mid-November.

Private-sector credit grew 15.9 percent in December from a year earlier, slowing from a 16.2 percent pace in December 2017, central bank data showed.

“The surprise cut appears to be targeted at addressing the persistent liquidity deficit issues faced by banks over the last few quarters, rather than an active signal of monetary easing,” said Trisha Peries, product head of economic research at Frontier Research.

Sri Lanka started discussions with the International Monetary Fund (IMF) last week on extending a $1.5 billion loan.

The talks were delayed after a political crisis erupted in October.

President Maithripala Sirisena’s abrupt change of prime minister and decision to dissolve parliament created panic and uncertainty among investors, who dumped Sri Lankan government bonds and other assets, sending the rupee currency to record lows.

The move was later ruled unconstitutional and Ranil Wickremesinghe was reinstated as prime minister after 51 days.

Analysts who had expected no change in the central bank’s stance had pointed to an easing of political and financial market pressure.. The rupee has rebounded 1.8 percent against the dollar since hitting an all-time low of 183.00 on Jan. 3, while foreigners have resumed buying government bonds.

Wickremesinghe’s government aims to focus on economic growth, which has been sluggish due to tight policies, ahead of a presidential poll later this year and general election in 2020.

Coomaraswamy also said the central bank “is doing the paper work” on a yuan swap agreement with the People’s Bank of China equivalent to $1.5 billion, along with a $400 million swap from Reserve Bank of India and another from Qatar as Sri Lanka struggles to repay a record $5.9 billion foreign loan due this year.

(1 US dollar = 179.4000 Sri Lankan rupee)

Reporting by Shihar Aneez and Ranga Sirilal; Editing by Richard Borsuk and Gopakumar Warrier


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