There is scope and justification for a fiscal stimulus package with room for some infusion in aggregate demand to spur economic growth, Central Bank (CB) Governor Dr. Indrajit Coomaraswamy told the media on the monetary policy stance of the bank last week.
“There is some scope for infusion of aggregate demand which justifies a fresh fiscal stimulus package which was launched last week by the government aimed at stimulating economic growth,” the Governor said.
However, he noted that the fiscal stimulus package should be structured in such a way that it does not lead to an overheating of the economy and undermine the debt dynamics of the country. “There will be policy statement from the government on the rationale of the stimulus package and how it hopes to address the challenges,” the Governor said, adding that the tax concessions should not undermine economic growth in the medium to long term, inflationary pressure and servicing of debts.
Economic growth this year is projected to be three percent or below according to the Central Bank which is slightly over the IMF’s and World Bank’s projection of 2.7 percent growth. However, economists point out that given the twin deficit that the country is grappling with and a bludgeoning external debt such drastic stimulus measures will have long term implications on the economy.
Among a host of tax reductions and withdrawals introduced last week is the slashing the Value Added Tax to eight percent from 15 percent, the increase of the tax-free threshold for VAT from Rs. 1 million to Rs. 25 million turnover per month and the VAT on banking, financial services and insurance to be maintained at 15 percent and the income from agriculture, fishing and livestock to be made income tax free. The revised tax rates will come into force from this month.
When asked about the future status of the country engaging with the IMF the governor said the new government will explore how best it could engage with global lender in the future.
The Central Bank decided to leave its key interest rates unchanged maintaining an accommodative monetary policy stance at its seventh monetary policy review last week.
Accordingly, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) will remain at their current levels of 7.00 percent and 8.00 percent, respectively.
The Board said it arrived at this decision following a careful analysis of current and expected developments in the domestic economy and the financial market as well as the global economy.
However, a third rate cut for the year, despite forecasting to the contrary prior to the recently concluded presidential election, was not ruled out by analysts.
The Central Bank cut policy rates twice so far this year, in May and August by 50 basis points each time.
“The decision of the Monetary Board is consistent with the aim of maintaining inflation in the desired 4-6 percent range while supporting economic growth to reach its potential over the medium term,” the Central Bank Governor said. Monetary policy in several key economies has become increasingly accommodative in view of the bleak global economic outlook.
The Bank said a gradual revival in domestic economic activity is expected over the medium term while the external sector remains resilient.
According to statistics, the Rupee appreciated against the US dollar by 1.0 percent thus far during the year. Gross official reserves are estimated at US$7.8 billion at the end of October providing an import cover of 4.7 months.
Market lending rates are adjusting downwards, responding to the relaxation of monetary policy and the imposition of caps on lending interest rates of licensed banks.
The Average Weighted Prime Lending Rate (AWPR) is expected to reduce by a further 70 basis points to 9.50 percent by the end of this month.