Business Sentiment - Confidence at a Five Month Low

Drastic disinflation after 19 months in double digits, questions regarding the impact of the domestic debt optimisation framework (DDO) and its impact on the fiscal outlook, and an easing of import restrictions are among the most recent vicissitudes on the minds of businesspeople.

The Central Bank of Sri Lanka informed that the rate of inflation as measured by the Colombo Consumer Price Index (CCPI) on a year-on-year basis reduced to 6.3 percent in July – down from 12 percent in the preceding month. The last time single digit inflation (9.9%) was recorded was back in November 2021.

As for the long awaited DDO, the proposed restructure is expected to knock off around 1.5 percent of GDP and the authorities have directed their attention towards restructuring rupee denominated debt on the country’s superannuation funds.

THE INDEX In the light of such developments, the LMD-NielsenIQ Business Confidence Index (BCI) shed 20 basis points in August to register 73. The index was last in the 70s range in March and the 20 point fall is the highest since February when the BCI surrendered 23 points.

The barometer’s overarching trend therefore, has been one of a downward spiral, having briefly gained ground in April and crossed the psychologically important 100 mark for three consecutive months. It reached a peak of 108 in April before falling back in July.

So the unique index is now 14 points shy of its average for the last 12 months (87) and eight notches lower than where it stood a year ago (81).

SENSITIVITIES Financial sector volatility and a statement by the Governor of the Central Bank of Sri Lanka that the rupee will move in both directions – and not be a one-way bet – under a flexible exchange rate regime has led to a sense of caution in biz circles.

September will be a crucial month as an IMF staff team is scheduled to visit Colombo for the first review of it Extended Fund Facility (EFF) loan programme. If approved by both the staff and executive board following this visit, the Washington-based lender of last resort will release its second disbursement of around US$ 338 million. Needless to say, the country needs this injection of funds and the confidence that goes with it.

Meanwhile, the International Energy Agency (IEA) has cautioned that declining global oil inventories, reduced production from OPEC+ members and record high demand could drive crude prices for the rest of this year.

The IEA asserts that world oil demand, which reached all-time highs in June and August, may increase further in the coming months.

PROJECTIONS NielsenIQ’s Market Leader – Sri Lanka Adrian Hakel says that “barring any significant developments in the coming months, it is highly unlikely that the BCI would see a significant positive upturn.”

Likewise, LMD stands by its assertion in recent months that the index will remain in negative territory – the tangible rewards of disinflation are unlikely to manifest in the near future, the DDO initiative continues to be questioned by critics and there is no guarantee that the IMF’s second tranche will eventuate as Sri Lanka has yet to meet all the conditions set out in the EFF.

– LMD