Sri Lanka’s Business Activities wil badly affected for the next three months further i due to prolonged power outages, supply shortages and sharp increases in prices of fuel, gas and other inputs, increase in borrowing costs, subdued demand for non-essentials and economic, political and social instability in the country, Central Bank analysys predicted.

The country’s manufacturing and service sectors suffered a set back significantly in April 2022, following the seasonal pattern and indicating a contraction in manufacturing activities on a month-on-month basis.

Accordingly, manufacturing recorded a decline in Production, New Orders, Stock of Purchases, and Employment subindices compared to the seasonal peak in month of March.

The decline in Production, particularly observed in the manufacture of food & beverage and textiles & apparel sectors, was due to fewer working days during the month owing to new year holidays, and supply-side constraints including ongoing power outages/energy shortage.

Decrease in New Orders, especially witness in the manufacture of food & beverage sector, was due to end of the festive season demand. Employment also dropped on a month-on-month basis with the increase of absentees following the new year holidays.

Further, Stock of Purchases declined mainly due to the unavailability of required quantities in the domestic market and difficulties in opening letters of credit for importing materials.

Many respondents in the manufacturing sector highlighted that they had to slow down production due to the unavailability of required raw materials, The Central Bank analytical report revealed.

Meanwhile, Suppliers’ Delivery Time lengthened at a higher pace in April 2022, mainly on account of international logistical issues, clearance delays due to forex payment issues, and diesel shortage.

As the manufacturers are concerned about the growing uncertainties from multiple fronts, the overall expectations for manufacturing activities for the next three months deteriorated further in April 2022.

Services sector performance was not up to the expectations in April 2022 indicating a deterioration across the sector amid the prevailing economic, social and political instability in the country.

New Businesses declined in April 2022 for the first time since August 2021, particularly with the deteriorations observed in accommodation, food and beverage, insurance, real estate and transportation sub-sectors.

Business Activities also declined in April 2022 due to the continuous disturbances to business operations mainly attributable to prolonged power outages and difficulties in sourcing inputs including fuel and gas.

Further, the subdued demand amid reduction in purchasing power, drop in tourist arrivals and uncertainties in the country also affected the business activities of some sub-sectors negatively. Accordingly, accommodation, food and beverage, professional services, education, insurance and real estate sub-sectors recorded major contractions during the month.

Nevertheless, several companies, mainly in wholesale and retail trade and other personal activities sub-sectors, saw progresses supported by the festive demand.

Employment recorded a marginal decline in April 2022 due to contract expirations, retirements and resignations. Meanwhile, Backlogs of Work increased for the first time since September 2021 due to power outages, shortages of supplies and transportation difficulties.

The sharp hike in interest rate to severely hit the Government most as analysts estimate one percentage increase translates to Rs. 20 billion per annum.

Maturing public debt is Rs. 2 trillion this year and 10% increase in interest rate fuels debt servicing cost by a further Rs. 20 billion per 1% hike.

Several financial analysts said that the public debt (Treasury Bills and Bonds) is estimated at Rs. 9 trillion, the average maturity of which is four and half years.

On that basis the value of such maturing public debt is Rs. 2 trillion per annum and a 10% increase in interest rate adds a Rs. 200 billion extra per annum.

This works out to Rs. 20 billion per 1% increase in interest rate. Since the policy rate hike, the interest rate has risen by 12%, they added.

On the basis of 4 and 1.2 average maturity the additional cost of debt servicing is a staggering Rs. 900 billion.

On 3 April in the tightest ever monetary policy stance the Monetary Board decided to double policy rates by 700 basis points (7%).

It justified the move saying a substantial policy response is imperative to arrest the build-up of added demand driven inflationary pressures in the economy.

Another reason for the rate hike was the escalation of adverse inflationary expectations, to provide the required impetus to stabilise the exchange rate and also to correct anomalies observed in the market interest rate structure, Central Bank said.

Since then, the benchmark 364-day Treasury Bill yields have doubled to 24% as of last week from 12% as at end March. From a year ago however it is a near five-fold increase.

“The Government is to increase taxes such as VAT and Income Tax to raise the revenue to GDP ratio.

However, any additional revenue garnered from this move gets negated due to the higher cost of debt servicing following the hike in interest rate,” analysts opined.

The next monetary policy review announcement by the Monetary Board is due on Thursday 19, Central Bank revealed. .

Some analysts expect a further tightening stance. If this happens the Government’s debt servicing cost will soar further, analysts warned.

The sharp fall in the value of the rupee helped swell the amount of outstanding loans and advances to the private sector in March, as the banks revalued their foreign currency assets and liabilities at the weaker rupee stood at the end of the month compared to a month earlier.

This gave a sudden boost to the private credit numbers stood at end-March, which otherwise had been anaemic and lacklustre, as the banks grew skittish over the deteriorating economic conditions and their consequences on their borrowers’ solvency and thereby the asset quality.

The latest private sector credit growth numbers published by the Central Bank for March showed that the licensed commercial banks’ outstanding private sector credit growth had swollen by an unprecedented Rs.478.0 billion, marking the biggest expansion in private credit in a single month