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Frontier Economic Monthly - December 2016

​Executive Summary

• -The IMF’s detailed report following its first review of the 3-year EFF program reiterates the need for proper implementation of fiscal and structural reforms while noting no further monetary tightening is currently required.
• -The proposed reduction in the use of foreign currency swaps and reliance on outright dollar purchases to build foreign reserves may exert short term pressures on the LKR. However, the reduction in the reserves target for the year by the IMF will likely provide some respite.

• -2016 has been a year of economic adjustment with a significant rise in interest rates and a moderate depreciation in the LKR.

• -Going into 2017, our base case view is for a decline in interest rates and possibility of a further limited depreciation in the LKR (against the USD) by the end of the year.

• -The key message is to remain vigilant given the possibility of black-swan type risks the external environment could bring next year following the drastic changes in the US political trajectory under a Trump presidency and other political and economic shocks that can take place.
• Focus 1 – Here we take a look at how FDIs into the country have been performing in recent years along with a detailed look into its composition and sector-wise breakdown of investments.
• Focus 2 – This provides a roundup of key global economic events which took place in 2016 along with their impact on few global indicators such as EM currencies, oil and gold.