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Frontier Economic Quarterly -October 2016

• IMF commended the CBSL's efforts to further monetary tightening as it raised policy rates for the second time this year in July as credit growth showed no signs of slowing down; however IMF stressed the need key fiscal reforms, particularly with regards to VAT.
• Brexit and its resultant volatility has created a favorable environment for emerging markets as yield-seeking investors turn their focus to riskier assets; increased foreign inflows into local government securities has allowed CBSL to reduce intervention of LKR in line with IMF recommendations.
• Our preliminary end-2017 view sees a decline in interest rates and a largely stable LKR (against the USD) with just a bit more room for further depreciation by the end of 2017, with a key assumption being an improvement in the fiscal situation next year particularly given the IMF presence.
• However, we expect to reassess these views once the Budget 2017 is presented to see if there is a need for a material change in our views.
• -Focus 1 – The Central Bank of Sri Lanka (CBSL) is in the process of adopting an Inflation Targeting model for its monetary policy framework. In this Focus, we take a closer look at what this framework is, its advantages and more importantly, limitations Sri Lanka would face in adopting the model.
• -Focus 2 – The Ministry of Finance recently released data on government’s fiscal operations for the first six months of 2016. Here we have analyzed the fiscal performance in the first half of the year, along with a further analysis on Tax revenue performance during the first four months of the year.