The manufacturing and services sectors were in expansion mode (above the neutral level of 50) in November, 2023 as per the Purchasing Managers Index (PMI) compiled by the Central Bank.

PMI - Manufacturing

The Manufacturing PMI increased to 57 on a month-on-month basis in November 2023, driven by the seasonal factors. The index exceeded the neutral threshold (50) for the first time since March 2023, with a positive contribution from all the sub-indices, according to CBSL.

The increases in new orders were largely driven by the ‘manufacture of food & beverages’ and ‘textiles & apparel’ sectors. Moreover, the increase in production was largely due to the manufacture of food & beverages, owing to the seasonal demand.

The overall expectation for the manufacturing activities remained positive for the next three months, mainly due to the gradual recovery in economic activities. However, the firms are concerned about the tax revisions, which will be effective from January 2024.

PMI – Services

The Services sector PMI recorded an index value of 59.4 in November 2023, compared to an index value of 56.2 in October 2023, indicating an accelerated expansion in the services activities. This was led by the increases observed in new businesses, business activities, employment and expectations for activity.

Business activities in relation to the services sector continued to expand in November 2023 in line with the positive developments observed in most of the sub-sectors. Accordingly, significant improvements were observed in business activities related to other personal activities and ‘accommodation, food and beverage’ sub-sectors driven by the sharp increase in tourist arrivals. Financial services improved further in line with the increase in credit demand following the recent reductions in policy rates and their impact on market interest rates.

The wholesale and retail trade sub-sector also continued to grow amid the festive season, supported by the seasonal discounts offered.

According to CBSL, expectations for the next three months with regard to business activities in relation to services, continued to increase in November 2023 due to festive and tourist seasons. However, some respondents have expressed their concerns regarding the amendments to Value Added Tax w.e.f. 1 January 2024.

Outlook for the future

The rate of inflation is expected to remain at the target range of 4-6% of the Central Bank in the next couple of months, in view of the normalization of monetary conditions, enhancements in supply conditions, and the impact of growth-promoting structural reforms. However, the key risks to this view stem from uncertainties related to the price of oil and other commodities, climate related risks, possibility of greater than expected depreciation of the rupee in view of the ongoing relaxation of import restrictions, and impact of VAT increase and removal of VAT exemptions on a number of previously exempted goods.

Sri Lanka’s construction sector, which accounts for 6.3% of the economy and is known for generating significant employment, recorded a contraction of 5.5% in 3Q, 2023 compared to the corresponding quarter in 2022. However, the sector decline has slowed significantly from the 23.1% (YoY) contraction recorded in 2Q, 2023, thereby reflecting that the sector is nearing the end of its declining trend which lasted for two years. Further, there are emerging signs that projects, particularly those funded by the multilateral agencies and the government, are resuming, indicating the potential for a rebound in the sector.

Interest Rates & Exchange Rate

At the T-bill auction held on 20th December, 2023 yield of 91 day t-bill decreased to 14.57% from 14.59% a week ago (-2bps) while yield of 182 day t-bill dropped to 14.24% from 14.29% a week ago (-5bps). The 364 day t-bill yield marginally increased to 12.93% from 12.83% (10bps). Meanwhile Rs 172.5bn worth bills were offered at the auction and Rs 156.16bn worth bills were sold.

CBSL purchased USD 117mn worth dollars from commercial banks on a net basis during November 2023.

The Central Bank middle rate recorded Rs.326.80 per US dollar as of 20 December, 2023.

Global Outlook

• The world economy is on the brink of a second cold war that could “annihilate” progress made since the collapse of the Soviet Union, a senior International Monetary Fund official has warned. Gita Gopinath, the IMF’s first deputy managing director, said the accelerating fragmentation of the world economy into regional power blocs – centred around the US and China – risked wiping out trillions of dollars in global output.
  
  
• The Federal Reserve left its key interest rate on hold at a range of between 5.25% and 5.5%, but it also published projections that suggested it would cut rates three times in 2024. The Fed’s decision came after data for November showed that America’s annual inflation rate had slowed only slightly to 3.1%, and the core rate, which excludes food and energy, had remained at 4%.
  
  
• The European Central Bank and Bank of England followed suit and kept their rates on hold. The ECB gave little away about when it might reduce rates, though it did lower its inflation forecasts. The British central bank scotched hopes that it would loosen policy soon, confirming that rates needed to be kept elevated for an “extended period of time” to curb inflation.
  
  
• Britain’s two-year cost of living crisis eased last month as cheaper petrol and less expensive food helped send the annual inflation rate sharply lower to 3.9% – its second big monthly fall in succession.
  
  
• Oil rose slightly on 20 December as investors kept an eye on the situation in the Red Sea after recent attacks by Iran-aligned Yemeni Houthi militants. USA Launched a task force to safeguard Red Sea commerce as attacks by the Yemeni militants forced major shipping companies to reroute, stoking fears of sustained disruptions to global trade.
  
  
• China reported its industrial output expanded at the fastest pace since February 2022 in November, though retail sales growth missed expectations, pointing to a patchy recovery in the world’s second largest economy. China’s industrial output grew 6.6% in November from a year earlier, according to the country’s National Bureau of Statistics.

Dr. Shanthikumar Fernando | Research & Development Unit | shanthikumar_fernando@combank.net

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