CBSL introduces several policy measures to stabilize economy
Central Bank Governor Dr. Nandalal Weerasinghe planted out a bleak short term economic picture for Sri Lanka stating that the economy contracted by 1.6% in the first quarter and this is expected to continue until the year end.
Domestic economic activity during the second quarter of 2022 is expected to have been severely affected by the continued supply side disruptions, primarily due to the shortages of power and energy. Amidst adverse developments on the domestic front, geopolitical tensions in Eastern Europe that have affected global commodity markets and supply chains could pose further risks to domestic economic growth in the near term.
“Foreign exchange inflows in the form of workers’ remittances and tourism earnings remain lower than expected, impacted by unfavourable conditions both domestically and globally. We also expect the inflation to peak soon and then one would be able to see it zooming down. To cushion out the high inflation to the less effulgent series of incentives would be provided in the two budgets that would be spelt out in August and end of the year.”
Gross official reserves, as at end June 2022, are estimated at US dollars 1.9 billion, including the swap facility from the People’s Bank of China equivalent to around US dollars 1.5 billion, which is subject to conditionality on usability.
He said that ensuring external sector stability and overall macroeconomic stability requires commitment from all stakeholders of the economy, given the unprecedented balance of payments pressures and severe stresses experienced at present across all sectors of the economy.
“The measures introduced by the Central Bank to ensure domestic monetary stability and external stability of the Sri Lanka rupee, need to be supported by coherent and consistent actions on the part of the Government, state-owned enterprises, private sector corporate and banking and non-banking financial institutions, among others.”
He also said that urgent restructuring measures are needed to bail out the bleeding SOE’s as the country cannot keep on giving handouts to bail out this sector and pay huge salaries. “Hence SOE reform package is in utmost urgency.”
In contrast to these factors, the Governor said that significant progress has been made with respect to negotiations with the International Monetary Fund (IMF) and expeditious arrangements are being made with regard to the external debt restructuring process. “Also the trade deficit narrowed significantly in May 2022 over the corresponding period of last year, largely supported by the policy measures that were aimed at discouraging non urgent imports, alongside the constrained foreign exchange liquidity in the domestic foreign exchange market.”
“The exchange rate, which underwent a severe bout of depreciation in March 2022, remains broadly stable with the introduction of market guidance from mid-May 2022.”
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Monetary policies further tightened
The Central Bank of Sri Lanka (CBSL) has decided to increase the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) by 100 basis points to 14.50% and 15.505 respectively to contain any build-up of adverse inflation expectations.
Governor Central Bank Dr. Weerasinghe also said that this will further increase bank deposit rates bringing in more money to the banking systems. “Global economic outlook too is deteriorating due to widespread inflation, substantial interest rate hikes, and geopolitical tensions Central Banks from around the world continue to tighten their monetary policies to counter sustained inflationary pressures, exacerbated by high petroleum and food prices arising from geopolitical tensions and destabilizing inflation expectations.