Domestic economic activity expected to recover gradually towards latter part of 2023
Domestic economic activity is expected to recover gradually towards the latter part of 2023 and sustain the recovery over the medium term, said Governor Central Bank Dr. Nandala Weerasinghe.
This will be mainly due to improvements in domestic supply conditions and enhancement in business and investor sentiments. Inflation will further decline in the coming months and that trend will continue, he told the post-monetary policy press conference on Tuesday evening. Justifying the February inflation increase he said it was because of the power tariff hike. Core inflation also decelerated for the sixth consecutive month in March 2023, reflecting the continued moderation in underlying demand pressures in the economy.
A faster deceleration of inflation is expected from April 2023 with the reduction in domestic prices of essentials following the greater pass-through of the moderation of global commodity prices and the recent appreciation of the Sri Lanka rupee and the large disinflationary impact arising from the base effect. Accordingly, headline inflation is projected to reach single digit levels by the end 2023 and stabilise at desired levels thereafter over the medium term.
The external sector outlook improved with the finalisation of the IMF-EFF, along with further financing assistance envisaged in the period ahead. The IMF programme is expected to unlock further financing from international financial institutions.
The external current account deficit is estimated to have declined notably in 2022 driven largely by a reduction in the trade deficit owing to the robust export earnings amidst a substantial decline in import expenditure. In addition, workers’ remittances continued to improve thus far in 2023 and are expected to remain healthy given the rising departures for foreign employment. The tourism sector is witnessing a notable improvement with the ongoing season for tourist arrivals.
Given these developments and with a view to allowing the exchange rate to be market- determined, the Central Bank discontinued the announcement of daily guidance on the exchange rate and revoked the mandatory forex sales requirement from the converted export proceeds and workers’ remittances from early March 2023. As a result of these policy measures, and the gradual improvement in liquidity in the domestic foreign exchange market and improved market sentiments, the exchange rate recorded a notable appreciation thus far during 2023, despite some volatility.
Moreover, the Central Bank built up its gross official reserves, which were estimated at US dollars 2.7 billion as at end March 2023, including the swap facility from the People’s Bank of China. The Monetary Board of the Central Bank said they will keep the key policy rates unchanged at the current levels as financial conditions continue to ease in the country.