GDP growth rate of around 5% expected in 2021
The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on July 7, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 4.50 % and 5.50%, respectively.
The Board arrived at this decision after carefully considering the macroeconomic conditions and expected developments on the domestic and global fronts.
Although GDP estimates for the first quarter of 2021 have not been released by the Department of Census and Statistics, indicators for several key sectors of the economy point towards a stronger than expected recovery during the quarter.
Nevertheless, the ongoing vaccination drive throughout the country and the likely removal of mobility restrictions are expected to ease the impact of the current wave of COVID-19 on overall economic activity, thereby facilitating a sustained economic recovery towards achieving a GDP growth rate of around 5 per cent in 2021. In spite of the resilience shown by merchandise exports, the trade deficit widened during the period from January to May 2021, over the same period last year. The notable improvement in workers’ remittances continued to provide support for the external current account.
While the measures introduced to address challenges in the external sector have helped ease the domestic foreign exchange market conditions to some extent, speculative behavior and frontloading of imports have caused undue pressures in the market. The exchange rate has recorded a depreciation of 6.7% against the US dollar thus far during the year. As of end June 2021, the gross official reserves were estimated at US dollars 4 billion. (Equivalent to 2.7 months of imports).
Although the level of foreign reserves could experience some variations in the period ahead, such developments are expected to be temporary, with the adequate financing strategies lined up to maintain reserves at sufficient levels and to meet all maturing debt servicing obligations of the Government on time.
In response to the monetary policy easing measures adopted by the Central Bank, most market deposit and lending interest rates have declined to their historic low levels.
Prevailing low interest rates and the surplus rupee liquidity in the domestic money market enabled the flow of low cost credit to the economy, thus supporting the revival of economic activity.
Accordingly, credit extended to the private sector expanded notably during the period from January to May 2021 and this momentum is expected to sustain through 2021.
The Central Bank expects domestic investors to make use of the low interest rate environment to expand their productive economic activities and explore new opportunities that are being created in the economy aimed at local and international markets.