ECONOMYNEXT – Sri Lanka Central Bank is eyeing for stability this year in the island nation’s economy after an unprecedented financial crisis forced the country for hard reforms amid worst contraction in the country’s post-independence history.
The central bank, which printed billions of rupees to finance government and resulted in a unprecedentedly high inflation, said the country is witnessing the impact of “consecutive economic shocks” in the last four years.
“Livelihoods were lost, while real incomes suffered the most,” the central bank said in a statement on “Monetary and Financial Sector Policies for 2023 and Beyond”.
“Structural economic impediments that existed across various spheres of the economy over decades were compounded by these economic shocks, along with ill-timed policy choices, thereby loosening the macroeconomic balance and resulting in a sudden and multi-pronged setback for the nation.”
The central bank last year raised the key monetary policy rates by a record high level to curb inflation after the money printing. The move, however, has hit the overall economy which was already on a downturn due to debt crisis and currency collapse.
The economy is projected to register a real contraction of around 8.0 percent in 2022 and expected to record a gradual recovery from the second half of 2023 and sustain the growth momentum beyond, the central bank said.
“The monetary policy will remain focused on ensuring price stability over the medium term,” the central bank, which is in a deal to finalize a $2.9 billion International Monetary Fund loan, said.
“The excessively high levels of interest rates observed at present are expected to moderate in
the period ahead as money market liquidity conditions improve and the risk premia attached
to debt restructuring concerns assuage.”
The market interest rates are now hovering around 30 percent, while inflation has eased to 57 percent last month from its record high of 73 percent in September.
“The market interest rate structure (of both deposit and lending interest rates) is expected to moderate in the period ahead with improving market liquidity conditions. If such adjustment would take longer time than anticipated, the Central Bank will consider taking administrative measures, as appropriate.”
“…measures are underway to secure financing assurances from official creditors for the debt restructuring process aimed at ensuring medium term public debt sustainability. With significant
progress being made at present in relation to the interaction with the Sri Lankan creditors,
the envisaged IMF facility is expected to materialise in early 2023.”
It also said the headline inflation is expected to move along a disinflationary path with a deceleration in the first half of 2023 and reaching the desired levels of inflation towards the end of 2023.
“If any upside risks to inflation emerge in the period ahead, that would be addressed through
appropriate policy measures.” (Colombo/Jan04/2023)