ECONOMYNEXT – Sri Lanka cuts policy rates 250 basis points lowering the rate at which liquidity is injected to markets to 14.0 percent to from 16.50 percent, saying inflation was falling faster than expected.

“The Board arrived at this decision with a view to easing monetary conditions in line with the faster than expected slowing of inflation, gradual dissipation of inflationary pressures and further anchoring of inflation expectations,” the central bank said in its May policy statement.

“The commencing of such monetary easing is expected to provide an impetus for the economy to rebound from the historic contraction of activity witnessed in 2022, while easing pressures in the financial markets.”

“Headline inflation (year-on-year), based on the Colombo Consumer Price Index (CCPI), continued the deceleration path, faster-than-projected earlier, supported by the lagged impact of tight monetary and fiscal policies, strengthening of the Sri Lanka rupee, reduction in fuel and gas prices, normalisation of food prices and the favourable impact of the statistical base effect.

“The full passthrough of the large appreciation of the exchange rate observed recently is yet to be
reflected in the price levels, and it would quicken the disinflation process, as the prices of
imported goods are expected to decline further in the period ahead.”

Sri Lanka’s balance of payments has been surplus for several months and the central bank has allowed the rupee to appreciate. When the BOP is in surplus and as long as the central bank can buy dollars and generate liquidity rates tend to fall.

“With greater macroeconomic stability being achieved through corrective policy measures, particularly in terms of faster-than-expected deceleration of inflation thus far during 2023 and the benign inflation outlook and the easing of the BOP pressures, the Monetary Board of the Central Bank of Sri Lanka, upon carefully assessing the current and expected developments, decided to relax the stance of monetary policy and reduce the policy interest rates.”

Market rates however has been high amid expectations of a domestic debt re-structuring and mainly government borrowings, with private credit negative and state enterprises also cutting losses.

Loans from the Asian Development Bank has started to come. More funding is also expected from the World Bank further easing government funding.

The full statement is reproduced below:

The Central Bank of Sri Lanka relaxes its Monetary Policy Stance

The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 31 May 2023, decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 250 basis points to 13.00 per cent and 14.00 per cent, respectively.

The Board arrived at this decision with a view to easing monetary conditions in line
with the faster than expected slowing of inflation, gradual dissipation of inflationary pressures
and further anchoring of inflation expectations. The commencing of such monetary easing is
expected to provide an impetus for the economy to rebound from the historic contraction of
activity witnessed in 2022, while easing pressures in the financial markets.

Inflation is projected to decelerate notably in the period ahead, reaching single digit levels
earlier than expected

Headline inflation (year-on-year), based on the Colombo Consumer Price Index (CCPI),
continued the deceleration path, faster-than-projected earlier, supported by the lagged impact of
tight monetary and fiscal policies, strengthening of the Sri Lanka rupee, reduction in fuel and gas
prices, normalisation of food prices and the favourable impact of the statistical base effect. The
full passthrough of the large appreciation of the exchange rate observed recently is yet to be
reflected in the price levels, and it would quicken the disinflation process, as the prices of
imported goods are expected to decline further in the period ahead. The favourable statistical
base effect due to large month-on-month inflation that materialised during the last year is
expected to slow inflation significantly in the next few months as well. Accordingly, as per the
latest projections of the Central Bank, headline inflation is forecast to reach single digit levels in
early Q3-2023, and stabilise around mid single digit levels over the medium term

The external sector, which underwent an unprecedented setback in 2022, begins to
demonstrate improved performance

During the four months ending April 2023, the trade deficit decreased notably, compared to a
year earlier, reflecting mainly the subdued import expenditure, which outweighed the impact of
moderation of external demand for merchandise exports. Inflows to the domestic forex market
remain robust following the approval of the Extended Fund Facility (EFF) from the International
Monetary Fund (IMF). The significant revival of workers’ remittances and earnings from tourism
continued to build resilience in the external sector.

The renewed foreign investor appetite for short term government securities has also helped improve forex liquidity in the recent months.

The exchange rate, which is allowed to be determined by market forces, continues to reflect positive market sentiments underpinned by the improvement in liquidity in the domestic forex market. The Central Bank has absorbed a sizeable amount of foreign exchange from the
domestic forex market thus far in 2023, resulting in a steady increase in gross official reserves
(GOR). As of end May 2023, the level of GOR is estimated to have surpassed US dollars 3
billion, including the swap facility from the People’s Bank of China. Reflecting the improved
balance of payments (BOP) conditions, the Central Bank relaxed the cash margin deposit
requirements imposed on selected imports in May 2023, and further measures will be initiated
to loosen capital flow restrictions in the period ahead. Further, the Monetary Board viewed that
a gradual phasing out of the existing import restrictions would need to commence soon.

The continuation of the IMF-EFF supported programme, further financial assistance from
international development partners, such as the Asian Development Bank (ADB) and the World
Bank, and renewed investor appetite, coupled with the advances in the debt restructuring
process, are expected to ease the BOP constraint significantly in the period ahead, supporting
the recovery in domestic economic activity.

ECONOMYNEXT – Sri Lanka’s exports fell 12.6 percent from a year ago to 849 million US dollars in April 2023, amid weaker external demand, while imports were down 15.8 percent to 1,431 million Us dollars, central bank data showed.

Exports also fell 1,037 million dollars in March 2023, amid seasonal effects.

The trade deficit expanded to 583 million US dollars in April from 412 million US dollars in March 2023. Imports were at 1431 million US dollars in April from 1,450 million dollars in March.

Imports can pick as tourism, worker remittances and net inflows to government go up.

The rupee continued to appreciate.

“Exchange rate showed a notable appreciation during April 2023 with the continued improvement in liquidity in the domestic foreign exchange market, the discontinuation of the daily guidance on exchange rates,” the central bank said.

Up to April exports were down 9 percent to 3.8 billion rupees and imports were down 28 percent to 5.2 billion rupees and the trade deficit was 1.4 billion rupees.

Investment goods imports were down in April amid a contraction in credit.

“Almost all types of goods listed under the three main investment good categories, namely machinery and equipment, building material and transport equipment, recorded a decline,” the central bank said.

ECONOMYNEXT – Sri Lanka’s President Ranil Wickremesinghe has discussed progress of International Monetary Fund program and debt restructuring during a visit of Deputy Managing Director Kenji Okamura, statement said.

“The discussion primarily focused on the progress of the IMF program between Sri Lanka and the IMF,” a statement from President’s office said.

“Attention was also paid to the on-going debt restructuring negotiations.”

State Minister of Finance Shehan Semasinghe, Senior Advisor to the President on National Security and Chief of Presidential Staff Sagala Ratnayake was also in the meeting.

Secretary of the Ministry of Finance Mahinda Siriwardena, Central Bank Governor Nandalal Weerasinghe, Deputy Director of the International Monetary Fund Anne Marie Gulde, and Resident Representative IMF in Sri Lanka Sarwat Jahan, attended this event. (Colombo/June01/2023)