The Central Bank has outlined its short to medium-term policy path and other measures that it intends to implement primarily to restore price stability and to maintain the financial system stability, as Sri Lanka struggles to emerge from the worst economic crisis since its independence.
Sri Lanka’s economy, which is projected to register a real contraction of around 8 percent in 2022, is expected to record a gradual recovery from the second half of 2023 and sustain the growth momentum beyond, the Central Bank says.
In a media release titled “Monetary and Financial Sector Policies for 2023 and Beyond”, the Central Bank laid out the major aspirations of its Monetary Board for regaining the macroeconomic stability in the country.
Speaking on the steps taken by the government to ride out the crisis situation, the Central Bank stated that in parallel with the implementation of near-term economic stabilisation measures, negotiations with the International Monetary Fund (IMF) for an EFF arrangement were initiated by the government and a staff-level agreement was reached in September 2022.
Meanwhile, measures are underway to secure financing assurances from official creditors for the debt restructuring process aimed at ensuring medium term public debt sustainability, the Central Bank said.
It has further added that, with significant progress being made at present in relation to the interaction with the Sri Lankan creditors, the envisaged IMF facility is expected to materialize in early 2023.
According to the Central Bank, Sri Lanka’s 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.
With regard to the monetary policy and interest rates, the Central Bank stated that the monetary policy would remain focused on ensuring stability over the medium term.
In the meantime the forthcoming Central Banking Act, of which the draft has already been green-lighted by the Cabinet of Ministers, will further strengthen the independence and accountability of the Central Bank, thus reinforcing its core objective of ensuring price stability within the flexible inflation targeting (FIT) framework.
The Central Bank went on to note that it would begin publishing a forward-looking monetary policy report to better inform the members of the public on the outlook of the economy, thereby further improving the transparency of monetary policy actions.
Meanwhile, the excessively high 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 concern assuage.
With regard to the financial sector policies for 2023 and beyond, the Central Bank emphasized that ensuring system stability also remains at the forefront of its reform and stabilization plan.
It stated that the proposed Banking (Special Provisions) Act is expected to provide the required legal framework to ensure that the banks are adequately capitalized, and upgrade their resolution framework, safeguard the interests of depositors, and strengthen the regulatory powers of the Central Bank.
