Sri Lanka’s Central Bank says that the economy is steadily progressing as displayed in the latest economic indicators even though the country’s social instability with trade unions picketing campaigns and employee unrest posed a setback.

Releasing the latest economic indicators, the Bank said that enhanced foreign exchange earnings and increased investment inflows are expected to assist Sri Lanka in reducing its dependence on external debt and improve macroeconomic resilience.

The Department of Census and Statistics (DCS) rebased CCPI with a new base year (2021=100) and discontinued compilation of the CCPI (2013=100) series effective from February 2023. Accordingly, on a year-on-year basis, CCPI (2021=100) based headline inflation recorded at 50.6 per cent in February 2023.

The Food inflation recorded at 54.4 percent while the Non-Food inflation recorded at 48.8 per cent in February 2023. Monthly change of the CCPI recorded at 0.47 percent in February 2023 due to price increases observed in items of the Non-Food category, which was 1.20 per cent. Furthermore, the CCPI based core inflation recorded at 43.6 per cent in February 2023

The reserve money increased compared to the previous week mainly due to the increase in the deposits held by the commercial banks with the Central Bank. Reserve Money has increased to Rs. 1,605,16billion as at March 02 from Rs. 1, 503.17 billion in February 23 this year.

The total outstanding market liquidity was a deficit of Rs. 14.091 bn by 03rd March 2023, compared to a deficit of Rs. 53.937 bn during the last week of February.

Earnings from tourism have also increased US$169.9 million in February 2023 compared to to $ 169.4 mn in February last year.

Workers’ Remittances have recorded an upward trend with inflows of US$ 437.5 million in January 2023 compared to $259.7 million during the same month last year.

During the year up to 03rd March 2023, the Sri Lankan rupee appreciated against the US dollar by 4.9 per cent. Given the cross currency exchange rate movements, the Sri Lankan rupee appreciated against the Japanese Yen by 8.0 per cent, the Pound Sterling by 5.6 per cent, the Euro by 5.4 per cent and the Indian Rupee by 4.4 per cent during this period

The gross official reserves were provisionally estimated at US dollars 2,121 mn as at end January 2023 including the PBOC swap equivalent to around US dollars 1.4 billion, which is subject to conditionalities on usability.

Earnings from exports declined by 11.3 per cent (year-on-year) to US dollars 978 million in January 2023 as a result of decreased

Earnings Were mainly from exports of textiles and garments (-17.8%), petroleum products (-30.9%), coconut (-34.1%), rubber products (-11.4%) and food beverages and tobacco(-16.7%).

Import expenditure also declined significantly by 29.2 per cent (year-on year) to US dollars 1,388 million in January 2023, mainly due to lower imports of machinery and equipment (-45.6%), textiles and textile articles (-31.3%), base metals (-82.5%) and building material (-49.1%). Accordingly, the deficit in the trade account narrowed to US dollars 410 million in January 2023 from US dollars 857 million in January 2022.

The average price of tea (in the Colombo auction) increased to US dollars 4.10 per kg in January 2023 from US dollars 3.44 per kg in January 2022.

Sri Lanka is set to institutionalize a ‘flexible’ exchange rate regime instead of a floating exchange through the central bank while continuing ‘flexible’ inflation targeting regime.

Countries with successful inflation targeting frameworks, such as New Zealand, Australia or the UK, have a floating exchange rate, where base money is not altered through pegging in either direction, or reserve money is backed by domestic assets.

However Sri Lanka will continue with an intermediate managed exchange arrangement, or a soft-peg which is called a flexible exchange rate.

Interest rates have been increased by 1 percent on the behest of the International Monetary Fund (IMF) and an inflation target will be set in consultation with the finance ministry.

The Central Bank on Friday 04 declared that the country would pursue a flexible exchange rate policy from this week in line with recommendation of the International Monetary Fund (IMF).

The move entails the removal of the trading band and variation margin and letting the market (demand and supply) determine the rate.

The CBSL will also suspend the mandatory forex sales requirement of banks. The latter was reduced to 15% from 25% earlier this week.

However other requirements such as 100% repatriation of export proceeds and conversion will continue.

The CBSL has been widening the trading band of dollar this week to give more leeway for the forex market.

CBSL expanded the daily trading band to +/- of Rs. 5 from Rs. 2.60 previously. Thereafter it was increased to Rs. 7.50 on Thursday and to Rs. 10 yesterday. This will be done away with from next week.

CB Governor Nandalal Weerasinghe revealed that last week the CBSL absorbed a recent time record US$ 308 million from the market thereby checking a sharper appreciation of the Rupee.

The Rupee had appreciated by nearly 5%. He said that CBSL will accept the 15% mandatory forex sales by banks on Tuesday and desist from such a move thereafter. HoweverWeerasinghe said that CBSL will remain in the market to buy or sell Dollars if and when needed to bring stability in the event of extreme volatility.

He said by absorbing $ 308 million, the money market has benifitted from an additional liquidity of Rs. 108 billion. “This week the forex market began to be active as before with participants having extra options of spot and forward contracts as opposed to swaps only,” CBSL Chief said.

“Going forward we expect both forex and money markets to be active as before. We are happy to see this development especially the former following stabilization measures earlier on and a pick-up in forex inflows and availability,” Weerasinghe added.