Government and Central Bank to explore avenues


The Government and the Central Bank will continue to explore avenues to increase financial flows to the country that will boost the level of official reserves to support economic growth, said Central Bank Governor, Prof. W. D. Lakshman at a virtual media briefing on the Monetary Policy stance of the bank last week.

He said discussions with domestic and foreign counterparts in this regard have made notable progress and added that the Central Bank and the Government will continue to discuss with local and foreign parties to bring in the much needed foreign exchange to the country.

Gross official reserves according to the regulator were estimated at US dollars 5.7 billion at end of last year, with an import cover of 4.3 months.

“Amid hostile global market conditions, the Government and the Central Bank continued to explore avenues of financial flows to the country,” the Governor said.

Market interest rates continued to adjust downwards in 2020, and the low interest rate structure is expected to be maintained.

The economy is expected to have contracted by around 3.9 per cent in 2020. As per the GDP estimates of the Department of Census and Statistics the economy, which contracted by 1.7 per cent and 16.3 per cent in the first and second quarters of 2020, rebounded in the third quarter of 2020 and recorded a growth of 1.5 per cent.

The spread of Covid-19 has weighed on Sri Lanka’s growth prospects in 2020, but the outlook for 2021 remains positive.

The regulator is optimistic that the economy would rebound this year from a muted growth notched last year which was battered by the global pandemic.

“The economy is well poised to rebound in 2021, supported by the unprecedented policy stimulus measures introduced by the Government and the Central Bank, improved domestic economic sentiments, alongside the improving prospects of the global economy,” the Governor said.

However, the global pandemic which is far from over is expected to dampened economic revival prospects this year.

Excluding China, emerging market and developing economies are forecast to expand 3.4% in 2021 after a contraction of 5% in 2020 according to the World Bank. The Central Bank relaxed its monetary policy stance to unprecedented levels last year to reviving the economy affected by the pandemic.

In response, market deposit and lending rates declined notably last year.

The Central Bank will continue its accommodative monetary policy stance to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) at their current levels of 4.50 per cent and 5.50 per cent.

The Board arrived at this decision after carefully considering the macroeconomic conditions and expected developments on the domestic and global fronts.

As announced in November last year, the Board decided to introduce priority sector lending targets for the micro, small and medium scale enterprises (MSME) sector to support a broad based economic revival, in consultation with the banking community.

The External sector is expected to remain resilient with the support of appropriate policy measures, amidst domestic and global challenges.

Cushioning the adverse impact of the pandemic on the balance of payments, the trade deficit continued to narrow, while the rebound of workers’ remittances continued through the second half of 2020.

The trade deficit is expected to have narrowed by over US dollars 2.0 billion in 2020 compared to the previous year. Workers’ remittances have grown by 5.8 per cent to US dollars 7.1 billion in 2020, with a historic high level of remittance receipts in December 2020.

With these developments, the external current account deficit is estimated to have narrowed substantially in 2020.

Measures taken by the Government to promote exports of goods and services are expected to buttress the external sector in 2021. Reopening the country for tourist arrivals under strict health guidelines could help improve external sector conditions in the period ahead. Meanwhile, overall domestic credit expanded notably, driven by the substantial increase in credit to the public sector. Reflecting the impact of increased domestic credit, the growth of broad money (M2b) continued to accelerate in 2020 providing ample liquidity to support domestic economic activity.

Headline inflation remained mostly within the targeted range of 4-6 per cent during 2020.

The regulator hopes to maintain inflation in the targeted 4-6 per cent range under its flexible inflation targeting framework.