Sri Lanka’s economy, which is projected to register a real contraction of around 8% in 2022, is expected to record a gradual recovery from the second half of 2023 and sustain the growth momentum beyond, the Central Bank of Sri Lanka (CBSL) says.

In a press 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 further adding 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 materialise 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. “If any upside risks to inflation emerge in the period ahead, that would be addressed through appropriate policy measures.”

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.

Meanwhile, 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 the 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 capitalised, and upgrade their resolution framework, safeguard the interests of depositors, and strengthen the regulatory powers of the Central Bank.

The Central Bank pledged to remain committed to achieving its mandate through appropriate policy measures while closely observing developments to take corrective policies and regulatory measures.

Appreciating the unwavering support, cooperation, and sacrifice of the financial sector participants, the business community, and the public at this crucial moment of Sri Lanka’s socioeconomic history, the Central Bank reiterated the need for steadfast commitment to remain focused until the crisis is overcome through collective efforts.

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