The central bank said yesterday that it remains committed to fulfilling its mandate through appropriate policy measures, but at this crucial moment in Sri Lanka’s socio-economic history, until the crisis is overcome through collective efforts, all efforts will be made. Reiterated the need for firm commitment to keep one focused. Efficient implementation of the identified short-term stabilization measures and medium- to long-term structural reforms by both the central bank and the government are essential to put Sri Lanka on a sustained and rapid recovery path.
That said, formulating macroeconomic policies and recovery strategies in times of crisis is fraught with enormous uncertainties. This will require timely adjustments to our policies and strategies as new information becomes available,” CBSL said in announcing its financial and financial sector policies for 2023 and beyond.
Below is the full text of the CBSL statement.
Sri Lanka has faced the most difficult year in 2022 for its post-independence economy.
The 2019 Easter attacks, the 2020 COVID-19 outbreak, and the lingering impact on activity in the aftermath of 2021, the socio-economic and political crisis of 2022 amid a devastating balance of payments Headwinds (BOP) pressures from a series of economic shocks in recent years, along with unprecedented policy trade-offs, have severely affected economic activity and created unimaginable difficulties for individuals and businesses.
Livelihoods have been lost, and real incomes have been hit hardest. Structural economic impediments that have existed in various sectors of the economy for decades are exacerbated by these economic shocks and ill-timed policy choices, thereby loosening the macroeconomic balance and reducing national brought a sudden and multifaceted setback to
Governments and central banks have been forced to implement painful but inevitable policy measures during 2022 aimed at restoring macroeconomic balance.
Monetary policy was tightened by an unprecedented interest rate adjustment to prevent a deterioration in short- to medium-term inflation expectations while preventing a deterioration in inflationary pressures. Selected foreign Debt moratorium announced.
Foreign exchange outflows averted by suspension of certain debt repayments, along with foreign exchange inflows from friendly countries and multilateral sources, will soon create the operational space needed to contain burgeoning BOP pressures. Helped. Foreign exchange outflows were further contained by several other measures.
Including import prioritization. These measures have made foreign exchange available for essential imports such as fuel, coal, cooking gas, medicines and foodstuffs, greatly reducing socio-economic insecurity.
Meanwhile, exchange rate stability has been restored following a significant overshoot in early 2022 through a consultation process with market participants. Foreign exchange repatriation and exchange requirements have initiated further measures to improve foreign exchange liquidity in the domestic foreign exchange market. activities in the gray market.
Meanwhile, a series of measures were implemented to maintain financial system stability, thereby avoiding far-reaching effects on the overall socio-economic structure. In addition, the government has embarked on long overdue reforms to correct structural deficiencies in fiscal management and other economic sectors that are essential to ensuring a sustained economic recovery.
Alongside the implementation of near-term economic stabilization measures, the government has started negotiations with the IMF on the EFF arrangement, reaching a staff-level agreement in September 2022.
Meanwhile, steps are underway to secure loan guarantees from public creditors for a debt restructuring process aimed at ensuring medium-term public debt sustainability. With significant progress currently being made in dealing with Sri Lankan creditors, the envisioned IMF facility is expected to materialize in early 2023.
The short-term economic stabilization measures implemented so far are unprecedented. The sacrifices made by individuals and businesses during this difficult time will only make sense once economic stability is restored in the medium to long term.
This will require collective and coordinated efforts from all corners of society to ensure a sustained economic recovery.
The outlook for the economy beyond 2023 and the central bank’s Monetary Committee’s main goals for restoring macroeconomic stability are presented under Inflation and Economic Growth.
I. The sharp acceleration in inflation that started in early 2022 has resumed in October 2022. This was underpinned by tight monetary policy, government fiscal consolidation efforts and supply-side policies implemented to contain inflationary pressures.Above all, global price pressure
II. We expect headline inflation to slow in the first half of 2023 and move along a disinflationary path to reach the desired level of inflation towards the end of 2023.policy measures
III. Inflation expectations remain firmly anchored along the expected disinflationary path
IV. Sri Lanka’s economy, which is projected to record a real contraction of around 8% in 2022, is expected to register a modest recovery from the second half of 2023 and maintain growth momentum thereafter.
monetary policy and interest rates
I. Monetary policy remains focused on ensuring medium-term price stability
II. The upcoming Central Bank Law, a draft of which has already been approved by the Council of Ministers, will further strengthen central bank independence and accountability, thereby promoting price stability within the framework of Flexible Inflation Targeting (FIT). strengthen the central bank’s core objective of ensuring
III. Central banks will begin issuing forward-looking monetary policy reports to better inform the public of the economic outlook, thereby further increasing the transparency of monetary policy actions.
IV. The currently observed excessively high interest rate levels are expected to moderate going forward as financial market liquidity conditions improve and risk premiums associated with debt restructurings ease.
V. Market interest rates may be revised downward as the near-term inflation outlook guides, but financial conditions are likely to remain reasonably tight until inflationary pressures are well contained.
VI. The central bank has already asked institutions in the banking and non-banking sectors to avoid unhealthy competition for funding deposits by offering high interest rates, thereby reducing all market interest rates, including lending rates. Interest rates have been adjusted too far, far beyond interest rate adjustments. policy interest rate. The market interest rate structure (both deposit and lending rates) is expected to ease going forward as market liquidity conditions improve. If the adjustment takes longer than expected, the central bank will consider administrative action as necessary.
VII. More flexibility in exchange rate decisions will be restored in line with medium- to long-term equilibrium levels to help promote competitiveness
I. Ensuring financial system stability remains at the forefront of central bank reform and stabilization plans
II.Central bank guarantees liquidity support to meet banking institutions’ cash flow requirements to strengthen financial sector resilience
III. The proposed Banking (Special Provisions) Act would provide the necessary provisions for banks to ensure adequate capitalization, improve resolution regimes, protect the interests of depositors and strengthen central bank regulatory powers. It is expected to provide a legal framework.
IV. Existing capital and liquidity regulations will be reviewed to ensure that the banking sector maintains capital and liquidity levels and is able to withstand emerging risks. In addition, current regulations on single borrower exposure limits will also be reviewed, reducing the relationship between sovereigns and banks.
V. Consolidation of financial institutions in both the banking and non-banking financial sectors will be undertaken/facilitated in order to benefit from economies of scale, synergies and efficiencies and improve capital, while increasing their financial strength. , resilience, and overall stability.Business entities and their ability to meet the growing demands of the business world in the future
VI. Amendments to the Financial Business Law No. 42 of 2011 and the Financial Leasing Law No. 56 of 2000 have been introduced in line with market trends and aim to ensure stability in the non-bank financial sector. Additionally, the proposed Microfinance and Credit Regulatory Authority Act will improve market conduct and consumer protection for customers across the non-banking sector. In addition, priority will be given to measures to bring licensed microfinance companies (LMFCs) and unregulated moneylenders into regulation.
I. A cross-border and domestic foreign exchange transaction surveillance system (i.e., the International Transaction Reporting System – ITRS), introduced in 2022, will strengthen the data coverage of the external sector, improve regulatory oversight and facilitate informed decision-making. Further optimized to support decision making.
II. Demand management measures imposed to curb certain imports will be evaluated in the light of foreign exchange liquidity and monetary conditions.
Efficient implementation of the identified short-term stabilization measures and medium- to long-term structural reforms by both the central bank and the government is essential to put Sri Lanka on a sustained and rapid trajectory to recovery.
That said, formulating macroeconomic policies and recovery strategies in times of crisis is fraught with enormous uncertainties. This requires timely adjustments to policies and strategies as new information becomes available.
Central banks remain committed to achieving their mandates through appropriate policy actions, while closely monitoring progress to take corrective policy and regulatory actions. The Central Bank thanks financial sector participants, the business community and the general public for their unwavering support, cooperation and sacrifice during this critical period in Sri Lanka’s socio-economic history and will remain focused until the crisis is over. We reiterate the need for firm commitment. Overcome with solidarity.