Sri Lanka Central Bank Statement

Author: IFLR Correspondent | Published: 24 Sep 2019
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An appropriate mix of monetary, fiscal and financial policies helped the Sri Lankan economy to grow by 3.2% in real terms in 2018, with per capita income reaching $4,102. Accordingly, Sri Lanka was recently classified as an upper-middle income economy by the World Bank. Inflation was also maintained at mid-single digit levels and remained well-anchored during 2018. However, these achievements came amidst challenging conditions.

The external sector experienced significant pressures, with the trade deficit expanding and the rupee depreciating substantially, particularly during the latter part of 2018. An improvement in fiscal operations was also observed in 2018, although central government debt increased due to depreciation. The financial sector also recorded an expansion in 2018, although profitability and loan growth were adversely affected.

So far, 2019 has been even more challenging for policymakers globally. Central banks that were on a tightening spree in 2018 have become increasingly dovish in 2019, considering sluggish global growth resulting from rising trade and geopolitical tensions, as well as subdued inflationary pressures with the waning of global demand and low commodity prices.

With global macroeconomic conditions becoming increasingly uncertain and its spillovers posing significant challenges, it has been the Central Bank of Sri Lanka's (CBSL) primary focus to establish a monetary policy framework within which it would be able to deliver price stability over the medium term, while allowing policy to address other objectives, such as stabilising output.

Accordingly, the CBSL is in the process of adopting flexible inflation targeting (FIT) and several prerequisites have already been fulfilled in this respect. An important step towards this has been the drafting of necessary amendments to the central bank law (the Monetary Law Act), with a view to improving the CBSL's governance; strengthening central bank independence and facilitating the adoption of FIT as the monetary policy framework, to ensure sustained price stability; and strengthening financial sector oversight. To aid this transition, the CBSL has also allowed for greater flexibility in the determination of the exchange rate, thereby preserving its ability to act as the shock absorber to any adverse external sector developments.

The monetary policy formulation process at the CBSL has been streamlined and improved to support this transition, while the CBSL's institutional and technical capacity and its staff have also been upgraded to produce improved macroeconomic projections with a view to proactively supporting data-driven decision-making.

Our external communications strategy has also been improved, with the aim of increasing awareness among stakeholders and promoting the transparency and credibility of our monetary policy conduct. Forward-looking monetary policy statements, reports and explanatory notes have helped enhance the purpose and understanding of monetary policy actions, which in turn has led to the firm anchoring of inflation expectations.

While substantial progress has already been made towards the adoption of FIT, the CBSL is confident that monetary policy conduct within such a framework will enable Sri Lanka to continue to achieve low and stable inflation and to support the growth initiatives of the economy on a sustainable basis, going forward.