‘CB continues to maintain equilibrium between capital formation and economic growth’

by Sanath Nanayakkare

The Monetary Board of the Central Bank has noted the need to continue the monetary policy support to maintaining the trend of declining lending rates which is crucial for capital formation, which in turn increases investment and helps boost the economic activities post-pandemic, Central Bank Governor Prof. W.D Lakshman said yesterday.

He made this comment when the Central Bank announced its third Monetary Policy Review for the Year 2021.

Lakshman added: “The Central Bank is on a monetary policy easing cycle for almost two years now. The subdued growth which prevailed in 2019 was exacerbated by the pandemic in 2020. Warranted monetary policy easing on an unprecedented scale along side fiscal policy support and intervention by the Central Bank with measures such as policy rate reduction and large liquidity injections helped many businesses and individuals to avoid severe hardships.”

“We are beginning to see the impact of bold policy measures reflected in the sharp turnaround in economic activities, favourable developments in employment, improved credit conditions helping the economic revival and faster than expected rebound in a number of high frequency economic endeavors.”

The following are some excerpts from the statement issued by the Central Bank on its monetary policy stance.

“The merchandise trade deficit continued to narrow during January 2021, while preliminary data for February 2021 showed a further reduction in the trade deficit, driven by a larger contraction in expenditure on imports over earnings from exports. Workers’ remittances continued to record a healthy growth thus far in 2021 and this momentum is expected to continue in the remainder of the year. The tourism sector is expected to recover gradually with the opening of the borders along with the successful rollout of vaccinations locally and globally.”

“Meanwhile, the Central Bank and the government continue to engage with investment and lending partners to secure foreign financing and remain committed to honouring foreign currency debt service obligations on time. Although the Sri Lankan rupee experienced some volatility recently, the continuation of the existing restrictions on non-essential imports and certain foreign exchange outflows, among others, is expected to help cushion pressures in the domestic foreign exchange market. Gross official reserves were estimated at US dollars 4.1 billion (excluding the swap facility with the PBOC), with an import cover of 3 months, at end March 2021.”

“Growth of credit extended to the private sector gathered pace in February 2021. This momentum is expected to continue, supported by low lending rates, surplus liquidity in the domestic money market and the expected rise in lending to micro, small, and medium enterprise (MSME) sector. Credit to the public sector, particularly net credit to the government, from the banking system continued to grow, resulting in a notable expansion of domestic credit and an acceleration of broad money growth.”