CBSL expecting gradual economic recovery following ‘temporary setbacks’ posed by Covid 3rd wave

The Central Bank expects economic activity to record a gradual recovery following a temporary setback due to the third wave of the Covid-19 pandemic, Central Bank Governor Ajith Nivard Cabraal said.

“We have noted that the External Sector remained resilient amidst heightened challenges. With the normalization of global economic activity, a notable improvement in export performance was observed, with monthly exports remaining in excess of US dollars 1 billion, consecutively since June 2021, Cabraal told the Monthly Policy Review Meeting yesterday at the Central Bank in Colombo.

The Sri Lanka rupee depreciated by 7.0 per cent against the US dollar in 2021 and has been broadly stable thus far in 2022. At the same time, the Central Bank was able to fulfill the timely settlement of the International Sovereign Bond (ISB) of US dollars 500 million on January 18, 2022, the Governor said.

Cabraal added: “As of end 2021, the gross official reserves were estimated at US dollars 3.1 billion.

“It has been decided to increase both the deposit rate and the lending rate by 50 basis points each with the view to strengthening macroeconomic stability.

‘’In consideration of the current and expected macroeconomic developments, the Monetary Board at its meeting held on January 19, 2022 has decided to adopt several policy measures with the view to strengthening macroeconomic stability.

“Accordingly, the Monetary Board decided to increase the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) by 50 basis points each, to 5.50 percent and 6.50 per cent respectively.

“Developments in the tourism sector appear to be promising with the influx of tourists in recent months. Although inflows in the form of workers’ remittances have reduced somewhat in the latter half of 2021, the introduction of special incentive schemes and the actions taken by the authorities to curb illegal fund transfers have generated renewed interest in routing funds through formal channels.

“Considering these developments in the External Sector, the Monetary Board, in addition to the policy rates hike, has decided to distribute the financing of essential import bills for fuel purchases among the licensed banks in proportion to their foreign exchange inflows.

“Further, all registered tourist establishments are to accept foreign exchange only in respect of services rendered to persons resident outside Sri Lanka. It has been decided to extend the payment of an additional Rs. 8.00 per US dollar for workers’ remittances paid, in addition to the incentive of Rs. 2.00 per US dollar offered under the “Incentive Scheme on Inward Workers’ Remittances” until 30 April 2022.

“It has been also been decided to reimburse the transaction cost borne by Sri Lankan migrant workers through the payment of Rs. 1,000 per transaction, when remitting money to rupee accounts via licensed banks and other formal channels with effect from February 1, 2022 and to introduce higher interest rates for both foreign currency and rupee denominated deposits of migrant workers.

“The Monetary Board was of the view that the above measures will curtail the possible build-up of underlying demand pressures in the economy, which would also help ease pressures in the external sector, thus promoting greater macroeconomic stability.”