Early signs of a gradual easing of excessive market interest rates have been observed recently in response to the administrative measures adopted by the Central Bank, along with the improvements in domestic money market liquidity and overall sentiments in the domestic markets, Dr. G. Harischandra, Director, Economic Research Central Bank Sri Lanka told the first Monetary Policy Review of the Central Bank for 2023 yesterday.
He said the recent measures adopted by the Central Bank to reduce the over reliance of licensed commercial banks on the standing facilities of the Central Bank and the concurrent conduct of open market operations helped improve liquidity in the domestic money market.
He said the Monetary Board had decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 14.50 per cent and 15.50 per cent, respectively. Dr.Harischandra said domestic economic activity is expected to recover towards the latter part of 2023, compared to the large contraction in 2022 and excessive market interest rates have begun to adjust downward and are expected to ease further.
He said the external sector remains resilient despite heightened challenges, and the outlook remains positive with the expected improvements in relation to “financing assurances” from creditors.The merchandise trade deficit is estimated to have contracted significantly in 2022, compared to recent years, owing to an improvement in export earnings and a substantial compression of 4 import expenditure on account of policy measures taken to curtail non urgent imports and foreign exchange liquidity constraints.
The gradual improvement in workers’ remittances, together with the revitalisation of tourism, helped improve the external current account balance in recent months while easing excessive pressures in the domestic foreign exchange market.
As a result, the exchange rate has remained relatively stable, and recorded a marginal appreciation against the US dollar, thus far in 2023. Gross official reserves were estimated at US$ 1.9 billion as of end 2022, including the swap facility from the People’s Bank of China, equivalent to around US$ 1.4 billion.
The envisaged finalisation of the IMF-EFF arrangement in the period ahead and the resultant developments that follow, along with the improvements in the external current account, are expected to enhance the external sector outlook, he added.
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