CBSL to Maintain Low Interest Rates to Promote Growth
By Rajiesh Seetharam
Central Bank of Sri Lanka’s (CBSL) third monetary policy review in 2021 revealed it will maintain the current low policy interest rates to ensure support for sustained economic recovery. Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) would remain at current levels of 4.50 % and 5.50%, respectively. Bank rate (8.5%) and Statutory Reserve Ratio (2%) would remain the same.
“CBSL is on a monetary easing cycle for almost two years now. Monetary easing on an unprecedented scale alongside fiscal policy support was necessary due to subdued growth in 2019 and 2020. Intervention by CBSL like policy rate reduction, large liquidity injection has helped many businesses to avoid severe hardship”, stated CBSL Governor W. D. Lakshman at a Media briefing on the Monetary policy review.
Gross official reserves were estimated at USD dollars 4.1 billion (excluding the swap facility with the PBOC), with an import cover of three months at end March 2021, noted the monetary review policy statement. Sri Lanka’s gross foreign reserves were 5.7 billion US dollars by December 2020. There is a large debt repayment of USD 1 billion in July 2021.
When questioned regarding contingency plans to avoid foreign reserves getting into dangerously low levels, CBSL Governor responded, “Recently, the Central Bank entered into a bilateral currency swap arrangement with the People’s Bank of China (PBOC) amounting to CNY 10 billion (equivalent to approximately US dollars 1.5 billion). We are expecting a loan facility from China Development Bank. In addition, we are moving in the direction of quick disbursement type of funding. In our recent overseas visit to the Middle East and Bangladesh, we had negotiated for such contingency funding and hope to get a positive reply in the coming weeks.”
Export earnings stood at USD 1.9 Bn in the first two months of 2021, compared to 2 Bn in same period of 2020. Imports have come down to 3.1Bn in the first two months of 2021 compared to 3.3 Bn same period last year. Therefore Trade deficit has narrowed to USD 1.2Bn compared to 1.3Bn last year.
USD 1.25 Bn of Worker remittance was recorded in the first two months of 2021 which is an increase of USD 150 Mn compared to same period last year. However, tourist revenue still remains low, but it is expected to increase by the end of the year, stated the Governor.
Regarding the exchange rate, he said, “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 pressure in the domestic foreign exchange market.”
The Monetary Board reiterated its stance to maintain inflation in the targeted 4-6 per cent range under the flexible inflation targeting framework.
“Growth of credit extended to the private sector and 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. Lending targets have been given to banks to promote lending to MSME sector.
As per the GDP estimates published by the Department of Census and Statistics (DCS), the contraction of the Sri Lankan economy at 3.6 per cent in 2020 was lower than initial projections. Despite the second wave of COVID-19 in the country, the Sri Lankan economy grew by 1.3 per cent in the last quarter of 2020 from a year earlier. CBSL forecasts high growth momentum in medium term”, noted the CBSL press release on monetary statement.