The Sri Lankan economy, which is projected to register a real contraction of around 8 % in 2022, is expected to record a gradual recovery from the second half of 2023 and beyond. The ‘Central Bank in their Monetary and Financial Sector Policies for 2023 and Beyond’ said that this growth momentum is expected to be sustained.
An array of measures was implemented to preserve stability in the financial system, thereby avoiding any far reaching consequences on the entire socioeconomic structure. Further, the Government has embarked on long-overdue reforms to rectify structural deficiencies in fiscal operations, as well as other sectors of the economy, that are imperative in ensuring a sustained recovery of the economy. The report also said that inflation is expected to move along a disinflationary path with a deceleration in the first half of 2023 and reaching the desired levels of inflation towards the end of 2023.
“Inflation expectations remain well anchored along the projected disinflation path.” The rapid acceleration of inflation that began from early 2022, turned around in October 2022, supported by the tight monetary policy measures implemented to contain inflationary pressures, the fiscal consolidation efforts and supply side policies of the Government, along with the relative easing of price pressures globally, among others. ii. If any upside risks to inflation emerge in the period ahead that would be addressed through appropriate policy measures.
The excessively high levels of interest rates observed at present are expected to moderate in the period ahead as money market liquidity conditions improve and the risk premia attached to debt restructuring concerns assuage.
“The Central Bank has already requested the banking and non-banking sector institutions to avoid unhealthy competition for raising deposits by offering high rates of interest, which has led to excessive adjustments in all market interest rates, including the lending rates, well above the adjustment of policy interest rates. The market interest rate structure (of both deposit and lending interest rates) is expected to moderate in the period ahead with improving market liquidity conditions. With significant progress being made at present in relation to the interaction with the Sri Lankan creditors, the envisaged IMF facility is expected to materialize in early 2023,” the report further said.
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