Sri Lanka’s Central Bank has decided to adopt several policy measures with a view to strengthening macroeconomic stability.
Accordingly, in consideration of the current and expected macroeconomic developments, the Monetary Board at its meeting held on 19 January 2022, has decided to:
a) increase the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points each, to 5.50 percent and 6.50 percent, respectively; Bank Rate (automatically adjusted with SLFR) 9.50 percent, Statutory Reserve Ratio (SRR unchanged) 4.00 percent;
b) distribute the financing of essential import bills for fuel purchases among the licensed banks in proportion to their foreign exchange inflows;
c) mandate all registered tourist establishments to accept foreign exchange only in respect of services rendered to persons resident outside Sri Lanka;
d) 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, 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 01 February 2022 and introduce higher interest rates for both foreign currency and rupee-denominated deposits of migrant workers.
The Monetary Board is 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.
In keeping with this policy stance, the Central Bank expects a corresponding increase in interest rates, particularly in deposit rates, thereby encouraging savings, while discouraging excessive consumption, which also fuels imports.
“Therefore, financial institutions are urged to swiftly pass on this increase to deposit rates of the customers,” the Central Bank said.
“Moreover, the anticipated adjustment in market interest rates will facilitate the reduction in the Treasury bill holdings of the Central Bank through increased market subscriptions.”
Expenditure on imports has increased significantly, partly reflecting the increased international prices, the demand for intermediate goods, and a more than expected demand for consumer goods.
The increase in imports was also underpinned by the availability of low cost credit, which led the trade deficit to widen to pre-pandemic levels in 2021.
According to the Central Bank, supply-side factors remain the key driver of domestic price pressures even though there are signs of demand pressures.
The possible build-up of demand-driven inflationary pressures may compel the adoption of proactive monetary policy measures, which will also help in managing inflation expectations, the bank further said.
The Central Bank expects the economy to record a growth of around 4.0 percent in 2021.