Sri Lanka has entered a path of recovery following the worst economic crisis in its postindependence history while the policy measures that were taken by the Government and the Central Bank during 2022 and 2023 helped restore macroeconomic stability, the Governor of the Central Bank said.
Governor P. Nandalal Weerasinghe announcing the Central Bank's annual policy statement for 2024 said the revival of confidence in the economy, the successful continuation of the IMF-EFF arrangement, and progress on the debt restructuring process would help further strengthening and safeguarding of macroeconomic stability in the period ahead.
In the near term, he said the real economy is expected to record positive growth rates and gain further momentum over the medium term.
"Such growth is to be underpinned by strong macroeconomic stability, especially price stability, external sector resilience, public debt sustainability as well as structural reforms that are being implemented by the Government to alleviate several vulnerabilities and inefficiencies, especially in relation to corruption."
Several substantial challenges may emerge as the economy progresses on this recovery path, he added.
"Efforts to improve government revenue via increased taxes and tax administration improvements, though essential, would create price pressures, particularly during 2024."
However, Weerasinghe says that such inflationary effects are anticipated to be short-lived, particularly amidst the diminished purchasing power of most of the population.
At the same time, efforts to attract non-debt-creating foreign inflows are important to ensure stability in the external sector, while continued commitment to ensuring fiscal sustainability has become a prerequisite for the sustainable recovery of the economy.
On the economic growth front, some scarring effects stemming from the economic crisis may have some dampening effects on the growth prospects of the country.
Therefore, the Governor says the continued commitment to addressing long-standing structural impediments of the economy, such as the weak doing-business environment, is imperative for a sustainable recovery of not only the macroeconomic environment but also socio-economic conditions. Given that the Sri Lankan economy is highly interconnected with the rest of the world, international developments will have a significant impact on Sri Lanka, including its reform efforts.
"Amidst the prevailing volatile geo-political environment, risks arising from global developments could have an impact on domestic economic activity. Further, on the domestic front, the anticipated elections could create some uncertainty in the decision making of the stakeholders, affecting the recovery process to a certain extent."
Moreover, he adds that weather anomalies may also continue to create disruptions to economic activity along with worsening climaterelated risks. In the meantime, if the balance sheets of the household and the corporate sectors further deteriorate, that could hinder the debt repayment capacities of households and corporates, thereby posing risks to financial system stability.
In this environment, the resolve of the people to support the reform agenda is crucial to the sustained revival of the economy and its ability to deliver, high, sustainable and inclusive growth over the medium term. Any departure from the reform agenda will hurt confidence while significantly endangering the growth prospects of the economy and creating significant pressures on public welfare.
This could create irreversible damage to the Sri Lankan economy, especially considering the economy has just exited from a deep economic crisis, he stressed.
Against this backdrop, the Central Bank would strive to maintain price stability and secure financial system stability, whilst supporting the economy to reach its potential.
Economic and market developments would be monitored continuously as the Central Bank remains prepared to undertake timely and proactive measures to address any inflationary pressures and any undue stresses on the financial system.
Weerasinghe says that the Central Bank will continue to exercise its mandate under the FIT framework, by maintaining appropriate levels of interest rates, to create an environment that effectively manages the demand conditions in the economy to ensure that inflation remains within the target over the medium term.
This, in turn, will serve to create the necessary socio-economic landscape that can promote price stability, financial stability and overall macroeconomic stability that will pave the way for productive investment, inclusive growth, and thereby public welfare.