Sri Lanka’s Six-Month Road Map at a glance

Sri Lanka’s Central Bank on Friday outlined the key measures and tools they will use to ensure macroeconomic & financial system stability in the country for the next six months.

• Intervene in the FX market by providing the funds to finance the country’s energy bills, and thereby to infuse liquidity

• Promote investments in Rupee denominated government securities with a guarantee on the exchange rate

• Strengthen mandatory conversion of export proceeds

• Request the Government to tax profits of Exporters at 28% and not 14% where forex is not repatriated and converted

• Expand the moratorium while also providing liquidity support to affected Finance Companies

• Stop Parate executions and repossession of vehicles in the next six months for pandemic-affected borrowers

• Share the burden of Pandemic losses suffered by local SMEs by allocating Rs. 15,000 mn towards interest accrued, through a mechanism which is to be worked out

• Use monetary policy tools to unwind monetary stimulus extended during the pandemic

• Use macroprudential tools as well as microprudential regulation and supervision to guide the financial sector towards sustained stability

• Facilitate Education and Health related forex outflows immediately

• Lift the ceiling imposed on Outward investment and Migration allowances in January 2022

• Discontinue cash margin deposit requirements on “nonessential/ non-urgent imports” with immediate effect

• Establish the International Transactions Reporting System (ITRS) to monitor foreign exchange transactions commencing 01 January 2022

• Monitor services related foreign exchange inflows and ensure due repatriation and conversion

• Replace maturing debt obligations with new inflows through nondebt sources, wherever possible

• Consider the possibility of buying back the entire issue of ISBs maturing in January 2022 and/or July 2022, if high discounts are prevalent in the market

• Replace maturing ISBs with Government-to-Government loans until ISBs/GDP ratio declines to 10% or less

• Take measures to improve Sovereign ratings

• Strengthen workers’ remittances through official channels

• Encourage forex transactions through formal channels with the restoration of licenses of Money Changers

Direct benefits will accrue to the general public through:

− Facilitating education and health related forex outflows, including those made using credit cards
− Lifting of restrictions on the migration allowance in January 2022
− Facilitating fuel and other essential imports, thereby ensuring uninterrupted supplies
− Enhancing real returns to savers with the correction in deposit interest rates
− Supporting credit availability at reasonable lending interest rates
− Maintaining stable price levels, thereby easing cost of living
− Ensuring the stability of the financial system, thereby protecting savings of the public

Central Bank will aim for the following results by end March 2022…

• Gross Official Reserves to be enhanced to cover a minimum of 4 months of imports

• Foreign holding of 2.5% in Rupee denominated government securities
(USD 1,000 mn)

• Diversified SLDB investor base

• Stable exchange rate and stable interest rates

• Stronger Central Bank Balance Sheet with an improved Net Foreign Assets/Net Domestic Assets ratio

• Stronger banking and non-bank sector

• Weekly Treasury bill auction size of below Rs. 50 bn

• Real GDP growth of around 5% in 2021 and 6.5% in 1Q-2022

• Stabilised inflation at mid single digits

By end 2022, Central Bank expects further positive outcomes:

• Normalcy in economic activity with the COVID-19 pandemic being under
control, resulting in a real GDP growth of around 6%

• Inflation to stabilise in the middle of the desired 4-6% target range

• Interest rates to stabilise further

• Revival of tourism to lead to a better business sentiment

• Higher investment flows

• Improved macroeconomic fundamentals, resulting in improved
Sovereign ratings

• Stronger and disciplined economy