Third wave of pandemic highlights need for continued fiscal & monetary support: CBSL

The Sri Lankan economy, which rebounded notably during the second half of 2020 and early 2021 as per available indicators, is experiencing renewed disruptions due to the emergence of the third wave of the COVID-19 pandemic and related preventive measures, including isolations.

“While its adverse effects on economic activity are expected to be lesser than during the first two waves due to the selective nature of mobility restrictions and the ongoing vaccination drive, the third wave has once again highlighted the disruptive nature of the pandemic and the challenges faced in sustaining the economic recovery amidst the pandemic,” the Central Bank said.

“It has also highlighted the need for continued fiscal and monetary support to place the recovery process on a firm footing.”

The merchandise trade deficit widened in March 2021, driven by a higher increase in expenditure on imports than the increase in earnings from exports.

Meanwhile, the notable increase in workers’ remittances continued during the period from January to April 2021, over the corresponding period of the previous year.

However, the recent surge in the global spread of COVID-19, could affect the recovery of the tourism industry, while posing renewed challenges to the external sector.

The Sri Lankan rupee depreciated by 6.6 percent against the US dollar thus far in 2021, and the continuation of the existing restrictions on non-essential imports and selected foreign exchange outflows is expected to help ease the pressure on the domestic foreign exchange market.

As at end April 2021, gross official reserves were estimated at US dollars 4.5 billion, equivalent to 3.2 months of imports. This does not include the bilateral currency swap facility with the People’s Bank of China (PBoC).

Meanwhile, the prevailing historically low interest rates have resulted in an acceleration of private sector credit.

Inflation is expected to remain within the 4-6 percent range in the near to medium term. The Central Bank further said that any pressures over the medium term will be addressed with appropriate measures.