The Monetary Council of the Central Bank of Sri Lanka, at its meeting on July 07, 2021, decided to maintain the Permanent Deposit Facility (SDFR) rate and the Permanent Loan Facility (SLFR) rate of the Bank. central to their current levels of 4.50. percent and 5.50 percent, respectively. The Council arrived at this decision after carefully considering macroeconomic conditions and expected developments on the national and global fronts.

Sri Lankan Economy Expected To Have Higher Than Expected Growth Rate In Q1 2021

Although GDP estimates for the first quarter of 2021 have not been released by the Census and Statistics Department, indicators from several key sectors of the economy point to a stronger-than-expected recovery in the quarter. The disruption of domestic economic activity due to the third wave of the COVID-19 pandemic and the associated preventive measures weakened the recovery somewhat, in the second quarter of 2021. Nevertheless, the vaccination campaign underway across the country and the probable removal of mobility restrictions are expected. to mitigate the impact of the current wave of COVID-19 on overall economic activity, thereby facilitating a sustained economic recovery with a view to achieving a GDP growth rate of around 5% in 2021. Along with the expected recovery the global economy and improvements on the home front, the upward momentum in economic activity is expected to continue over the medium term.

The external sector is expected to gradually recover over the coming period

Despite the resilience of merchandise exports, the trade deficit widened during the period January to May 2021, compared to the same period last year. Challenges emanating from multiple waves of COVID-19 globally and nationally have continued to stifle the recovery of the tourism industry. In contrast, the noticeable improvement in workers’ remittances continued to support the external current account. While the measures introduced to address the challenges of the external sector have helped to ease domestic foreign exchange market conditions to some extent, speculative behavior and frontloading of imports have exerted undue pressure on the market. The exchange rate has depreciated 6.7 percent against the US dollar so far during the year. At the end of June 2021, gross official reserves were estimated at US $ 4.0 billion (or 2.7 months of imports). This does not include the bilateral currency swap facility with the People’s Bank of China (PBoC) of CNY 10 billion (equivalent to approximately US $ 1.5 billion). Although the level of foreign exchange reserves may experience some variations over the coming period, these developments are expected to be temporary, with adequate funding strategies aligned with

Department of Economic Research 08.07.2021 2 maintain reserves at sufficient levels and meet all government debt service obligations as they fall due on time.

Market interest rates remain low, facilitating increased credit flows to the private sector

In response to the monetary policy easing adopted by the Central Bank, most interest rates on deposits and market loans have fallen to their historically low levels. Low interest rates and excess rupee liquidity in the domestic money market have allowed low-cost credit to flow into the economy, thus supporting the resumption of economic activity. As a result, credit to the private sector has grown significantly over the period January-May 2021, and this momentum is expected to continue through 2021. The Central Bank expects domestic investors to profit the low interest rate environment to develop their productive economic activities. and explore the new opportunities being created in the economy targeting local and international markets. At the same time, the credits obtained by the public sector from the banking system, in particular from the government, have also increased noticeably, in the context of the impact of the pandemic on public revenues and recurrent expenditure. With the significant expansion of domestic credit, the growth of broad money (M2b) remained high at the end of May 2021.

Any build-up of sustained inflationary pressures will be addressed through appropriate medium-term measures

Inflation remains subdued, given weak aggregate demand, although food inflation has accelerated due to supply side disruptions. Inflation is expected to remain broadly within the desired 4-6% range for the remainder of 2021. The envisaged improvements in aggregate demand conditions resulting from the effects of the stimulus measures adopted by the central bank and the government and the likely increases in commodity prices, can generate medium-term inflationary pressures. These pressures will be alleviated through timely policy intervention by the Central Bank, thereby ensuring that inflation is maintained at mid-single-digit levels over the medium term.

Policy rates are maintained at current levels

In view of the current and expected macroeconomic developments highlighted above, the Monetary Council has decided to maintain the key interest rates, namely the rate of the permanent deposit facility (SDFR) and the rate of the permanent loan facility ( SLFR) of the Central Bank, at their current levels. 4.50 percent and 5.50 percent, respectively. The Central Bank will continue to monitor developments in the domestic and global macroeconomic and financial markets and stand ready to take appropriate measures, as necessary, with the aim of keeping inflation within the target range of 4-6% within the framework. framework of the flexible medium-term inflation targeting framework, while supporting a sustained economic recovery.

Monetary policy decision:

Policy rates

and SRR unchanged

Permanent deposit facility rate (SDFR) 4.50%

Permanent Loan Facility Rate (SLFR) 5.50%

Discount rate 8.50%

Statutory Reserve Ratio (SRR) 2.00%

(CBSL)



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