CB bullish on reining in runaway inflation – The Island

By Shyam Nuwan Ganewatta

The Governor of the Central Bank of Sri Lanka (CBSL), Dr Nandalal Weerasinghe, said yesterday (19) that there was some political and social stability in the country and this would help the CBSL to succeed in its endeavors .

Dr Weerasinghe said so in response to a question posed by a reporter about the Governor’s earlier claim that he would step down if political stability could not be restored within two weeks.

“Now we have a prime minister. We have a cabinet. Parliament is in session. We expect a finance minister to be appointed soon. There is no more violence now. Protests and peaceful demonstrations do not affect political and social stability. I think the country is on the right track. Most MPs expressed a desire to work together. I think things will become more stable soon,” he said.

Inflation in Sri Lanka is expected to decline in the coming months due to corrective policy actions by the Central Bank and expected improvements in domestic and global supply conditions, the Central Bank said in a press release (19).

Inflation is expected to rise in the near term due to domestic supply shortages, rising global commodity prices, the effects of the Sri Lankan rupee’s steep depreciation against the US dollar so far over the year, as well as the impact of aggregate demand pressures .

“However, that will change in the coming months and the bank expects the recent tightening of monetary conditions and heightened monetary policy communication to help anchor the public’s inflation expectations in the period ahead. to come.

“The Central Bank plans to minimize excessive volatility in the domestic foreign exchange market by tightening the monetary policy stance, restricting open-account imports, and reducing the proportion of compulsory foreign exchange sales by banks to the Central Bank.

“The Central Bank expects an increase in workers’ remittances due to the noticeable narrowing of the gap between the official exchange rate and the rate offered by the gray market and the continued increase in migration of workers. workers.

“The near-term outlook for the tourism sector is expected to remain unfavorable due to both global and domestic factors.

“Meanwhile, gross official reserves at end-April 2022 were provisionally estimated at US$1.8 billion, including the People’s Bank of China swap facility equivalent to approximately US$1.5 billion, which is subject to terms of use.”

The Central Bank and the government have started technical-level discussions with the International Monetary Fund aimed at developing a program to address the macroeconomic challenges facing the economy, while expeditious steps are being taken to begin the process of restructuring the economy. external debt.

“Negotiations have already begun with bilateral and multilateral partners to secure bridging funding to obtain the foreign currency needed to finance imports of essential goods and strengthen social safety net programs.

“Economic activity is expected to be significantly affected by ongoing supply shortages, energy-related issues and social tensions, as evidenced by several leading indicators. The Central Bank’s demand management policies and Planned fiscal consolidation measures should also keep aggregate demand subdued over the course of the year.

“Global economic growth is also expected to moderate in response to monetary policy tightening by central banks globally to counter inflationary pressures as well as the ripple effects of geopolitical tensions in Eastern Europe.

“After careful consideration of current and expected macroeconomic developments both globally and domestically, the Monetary Board of the Central Bank of Sri Lanka, at its meeting on 18 May 2022, decided to maintain the permanent deposit facility rate (SDFR) and the Central Bank’s Standing Lending Facility Rate (SLFR) at current levels of 13.50% and 14.50%, respectively.

“The Board considered that the policy measures already implemented by the Central Bank would continue to feed through to financial markets, while some signs of monetary policy tightening are already seen in real economic activity. The Central Bank would continue to monitor national and global macroeconomic and financial market developments and would stand ready to proactively take appropriate measures to help reinforce greater macroeconomic stability in the economy in the period ahead.

“In order to prevent a further deterioration of economic conditions and to complement the efforts of the Central Bank implemented so far, urgent measures are needed to restore greater political stability through consensual governance and harmony. social.

“In addition, prompt policy measures are needed to strengthen fiscal performance that would help avoid overreliance on monetary financing and maintain medium-term fiscal sustainability. In addition, the rapid and transparent revision of tariffs in the energy sector remains a priority in order to strengthen the financial situation of energy-related public companies, while improving the effectiveness of social protection programs to support groups. vulnerable members of society affected by the unprecedented economic circumstances.