Economic Research Department

06.10.2022

Monetary Policy Review: No. 07 - October 2022

The Central Bank of Sri Lanka maintains policy interest rates

at their current levels

The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 05 October 2022,
decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility
Rate (SLFR) of the Central Bank at their current levels of 14.50 per cent and 15.50 per cent,
respectively. In arriving at this decision, the Board considered the latest macroeconomic
conditions, expected developments and macroeconomic projections. The Board noted the tight
monetary conditions prevailing at present, the decelerating pace of inflation, and the envisaged
disinflation path in the near term supported by both domestic and global factors. The Board was
of the view that the monetary conditions remain sufficiently tight to achieve the envisaged
disinflation path in the period ahead. The contractionary fiscal policies would complement the
effects of tight monetary policy measures already in place, helping to mitigate any build-up of
aggregate demand pressures, thereby anchoring inflation expectations and bringing down
headline inflation to the targeted level of 4-6 per cent over the medium term.

Domestic economic activity is expected to remain subdued during 2022, before

recovering in 2023

As per the GDP estimates published by the Department of Census and Statistics (DCS), the real
economy is estimated to have contracted by 4.8 per cent in the first half of 2022, on a year-on-
year basis. The economy is expected to contract in the second half of 2022 as well, impacted by
tighter monetary and fiscal conditions, along with the continuation of supply-side constraints and
uncertainty surrounding the business environment amidst shortages of foreign exchange in the
domestic foreign exchange market, among others. However, a recovery in economic activity is
expected in 2023 with the envisaged improvements in the supply-side, along with the timely
implementation of the required reforms.

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Private sector credit continues to contract due to tight monetary and liquidity conditions

Market interest rates are continuously adjusting upwards reflecting the tight liquidity conditions
in the domestic money market and the further passthrough of significant monetary policy
tightening measures introduced thus far by the Central Bank. With relatively high deposit interest
rates offered by licensed banks, a return of currency in circulation to the banking system is also
observed. In August 2022, outstanding credit extended to the private sector by commercial banks
contracted for the third consecutive month in absolute terms, reflecting the impact of increased
effective market lending interest rates, a moderation of economic activity, and measures to curtail
non-urgent imports. Accordingly, the current declining trend in the year-on-year growth of credit
to the private sector is expected to continue during the remainder of the year, while a similar
trend is expected in the growth of broad money (M2b) supply as well. Meanwhile, the need for
further monetary financing is expected to reduce gradually, supported by the envisaged fiscal
consolidation measures and planned reforms of major state owned business enterprises.

Headline inflation is expected to follow a disinflationary path in the near term

Headline inflation, based on the Colombo Consumer Price Index (CCPI), edged up in September
2022, driven mainly by the recent revision of electricity and water tariffs and the increase in Value
Added Tax (VAT). However, headline inflation is expected to follow a disinflation path in the
period ahead. Subdued aggregate demand pressures resulting from tight monetary and fiscal
conditions, expected improvements in domestic supply conditions, normalisation in global food
and other commodity prices, and the timely passthrough of such reductions to domestic prices,
along with the favourable statistical base effect, will be instrumental in bringing down inflation
over the medium term.

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 Note: A forecast is neither a promise nor a
Figure
Quarterly Average Headline 01 Projections Based on
Inflation
the Colombo Consumer Price Index (CCPI) (Y-O-Y, %) commitment.

The fan chart illustrates the uncertainty surrounding

the baseline projection path using confidence bands of
gradually fading colours. The confidence intervals (CI)
shown on the chart indicate the ranges of values within
which inflation may fluctuate over the medium term.
Specially, the thick green shaded area represents the
50 per cent confidence interval, implying there is a 50
per cent probability that the actual inflation outcome
will be within this interval. The confidence bands show
the increasing uncertainty in forecasting inflation over
a longer horizon.

The projection reflects the available data, and

assumptions and judgements made at the October
2022 forecast round. The projections are conditional
on current forecasts of global fuel and food prices that
are anticipated to ease gradually, which in turn are
Source: Central Bank Staff Projections expected to be reflected in domestic prices; below
potential level growth in Sri Lanka’s major trading
partners; and tightening global financial conditions implied by the current and anticipated monetary policy stance of the USA.
Further, the projections are conditional on the model-consistent interest rate path and the achievement of medium-term fiscal
targets. Moreover, domestic food supply conditions are assumed to ease in 2023. Given the prevailing domestic and global
economic uncertainties and geopolitical tensions, the risks associated with the current projections are much higher than in
normal times. Any notable change in these assumptions could lead to the realised inflation path deviating from the above.
The Central Bank remains committed to communicating anticipated changes in the inflation outlook to the public on a regular
basis, to enable them to make informed decisions.

Positive developments are observed in the external sector despite heightened challenges

The merchandise trade deficit contracted significantly during the eight months ending August
2022, compared to the same period in 2021, driven by an increase in export earnings, while also
reflecting the impact of policy measures taken to curtail non-essential imports. An improvement
in monthly workers’ remittances has been observed recently, while the tourism sector is
anticipated to recover in the upcoming season. Foreign exchange liquidity in the domestic
banking system recorded some improvements supported by increased inflows in the form of
export proceeds and workers' remittances. Such improvements in foreign exchange liquidity
conditions, despite underlying pressures in the foreign exchange market, are expected to
facilitate the continuous provision of essential imports, including fuel, coal, and other
commodities, in the period ahead. Meanwhile, the weighted average spot exchange rate remains
unchanged since mid-September 2022 due to relatively low volume of transactions in the
interbank spot market. The gross official reserves are estimated at US dollars 1.8 billion as at
end September 2022, including the swap facility from the People’s Bank of China, equivalent to
around US dollars 1.4 billion, which is subject to conditionalities on usability. Subsequent to the
staff-level agreement reached with the IMF on the Extended Fund Facility (EFF) arrangement,
the authorities are expediting negotiations with the country’s external creditors, assisted by
financial and legal advisors, to advance the debt restructuring process.
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Policy rates are maintained at current levels

In consideration of the current and expected macroeconomic developments as highlighted

above, the Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 05 October
2022, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending
Facility Rate (SLFR) of the Central Bank at their current levels of 14.50 per cent and 15.50 per
cent, respectively. The Board was also of the view that the recently introduced tight fiscal policy
measures would also help curtail any further build-up of demand pressures in the economy,
complementing the effects of tight monetary policy already in place. However, the Central Bank
will continue to monitor macroeconomic conditions and expected developments on the domestic
and global fronts and stand ready to take measures swiftly and proactively, as appropriate. The
Board reiterates its commitment to restoring price stability and remains confident that the already
implemented tight monetary policy measures would help rein in any inflationary pressures, while
supporting the economy to reach its potential over the medium term.

Monetary Policy rates and SRR unchanged

Policy Standing Deposit Facility Rate (SDFR) 14.50%
Decision Standing Lending Facility Rate (SLFR) 15.50%

Statutory Reserve Ratio (SRR) 4.00%

INFORMATION NOTE:

A press conference, chaired by Governor Dr. P Nandalal Weerasinghe, will be held on 06 October 2022
at 01.00 pm at the Atrium of the Central Bank of Sri Lanka, and proceedings will be livestreamed on
Facebook and YouTube.

The release of the next regular statement on monetary policy review will be on 24 November 2022.

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 Annexure I

Table 01: Real GDP Growth (Provisional)

Year-on-Year % Change (a)

Economic 2021 2022

Activities
First Second Third Fourth First Second First
Annual
Quarter Quarter Quarter Quarter Quarter Quarter Half

Agriculture 6.4 11.2 -2.8 -3.1 2.5 -6.8 -8.4 -7.6

Industries 6.0 21.6 -2.0 1.4 5.6 -4.7 -10.0 -7.1

Services 3.5 8.3 -1.7 4.3 3.3 0.7 -2.2 -0.6

GDP 4.0 16.3 -5.8 2.0 3.3 -1.6 -8.4 -4.8

(a) Based on rebased GDP estimates (base year 2015) Source: Department of Census and Statistics

Table 02: Inflation

Feb Mar Apr May Jun Jul Aug Sep

Month
22 22 22 22 22 22 22 22

CCPI
15.1 18.7 29.8 39.1 54.6 60.8 64.3 69.8
Headline (2013=100)
Inflation
(Year-on-Year %
NCPI
change) 17.5 21.5 33.8 45.3 58.9 66.7 70.2 -
(2013=100)

CCPI
10.9 13.0 22.0 28.4 39.9 44.3 46.6 50.2
Core (2013=100)
Inflation
(Year-on-Year %
NCPI
change) 14.1 17.3 27.9 37.7 49.3 57.3 60.5 -
(2013=100)

Source: Department of Census and Statistics

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 Table 03: Monetary Sector Developments (Provisional)

Outstanding Amount (Rs. billion)

Indicator
Dec Jan Feb Mar Apr May Jun Jul Aug
21 22 22 22 (a) 22 (a) 22 (a) 22 22 22

Reserve Money 1,306 1,337 1,324 1,387 1,482 1,415 1,453 1,436 1,386

Broad Money (M2b) 10,647 10,668 10,755 11,576 11,941 11,897 11,901 11,955 11,987

Net Foreign Assets (NFA) (982) (1,216) (1,275) (1,889) (2,195) (2,083) (2,122) (2,124) (2,035)

Net Domestic Assets (NDA) 11,629 11,883 12,030 13,464 14,136 13,980 14,023 14,079 14,022

Net Credit to the Government (NCG) 5,832 6,054(b) 6,100(b) 6,556(b) 6,569(b) 6,523(b) 6,697(b) 6,826 6,990

Credit to Public Corporations / SOBEs 1,188 1,192 1,238 1,548 1,725 1,750 1,729 1,754 1,700

Credit to the Private Sector 6,981 7,018(b) 7,051 7,534(b) 7,753 7,755(b) 7,714 7,673 7,614

Broad Money (M4) 12,985 13,058 13,167 13,992 14,356 14,340 14,335 14,410 -

(a) The sharp depreciation of the Sri Lanka rupee during March to May 2022 remains the key reason for the augmentation of monetary and credit
aggregates during that period.
(b) Revised Source: Central Bank of Sri Lanka

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 Table 04: Interest Rates

End End End End End End As at

Interest Rate (%) Apr May Jun Jul Aug Sep 05 Oct
22 22 22 22 22 22 22

Key Policy Interest Rates of the Central Bank

Standing Deposit Facility Rate 13.50 13.50 13.50 14.50 14.50 14.50 14.50

Standing Lending Facility Rate 14.50 14.50 14.50 15.50 15.50 15.50 15.50

Bank Rate 17.50 17.50 17.50 18.50 18.50 18.50 18.50

Average Weighted Call Money Rate (AWCMR)(a) 14.50 14.50 14.50 15.50 15.50 15.50 -

Treasury bill yields (Primary market)

91-day 23.53 23.65 23.85 28.86 32.89 31.94 32.34

182-day 23.96 24.22 24.40 29.24 31.28 30.59 30.61

364-day 24.09 24.30 23.84 29.53 30.50 29.85 29.75

Lending Rates

Average Weighted Prime Lending Rate (Weekly) 16.38 22.11 22.62 24.94 25.76 25.95 -

Average Weighted Lending Rate (AWLR) 11.31 13.46 15.06 15.94 16.86 - -

Average Weighted New Lending Rate (AWNLR) 13.72 20.00 21.50 22.42 24.18 - -

Deposit Rates

Average Weighted Deposit Rate (AWDR) 5.52 6.99 8.41 9.56 10.49 11.63 -

Average Weighted Fixed Deposit Rate (AWFDR) 6.84 8.97 11.06 12.60 13.90 15.41 -

Average Weighted New Deposit Rate (AWNDR) 15.35 16.98 17.15 19.11 21.29 - -

Average Weighted New Fixed Deposit Rate (AWNFDR) 15.63 17.19 17.45 19.42 21.62 - -

(a) No transactions were reported in the Call Money Market during 01 to 05 October 2022 Source: Central Bank of Sri Lanka