Sri Lanka Central Bank raises policy interest rates to strengthen macroeconomic stability

(LANKAPUVATH | COLOMBO) –  Sri Lanka’s Central Bank today said it has decided to increase both the deposit rate and the lending rate by 50 basis points each with the view to strengthening macroeconomic stability.

The Central Bank said in consideration of the current and expected macroeconomic developments, the Monetary Board at its meeting held on 19 January 2022 has decided to adopt several policy measures with the view to strengthening macroeconomic stability.

Accordingly, the Monetary Board decided to increase the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR), by 50 basis points each, to 5.50 percent and 6.50 percent, respectively.

The Central Bank expects the economic activity to record a gradual recovery following a temporary setback due to the third wave of the Covid-19 pandemic.

The Bank noted that the External Sector remained resilient amidst heightened challenges. With the normalization of global economic activity, a notable improvement in export performance was observed, with monthly exports remaining in excess of US dollars 1 billion, consecutively since June2021.

Developments in the tourism sector appear to be promising with the influx of tourists in recent months, the Bank said.

Although inflows in the form of workers’ remittances have reduced somewhat in the latter half of 2021, the introduction of special incentive schemes and the actions taken by the authorities to curb illegal fund transfers have generated renewed interest in routing funds through formal channels.

The Sri Lanka rupee depreciated by 7.0 percent against the US dollar in 2021 and has been broadly stable thus far in 2022.

At the same time, the Central Bank was able to fulfil the timely settlement of the International Sovereign Bond (ISB) of US dollars 500 million on 18 January 2022.

As of end 2021, the gross official reserves were estimated at US dollars 3.1 billion.

Considering these developments in the External Sector, the Monetary Board, in addition to the policy rates hike, has decided to

• distribute the financing of essential import bills for fuel purchases among the licensed banks in proportion to their foreign exchange inflows;

• mandate all registered tourist establishments to accept foreign exchange only in respect of services rendered to persons resident outside Sri Lanka;

• extend the payment of an additional Rs. 8.00 per US dollar for workers’ remittances paid in addition to the incentive of Rs. 2.00 per US dollar offered under the “Incentive Scheme on Inward Workers’ Remittances” until 30 April 2022, reimburse the transaction cost borne by Sri Lankan migrant workers through the payment of Rs. 1,000 per transaction, when remitting money to rupee accounts via licensed banks and other formal channels with effect from 01 February 2022 and introduce higher interest rates for both foreign currency and rupee denominated deposits of migrant workers.

The Monetary Board was of the view that the above measures will curtail the possible build-up of underlying demand pressures in the economy, which would also help ease pressures in the external sector, thus promoting greater macroeconomic stability.

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