Given the economic recovery Sri Lanka has before it in 2021, the Central Bank yesterday pledged to continue its accommodative monetary policy stance, establish a single digit interest rate and push private sector credit to expand 14% despite an estimated 3.9% growth contraction last year.
Delivering the ‘Road Map 2021: Monetary and Financial Sector Policies for 2021 and Beyond’, Central Bank Governor Prof. W.D. Lakshman recapped the challenges faced by the economy last year, especially after the second wave hit, projecting that Sri Lanka experienced an annual contraction of around 3.9% in 2020. “The Central Bank is of the view that continued support through monetary and fiscal interventions is essential to provide adequate impetus to the economy amidst the challenging domestic and global macroeconomic conditions.
“Therefore, the Central Bank will continue the prevailing accommodative monetary policy stance in 2021 to ensure the envisaged recovery of economic activity. We would of course, be closely monitoring developments to avoid any strong demand-driven pressures on inflationary trends,” he said during a virtual launch of the Road Map.
Capitalising on the achievement of 12 years of single-digit inflation, the Governor stated the Central Bank intends to establish a permanent single digit interest rate structure in the economy. “We will remain focused on maintaining market interest rates at single digit levels going forward. The business community will benefit from low-cost borrowing facilities corresponding to a low interest rate regime.”
The Governor also said this was imperative to promote investment and entrepreneurship in the country, and provide the needed foundation for sustained high economic growth. The availability of low-cost funding on a sustainable basis would encourage businesses, including start-ups, to venture into new industries and sectors that have high growth potential, he added.
While acknowledging that a long-term reduction of interest rates would hit pensioners hard, he argued that the sustainable solution to this problem lay in long-term income growth and institutional developments involving mutual funds, insurance and annuity schemes, pension, and superannuation schemes.
“The Central Bank will continue to work with the financial sector to develop new financial products that will support such vulnerable segments in the society. The Government has also proposed to introduce a contributory pension scheme to assist those in public enterprises, as well as the private sector.”
Low lending rates and adequate levels of liquidity in the market would help channel funds to the private sector in the form of low-cost loans, the Governor opined. The Central Bank expects credit to the private sector to expand by around 14% in 2021 and at least by around 12%-12.5% annually over the medium-term, thereby supporting the envisaged growth of the economy.
“For the sustainability of the low interest rate structure, it is essential that foreign exchange leakages for non-essential imports and outward investment are minimised, thereby allowing the domestic production economy to reap the intended benefits from easy monetary conditions.
“Monetary policy will also be reoriented towards supporting the identified sectors of the economy, and lending targets to priority sectors and winning industries will be introduced during the year, following consultation with relevant stakeholders.”
He went on to say that while working within a framework of market economy, the performance of the open economy policies introduced from 1977 will be reviewed vigorously, so that the country and its economic agents could follow a focused approach to becoming an industrial economy. “A policy framework with such long-term objectives would generate greater macroeconomic benefits than being driven by short-term vicissitudes in the market and unbridled desire for short-term financial gains.”
Central Bank intends to publish a comprehensive Monetary Policy Report (MPR) commencing in the second half of this year. This would present an analysis of developments as well as projections of key macroeconomic variables. The Governor believes that the communication of these macroeconomic projections will increase transparency, provide clarity on the future trajectories, and highlight any risks surrounding such trajectories over the medium term.
“While the exchange rate would be allowed to act as a shock absorber to alleviate the impact of external developments on the domestic economy, the Central Bank would continue to intervene in the domestic foreign exchange market to reduce undue volatilities in the exchange rate as well as to build up international reserves as appropriate, as done in 2020. The Central Bank trusts that the envisaged real sector developments will help maintain exchange rate stability.”
Central Bank will introduce its International Transactions Reporting System (ITRS) by the end of this year. Considerable progress in preparatory work in this regard has been made during 2020. Upon establishment, the ITRS would provide a comprehensive platform for monitoring cross border and foreign currency transactions through the banking sector.
The Central Bank expects continuous cooperation of the banking sector in the coming months for the successful implementation of this project as scheduled.
“The Central Bank will work jointly with the Government to introduce and implement essential structural changes that are required to drive the economy along the envisaged growth path. The implementation of these structural reforms, along with the picking up of Government revenues and rationalisation of Government expenditures, should ensure sustainability and easy management of public debt in the period ahead.”
(FT)