Business
Central Bank of Sri Lanka tightens monetary policy stance
Monetary Policy Review: No. 06 – August 2021
The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 18 August 2021, decided to increase the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points each, to 5.00 per cent and 6.00 per cent, respectively. In addition, the Monetary Board decided to increase the Statutory Reserve Ratio (SRR) applicable on all rupee deposit liabilities of licensed commercial banks (LCBs) by 2.0 percentage points to 4.00 per cent, with effect from the reserve maintenance period commencing on 01 September 2021.
These decisions were made with a view to addressing the imbalances on the external sector of the economy and to preempt the buildup of any excessive inflationary pressures over the medium term, amidst improved growth prospects. The global economy is set to make a gradual recovery in 2021, although normalisation of economic activity would largely be uneven across regions As per the July 2021 update to the World Economic Outlook (WEO) of the International Monetary Fund (IMF), the global economy is projected to grow by 6.0 per cent in 2021 and 4.9 per cent in 2022. Economic prospects have diverged across regions and access to COVID-19 vaccines has emerged as the principal factor that drives the global economic recovery in the period ahead.
Most countries have experienced transitory price pressures due to supply-demand mismatches amidst the pandemic. Such transitory pressures could become more persistent, thereby warranting preemptive action by central banks in order to ensure stability in the period ahead. Accordingly, some central banks have already commenced tightening monetary policy while several others have signalled a possible tightening of monetary policy in the period ahead. The Sri Lankan economy is on a recovery path despite the pandemic related disruptions
Supported by fiscal and monetary stimulus measures, the Sri Lankan economy is gradually making headway following the setback in 2020. As per the estimates published by the Department of Census and Statistics (DCS), the economy witnessed a stronger than expected recovery during the first quarter of 2021, recording a real growth of 4.3 per cent, year-on-year. The economy is poised to record a higher growth rate during the second quarter of 2021, partly due to the sharp contraction observed in the corresponding quarter of the previous year. Possible disruptions to domestic economic activity from the re-emergence of the COVID-19 pandemic and related preventive measures could weaken the recovery to some extent during the second half of 2021. Nevertheless, with the successful rolling out of the national COVID-19 vaccination programme and the Government’s strategy to impose only selective mobility restrictions, the momentum of activity is expected to sustain in the period ahead. Available indicators and projections suggest that the real economy would grow over 5 per cent in 2021, and this momentum would be sustained over the medium term.
Most market interest rates have reached low levels resulting in the expected acceleration in credit flows to the private sector With the gradual transmission of accommodative monetary policy measures, most market deposit and lending interest rates declined to their historic low levels. Supported by the low interest rate environment, credit to the private sector expanded notably during the first half of 2021, surpassing the annual expansion of credit observed in 2019 and 2020. The momentum of credit expansion is expected to continue in the period ahead, with increased credit flows to productive and needy sectors of the economy. Meanwhile, credit obtained by the public sector from the banking system, particularly net credit to the Government, also increased notably thus far during the year, amidst the impact of the pandemic on government revenue and recurrent expenditure. Reflecting the impact of increased domestic credit, the growth of broad money (M2b) continued to remain elevated. The external sector continued to face a multitude of challenges requiring coordinated measures The implementation of the essential growth-conducive stimulus measures, which resulted in the availability of low cost credit to the private sector, led to a sustained increase in the demand for merchandise imports since mid-2020. With the increase in import expenditure outweighing the improvements observed in earnings from exports, the trade deficit continued to widen during the first half of 2021 over the corresponding period of last year. Moreover, the expected recovery in the tourism industry could be further delayed due to uncertainties associated with the resurgence of the pandemic globally. Workers’ remittances, which recorded a significant growth in 2020 as well as in the first few months of 2021, have also displayed some deceleration. Limited conversion by exporters and the advancing of imports together with some speculative activity, prompted by anomalies between interest rates on the rupee and foreign currency products in the financial market, exerted undue pressure on the exchange rate in the domestic market. Amidst these developments, all debt service obligations of the Government, including the settlement of the International Sovereign Bond (ISB) of US dollars 1 billion in late July 2021, have been duly met thus far in 2021. Gross official reserves were estimated at US dollars 2.8 billion with an import cover of 1.8 months by end July 2021. This, however, does not include the bilateral currency swap facility with the People’s Bank of China (PBoC) of CNY 10 billion (equivalent to approximately US dollars 1.5 billion). Measures are being taken by the Government and the Central Bank to secure foreign financing from several sources in order to reinforce the level of official reserves in the near future. Meanwhile, the Government continued to aggressively explore avenues to enhance non-debt creating foreign inflows, by strengthening the domestic production economy, which would help strengthen the external sector in the period ahead. Possible upside pressures on inflation are being addressed through preemptive policy measures Inflation, which remained moderate during early 2021, accelerated somewhat in recent months due to high food inflation and some acceleration in non-food inflation. Inflation is projected to hover around the upper bound of the desired 4-6 per cent target range in the near term. The envisaged improvements in aggregate demand conditions and the likely increases in global energy and other commodity prices may generate some inflationary pressures in 2022, requiring preemptive policy measures to ensure the maintenance of inflation in mid-single digit levels over the medium term.
Tightening of monetary policy stance is expected to support greater economic stability In consideration of the current and expected macroeconomic developments as highlighted above, the Monetary Board decided to rollback some extraordinary support provided to the economy at the onset of the COVID-19 pandemic. Accordingly, with effect from 19 August 2021, the Board decided to increase the policy interest rates, i.e., the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR), of the Central Bank by 50 basis points each, to 5.00 per cent and 6.00 per cent, respectively. This would also result in the Bank Rate, which is linked to the SLFR with a margin of +300 basis points, automatically adjusting to 9.00 per cent.
The United Nations Development Programme (UNDP) and the Central Bank of Sri Lanka (CBSL) have strengthened their partnership to advance financial literacy across the country, with a renewed focus on empowering vulnerable communities, strengthening economic resilience and promoting sustainable development.
The two institutions formally launched the second phase of their collaboration recently, reaffirming their commitment to implementing Sri Lanka’s National Financial Literacy Roadmap (2024–2028), a cornerstone of the National Financial Inclusion Strategy (NFIS).
The partnership was marked by a meeting between Central Bank Governor Dr. P. Nandalal Weerasinghe and UNDP Resident Representative in Sri Lanka Ms. Azusa Kubota, together with officials from both organisations.
Building on technical support provided by UNDP during 2024 and 2025, the latest phase seeks to equip individuals, households and businesses with the knowledge required to make sound financial decisions, improve livelihoods and enhance resilience in an increasingly uncertain economic and climatic environment.
The initiative comes at a crucial juncture as Sri Lanka continues its economic recovery while grappling with climate-related challenges that disproportionately affect rural communities and small enterprises.
A key component of the programme will be strengthening the capacity of government outreach officers across all districts to deliver financial literacy training to rural populations and micro, small and medium enterprises (MSMEs).
The training will be based on the Financial Literacy Curriculum developed by the Central Bank, with UNDP supporting the enhancement of modules through the integration of climate-resilient financial management concepts.
The programme aligns closely with Sri Lanka’s Financial Literacy Roadmap and is expected to contribute significantly to improving financial knowledge and access across the country. It is supported by several development and private-sector partners, including the government of Japan, Chrysalis, VISA and Hirdaramani-Lacoste.
Speaking on the importance of the initiative, Central Bank Governor Dr. Weerasinghe said the partnership would help broaden the reach of financial literacy efforts while addressing emerging challenges such as climate-related financial risks.
“We particularly welcome the focus on strengthening financial resilience, climate-related financial preparedness, public awareness campaigns and capacity-building through Training-of-Trainers programmes, he said.
He noted that the initiatives would ensure that different segments of society gain access to practical financial knowledge and develop the skills necessary to foster responsible financial behaviour and improve their overall financial well-being.
UNDP Resident Representative Ms. Kubota underscored the critical role financial literacy plays in creating inclusive and resilient economies.
“Financial literacy is a critical foundation for inclusive and resilient economies. Through our partnership with the Central Bank of Sri Lanka, we have been working to empower individuals, particularly those most vulnerable, with the knowledge and tools needed to make informed financial decisions and build secure livelihoods, she said.
By Ifham Nizam
The government’s decision to ban the export of mineral resources in raw form and place all future mineral exploration under state control has triggered fresh debate over how Sri Lanka should develop its untapped mineral wealth and attract foreign investment.
Announcing the new National Mineral Policy, Industry and Entrepreneurship Development Minister Sunil Handunnetti said the country had long failed to capture the full value of its mineral resources by exporting them with minimal processing.
“We will no longer allow mineral resources to leave the country in raw form,” the minister said, arguing that Sri Lanka must move towards value-added industries that generate greater economic returns.
A key feature of the new policy is the transfer of all mineral exploration activities to the state-run Geological Survey and Mines Bureau (GSMB). Under the new system, the GSMB will carry out exploration, publish geological data and subsequently invite investors to participate in commercially viable projects.
Handunnetti defended the move by citing what he described as the failure of the previous licensing regime. According to government figures, 471 exploration licences had been issued since 1993, but only 28 advanced to mining operations, with just 12 remaining active today. The minister alleged that some companies had used exploration licences to boost corporate valuations rather than develop actual mining projects.
He also stressed that mineral deposits located beneath privately owned land belong to the state and should be developed in the national interest.
However, the reforms are likely to attract close scrutiny from foreign investors seeking opportunities in Sri Lanka’s mineral sector.
An independent industry analyst said the policy’s emphasis on value addition is consistent with global trends, as countries increasingly seek to process critical minerals domestically rather than export raw materials.
“The more difficult question is whether a state-controlled exploration model can generate the confidence required by international investors,” the analyst said. “Investors will want access to reliable geological data, transparent licensing procedures and predictable regulations before committing significant capital.”
The analyst noted that the government’s plan to publish exploration data before inviting investment proposals could help improve transparency, but its success would depend on how scientifically the process is implemented.
Sri Lanka possesses commercially valuable deposits of graphite, mineral sands, ilmenite, rutile, garnet, silica and phosphate. As global demand for industrial and strategic minerals continues to grow, the new policy represents a significant test of whether stronger state involvement can translate geological potential into investment, industrial development and export earnings.
“The success of the strategy may ultimately depend on whether the government can balance tighter control over mineral resources with the policy certainty and commercial incentives that international investors typically seek,” the analyst said.
By Sanath Nanayakkare
The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) felicitated Ms. Samudika Jayaratna, the 42nd Auditor General of the Democratic Socialist Republic of Sri Lanka, at a special ceremony held on Thursday at the Institute.
The event was organised in recognition of her landmark appointment as the first woman to hold this distinguished constitutional office, as well as her decades of dedicated service to the nation’s public financial governance.
The ceremony reflected the accounting profession’s pride in one of its most accomplished members, who has attained the highest constitutional office in public audit. Ms. Jayaratna was warmly received by the President of CA Sri Lanka, Tishan Subasinghe, Vice President Ms. Anoji de Silva, members of the Council, and Chief Executive Officer Ms. Lakmali Priyangika.
A Fellow Member of CA Sri Lanka, Ms. Jayaratna’s appointment stands as a powerful testament to her exemplary professional journey spanning over 25 years. Her career has been defined by an unwavering commitment to excellence, integrity, and the highest standards of public accountability.
The felicitation ceremony drew a large and distinguished gathering, including Chartered Accountants and officials from the National Audit Office.
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