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Central Bank of Sri Lanka adopts further policy measures to strengthen macroeconomic stability

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Economic activity is expected to record a gradual recovery following a temporary setback

Monetary Policy Review: No. 01 – January 2022

As per the data released by the Department of Census and Statistics, domestic economic activity that was disrupted with the outbreak of the third wave of the COVID-19 pandemic and related mitigative measures is estimated to have contracted by 1.5 per cent, year-on-year, during the third quarter of 2021. However, economic activity towards the latter part of 2021 appears to have gathered momentum as several leading indicators point towards activity returning to normalcy along with the successful vaccination drive of the Government. Accordingly, the economy is expected to have recorded a growth of around 4.0 per cent in 2021.

External sector remains resilient amidst heightened challenges

With the normalisation 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 June 2021. Meanwhile, expenditure on imports increased significantly, partly reflecting the increased international prices, the demand for intermediate goods, and a more than expected demand for consumer goods. The increase in imports was also underpinned by the availability of low cost credit, which led the trade deficit to widen to pre-pandemic levels in 2021. Meanwhile, developments in the tourism sector appear to be promising with the influx of tourists in recent months.

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 per cent 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. 2

Credit flows to the private sector continue to expand

Credit extended to the private sector, which slowed down during September and October 2021, has picked up recently, partly reflecting the increased credit flows to finance imports. In the meantime, credit obtained by the public sector from the banking system, particularly net credit to the Government, continued to expand. Despite the recent deceleration observed due to the decline in net foreign assets of the banking system, with the significant expansion in domestic credit, the growth of broad money (M2b) remained elevated by end November 2021. Meanwhile, most market lending rates have adjusted upwards, while deposit rates have also increased albeit at a slower pace.

Further, yields on government securities have increased amidst enhanced market subscriptions at primary auctions for government securities.

Supply side factors remain the key driver of domestic price pressures amidst the possible signs of demand pressures

Inflationary pressures in the domestic front continued to be fuelled by supply side disruptions, upward adjustments to administered domestic prices, and the strengthening of underlying demand conditions in the economy as reflected in the rise in core inflation. Such supply driven price pressures are expected to be transitory, although the possible build-up of demand driven inflationary pressures may compel the adoption of proactive monetary policy measures, which will also help in managing inflation expectations.

Monetary and other policy measures are expected to strengthen the macroeconomic stability

In consideration of the current and expected macroeconomic developments, the Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 19 January 2022, decided to adopt several policy measures with the view to strengthening macroeconomic stability. Accordingly, the Monetary Board decided to:

a)

increase the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points each, to 5.50 per cent and 6.50 per cent, respectively;

b )

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

c )

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

d )

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. In keeping with this policy stance, the Central Bank expects a corresponding increase in interest rates, particularly in deposit rates, thereby encouraging savings, while discouraging excessive consumption, which also fuels imports. Therefore, financial institutions are urged to swiftly pass on this increase to deposit rates of the customers. Moreover, the anticipated adjustment in market interest rates will facilitate the reduction in the Treasury bill holdings of the Central Bank through increased market subscriptions, as enunciated in the Six-Month Road Map for Ensuring Macroeconomic and Financial System Stability. Meanwhile, the materialisation of the expected foreign exchange inflows through bilateral arrangements and other import financing arrangements with friendly countries are expected to ensure a healthy level of gross official reserves in the period ahead and further strengthen the external sector in the economy.



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Dialog Smart Home Enables Seamless Home Automation via Range of Intuitive Solutions 

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Dialog Axiata PLC, Sri Lanka’s premier connectivity provider, introduced a range of convenient and integrated solutions via ‘Dialog Smart Home’ to enable intelligent automation and intuitive control of homes.

The newly introduced range of future-fit smart home solutions by Dialog Smart Home ranges from Home Automation, Home Security & Surveillance and Home Connectivity, and are designed to enable any home to work as one harmonious system where all elements work in tandem together to create a truly intelligent home.

The Home Automation solutions offer homeowners seamless and convenient control of their electronic appliances through their smartphones anytime, anywhere. With the Smart Touch Wall Switches, Smart Power Strips and Smart Fan Controllers, homeowners can take control of existing light bulbs, table fans, rice cookers, chargers, ceiling fans and more appliances. Additionally, the Artificial Intelligence (AI) powered TeDi Alexa Solution enables users to control connected smart devices including TVs, air conditioners, home security systems and more through voice commands.

Home Security & Surveillance solutions transform basic cameras into high-powered CCTV solutions. Baby and house monitoring smart cameras can be placed inside homes to keep a 360-degree eye on children and pets. The Indoor Security Camera has the ability to sound a siren and notify users if a stranger enters their home. Dialog Smart Home has also partnered with Singer to offer customers world-renowned Dahua CCTV solutions.

The Home Connectivity solutions offers consumers Wi-Fi extenders to facilitate uninterrupted internet connectivity across the house to fit the homeowner’s lifestyle and requirements.

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CBSL implements extraordinary measures to support banking sector

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The Central Bank of Sri Lanka, considering the prevailing macroeconomic conditions and its impact on the banking sector, has decided to implement the following regulatory measures to support the banking sector to facilitate effective financial intermediation and the flow of credit to the economy, whilst ensuring the soundness of the banking sector.

• Sri Lankan banking sector maintains a Capital Conservation Buffer (CCB) of 2.5% to ensure that banks have an additional layer of usable capital that can be drawn down during stress times. An industry wide flexibility is granted for banks to drawdown the CCB (up to 2.5%), if needed, subject to restrictions on distribution to shareholders/ repatriation of profits and submission of a capital augmentation plan to rebuild CCB during a period up to three years.

• The current deadline for licensed banks to meet the enhanced minimum capital requirement (31.12.2022) is extended up to 31.12.2023. Licensed banks which are unable to meet the minimum capital requirement by 31.12.2022, need to submit their capital augmentation plan, including plans to consolidate or merge with suitable financial institutions, by 31.12.2022 and these licensed banks too shall refrain from distribution of dividends/ repatriation of profits until the minimum capital requirement is met.

• Licensed banks are encouraged to move to approaches such as The Standardised Approach (TSA) or alternative TSA for computation of risk weighted assets for operational risk for the purposes of computing the Capital Adequacy Ratio, subject to supervisory review.

• Licensed banks are given the flexibility to stagger the unrealised mark to market loss on Government Securities denominated in LKR on account of the recent interest rate hike for Capital Adequacy purposes until Q2 of 2024, subject to conditions.

• Licensed banks are granted flexibility on the treatment for Other Comprehensive Income (OCI) for Capital Adequacy purpose in line with the International Standards.

• The deadline for licensed banks to submit the document on Internal Capital Adequacy Assessment Process (ICAAP) for 2022, to the Central Bank of Sri Lanka is extended by one month, until 30.06.2022.

• As a short-term measure to support licensed banks to adjust their liquidity profiles, licensed banks are provided with the flexibility to operate maintaining the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) not lower than 90% up to 30.09.2022. Furthermore, the Central Bank of Sri Lanka, on 06 May 2022 decided to restrict certain discretionary payments of licensed banks, such as declaring cash dividends and repatriation of profits, until the financial statements for the year 2022 are audited by its External Auditor, engaging in share buy backs, increasing management allowances and payments to the Board of Directors until 31 December 2022 with a view to strengthening the liquidity and capital positions of licensed banks under these exceptional circumstances.

The above measures were introduced with the aim of providing the licensed banks with more flexibility and opportunities to operate in these challenging conditions and support economic recovery, while taking measures to improve their safety and soundness. The Central Bank of Sri Lanka will periodically review the implementation of these policy measures and expects licensed banks to avail these measures in the best interest of the customers and the economy at large, while supporting the banking sector to remain resilient.

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CEAT official tyre supplier for locally assembled Tata Ace HT 

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CEAT Kelani Holdings has been appointed as the official tyre supplier for Tata Ace HT series compact trucks which are assembled in Sri Lanka by DIMO in collaboration with India’s largest automobile manufacturer TATA Motors.

 CEAT RHINO PLUS TL tyres in the size of 155R12 8PR, manufactured at the CEAT Kelani plant in Kelaniya are used for the TATA Ace HT series vehicles, popularly known in Sri Lanka as “DIMO Batta” under this project. The locally manufactured CEAT RHINO PLUS TL tyre features a zig zag pattern on its circumference and ribs with lateral notches that contribute towards uniformity and better wear and tear on local roads.

 Commenting on this latest OEM agreement of the company, CEAT Kelani Holdings Managing Director Mr. Ravi Dadlani said: “As a brand that has been at the forefront of local value addition in Sri Lanka, CEAT is excited to contribute further to the process through its association with this assembly operation. This is particularly relevant in the prevailing situation in the domestic market. We are able to provide high-quality tyres engineered for local conditions at competitive prices and ensure uninterrupted supply, while at the same time helping to conserve foreign exchange.”

In January this year, CEAT was appointed as an OEM for a range of heavy-duty trucks, tippers and light commercial vehicles assembled in Sri Lanka by Lanka Ashok Leyland PLC (LAL), a joint venture company of Ashok Leyland India. In November 2021 the brand was chosen as the OEM for Bolero City Pik-up vehicles assembled in Sri Lanka by Mahindra & Mahindra India in collaboration with Ideal Motors.

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